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TMI Blog2016 (8) TMI 1047X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be held to be gain or profit derived from export of its product. Therefore, the assessee is not eligible to claim deduction u/s. 10AA of the Act on the aforesaid receipts. We do not find any infirmity in the well reasoned findings of Commissioner of Income Tax (Appeals) in rejecting the claim of the assessee. Disallowance of deduction u/s. 10B with reference to export invoice for want of ‘extension letter’ in spite of subsequent realization of export proceeds - Held that:- We observe that in the assessment year under appeal disallowance has been made for similar reasons. No material has been placed on record to show any variation in the facts. Therefore, respectfully following the order of Co-ordinate Bench, we accept the prayer of the assessee and direct the Assessing Officer to allow deduction u/s. 10B on the aforesaid amount of delayed export realization. Provision for leave encashment pertaining to DTA unit decided against the assessee Disallowance of contribution towards Manjari Gram Panchayat’s project for supply of drinking water where employees/workers of assessee company are also staying - Held that:- The present case the contribution has been made by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds discharge of corporate social responsibility. No infirmity in the order of Commissioner of Income Tax (Appeals) in allowing the expenditure. - ITA No. 914/PN/2013, ITA No. 931/PN/2013 - - - Dated:- 22-7-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri H.P. Mahajani, Shri R.S. Abhyankar For The Revenue : Shri O.A. Mao, Shri Rajeev Kumar ORDER PER VIKAS AWASTHY, JM : These cross appeals by the Revenue and assessee are against the order of Commissioner of Income Tax (Appeals)-III, Pune dated 02-01- 2012 for the assessment year 2008-09. 2. The brief facts of the case as emanating from records are: The assessee company is engaged in manufacturing, processing and sale of life saving drugs, export of vaccines, biotech and pharma products. The assessee is having three units engaged in manufacturing and processing of aforesaid products. One of the units is a 100% export oriented unit (hereinafter referred to as EOU ) in respect of which deduction u/s. 10B has been claimed. The second unit is set up in Domestic Trade Area (hereinafter referred to as DTA unit ). The third unit is located in Special Economic Zone at Hadapsar, Pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax (Appeals) upheld the findings of Assessing Officer in treating the receipts from M/s. Akorn Inc., USA as not part of Export Turnover, disallowance of deduction u/s. 10B ₹ 9,95,952/-, disallowance u/s. 14A ₹ 64,03,323/-, disallowance of Provision for Leave Encashment, disallowance of donation to Manjari Grampanchyat, payment of License fees for acquiring computer softwares as Capital expenditure, capitalizing/disallowing in foreign travel expenses of employees, disallowance of PMS fees and confirming classification of some fixed assets as Furniture and Fixtures . Against these findings of Commissioner of Income Tax (Appeals), the Department and the assessee are in appeal. 3. For the sake of convenience we are first dealing with the appeal of the assessee. ITA No. 931/PN/2013 (Assessee s Appeal) 4. The first ground raised by the assessee in its appeal is against not treating the receipts in foreign currency from M/s. Akorn Inc., USA amounting to ₹ 3,87,57,400/- (USD 8,92,000) towards development of the products as Income from Business for the purpose of allowing deduction u/s. 10AA of the Act. 5. In the original retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and Exclusive Distribution Agreement and Development Funding Agreement placed on record by the assessee. A conjoint reading of Memorandum of Understanding dated 04-04-2006, Development and Exclusive Distribution Agreement dated 07-11-2006 and Development Funding Agreement dated 07-11-2006 shows that a sum of ₹ 3,87,57,400/- (US $ 8,92,000) were received by the assessee towards exclusive marketing rights of new products granted by the assessee to M/s. Akorn Inc., USA. The payments made by M/s. Akorn Inc., USA to assessee were against the milestones achieved during the product development. A perusal of Clause 2 of Memorandum of Understanding reveal that the Net Revenue from sale of new products shall be shared between the two parties equally. The assessee would bear all manufacturing cost and M/s. Akorn Inc., USA shall bear all marketing cost including product registration cost. The term Net Revenue has been defined in the MOU has sales realized by M/s. Akorn Inc., USA less the royalty paid by assessee to its collaborators for obtaining the technology for developing the products. There is no direct nexus between sale of product and the amount received by assessee. The amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in or profit derived from export of its product. Therefore, the assessee is not eligible to claim deduction u/s. 10AA of the Act on the aforesaid receipts. We do not find any infirmity in the well reasoned findings of Commissioner of Income Tax (Appeals) in rejecting the claim of the assessee. Accordingly, the ground No. 1 raised by the assessee in its appeal is dismissed. 10. The ground No. 2 raised by the assessee in its appeal is in respect of disallowance of deduction u/s. 10B with reference to export invoice of ₹ 9,95,952/- for want of extension letter in spite of subsequent realization of export proceeds. The ld. AR of the assessee submitted that the assessee had availed deduction u/s. 10B on the profits derived from its EOU. The assessee had inter alia claimed deduction u/s. 10B on invoice outstanding at the time of filing of return of income. The assessee had filed an application for extension. The assessee subsequently received the payments. The assessee had filed copies of extension letter and bank realization certificates before the Commissioner of Income Tax (Appeals). However, the same were overlooked. The ld. AR contended that similar disallowance was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AR of the assessee submitted that the assessee is having sufficient own interest free funds for making investments. The total investments made by the assessee is ₹ 100 crores, whereas the own funds i.e. share holder funds is to the tune of ₹ 996 crores. Apart from own funds, the assessee has profit of ₹ 385 crores during the year. The total loans of the assessee during the previous year were ₹ 184.68 crores. The ld. AR contended that the assessee had made strategic investment of ₹ 6 crores in sister concern. While computing disallowance u/s. 14A r.w. Rule 8D, the Assessing Officer has included the investment made by the assessee in sister concern as well. The loans taken by the assessee were exclusively used for business purpose and there is no direct nexus between the loans taken and the investments made by the assessee. The ld. AR contended that the matter can be referred back to the file of Assessing Officer for verification of the loans taken and investments made by the assessee during the year. 15. On the other hand the ld. DR contended that disallowance u/s. 14A r.w. Rule 8D has been rightly made by the Assessing Officer and upheld by the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its appeal is in respect of disallowance of contribution of ₹ 15,00,000/- towards Manjari Gram Panchayat s project for supply of drinking water where employees/workers of assessee company are also staying. The assessee had claimed the said expenditure as revenue expenditure u/s. 37 of the Act. The ld. AR of the assessee submitted that the amount of ₹ 15,00,000/- was contributed by the assessee to Manjari Gram Panchayat for construction of drinking water tank. The assessee company s laboratory is located at Hadapsar and village Manjari is in the immediate vicinity of Hadapsar. Several workers/employees of the company are staying in the village. The contribution of ₹ 15,00,000/- for water supply project would indirectly benefit the employees of assessee company staying in that area. The ld. AR contended that the said amount has been contributed by the assessee towards corporate social responsibility. The ld. AR referred to the decision of Co-ordinate Bench of the Tribunal in assessee s own case for assessment year 2005-06 in ITA No. 679/PN/2009 decided on 22-02-2013, wherein the assessee had made contribution for the school and the same was allowed by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke in upholding the contention of the assessee that the impugned expenditure was a business expenditure allowable u/s 37(1) of the Act. Thus, on this ground, Revenue fails. 22. In the present case also the contribution has been made by the assessee for the benefit of its employees/workers, although in the process general public would also be benefited. The Govt. is seeking contribution from various corporate houses for strengthening infrastructure facilities by creating awareness of social corporate responsibility. Thus, in the facts of the case and in the light of decision of Co-ordinate Bench we accept this ground of appeal of the assessee and delete the addition of ₹ 15,00,000/-. The ground No. 5 raised in the appeal of the assessee is thus allowed. 23. In the sixth ground of appeal, the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in upholding the capitalization of expenditure incurred on purchase of Microsoft XP and Microsoft Office 2007 software. The assessee had claimed the expenditure to be revenue in nature. The Assessing Officer held the expenditure as capital. In first appeal the Commissioner of Income Tax (Appeals) upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature. 26. The seventh ground raised in the appeal by the assessee is against disallowance of foreign travel expenses of employees ₹ 25,77,069/-. The assessee had claimed the expenditure as revenue expenditure. The ld. AR of the assessee fairly admitted that in the earlier assessment year 2005-06 under identical circumstances the Tribunal has disallowed the capitalization of foreign travel expenditure of employees. The ld. AR placed on record a copy of the order of Tribunal in assessee s own case in ITA No. 1383/PN/2011 for assessment year 2006-07 decided on 22-02-2013. The Assessing Officer disallowed the foreign travel expenditure incurred on employees for finalizing the proposal of purchasing the plant and machinery. The assessee had claimed expenditure as revenue in nature. The Assessing Officer held expenditure to be capital expenditure and allowed depreciation on the same. Therefore, Assessing Officer rectified his order u/s. 154 and disallowed ₹ 25,77,069/-. In first appeal, the Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer. 27. The ld. DR vehemently defended the order of Commissioner of Income Tax (Appeals) in upholding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of such foreign travel was liable to be treated as part of cost of machinery. Ostensibly, the purchase of the machinery was not finalized in the particular year but the same has been purchased in subsequent year, as adverted by the assessee before the Assessing Officer. Therefore, it would be in the fitness of things that such expenditure would form part of cost of purchase of machinery as and when in the year in which the machinery is capitalized. On facts, therefore, the claim of the assessee for allowability of such expenditure as revenue expenditure is liable to be negated and on this aspect, we affirm the order of the Assessing Officer. In so far as the reliance placed by the assessee on the decision of the Tribunal for A.Y. 2002-03 is concerned, we find it appropriate to reproduce operative part of the order of the Tribunal contained in para 13, which is as under:- We find that Revenue has not made out a case to demonstrate that the said foreign travel expenditure was incurred in connection with any capital asset. Therefore, Assessing Officer failed to discharge the onus successfully. When allegation is made by AO, it is expected that he should demonstrate wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-ordinate Bench of the Tribunal in assessee s own case in immediately preceding year. The relevant extract of the findings of Tribunal while deciding the issue in favour of the assessee are as under : 11.1 Facts of the case, in brief, are that the Assessing Officer observed that the assessee has claimed deduction of Portfolio Management Scheme fees amounting to ₹ 32,49,729/- out of the capital gains derived on sale of shares/securities. On being asked as to why such expenditure should not be disallowed while working out the resultant capital gains, the assessee submitted that the said expenditure having been incurred for managing the investment portfolio of the assessee by experts in the field was nothing but cost associated with buying of good scrips and selling the same at right time and therefore, it constituted cost of investment. However, the Assessing Officer did not find any merit in the contention of the assessee. He observed that as per sec.48, only such expenses are deductible from the sale consideration of an asset which are wholly and exclusively incurred in connection with the transfer of the asset. According to the Assessing Officer, portfolio management c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra). However, the CIT(A) noticed that subsequently Mumbai Bench of the Tribunal in the case of one Shri Homi K. Bhabha vs. ITO in ITA No. 3287/Mum/2009 decided a similar issue against the assessee and therefore he held the issue against the assessee. In view of the aforesaid, assessee is in further appeal before us. 11. At the time of hearing, the learned counsel for the assessee submitted that similar stand of the CIT(A) in the assessee s own case for assessment year 2007-08 came up before the Tribunal in ITA No. 356 240/PN/2011 dated 25.07.2012 and after considering the divergent view of the Mumbai Bench of the Tribunal in the case of Shri Homi K. Bhabha (supra) which has been relied upon by the CIT(A), the issue has been decided in favour of the assessee. It was, therefore, contended that the issue is accordingly liable to be decided in favour of the assessee. 12. The learned CIT(DR) appearing for the Revenue has not controverted the factual matrix brought out by the learned counsel so however she has relied upon the order of the CIT(A) in support of the case of the Revenue. 13. We have carefully considered the rival submissions and also the precedent in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter, we respectfully following the order of the Tribunal in assessee s own case for A.Y. 2004- 05 allow the claim of the Portfolio Management fees as an allowable expenditure. The ground raised by the assessee is accordingly allowed. 14. Following the aforesaid precedent, which has considered the similar objections of the CIT(A), in our considered opinion, the order of the CIT(A) in the present case is untenable and we accordingly set-aside the same and direct the Assessing Officer to delete the impugned addition. 12.1 Respectfully following the decision of the Tribunal in the case of KRA Holding and Trading Pvt. Ltd. (Supra) we hold that the PMS fees paid by the assessee is an allowable deduction from the capital gains. Ground appeal No.2 by the assessee is accordingly allowed. 32. Facts in the present assessment year being similar, the ground No. 8 raised by the assessee in its appeal is allowed accordingly. 33. The ground No. 9 raised by the assessee in its appeal is with respect to classification of certain items of fixed assets to the tune of ₹ 24,69,933/- viz. stainless steel tables, stools, racks etc. located at manufacturing unit as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deciding the applicable rate of depreciation. The perusal of the orders of the revenue revealed that they have not applied the functional test to each of the disputed items. In a weeping statement, the AO mentioned that the 'furniture items like stools, chairs, tables, racks, trolleys etc' used in the factory cannot be categorized as plant and machinery as they fail even on the 'functional test'. There is no discussion in the orders on the details of the said test. In our opinion, the functional test implies if the said items are necessary for the production of the product in the laboratory premises. In other words, if the Stools, Tables, Stainless Steel racks, SS cupboards, SS trolleys, SS trays etc. are required for the laboratory purpose i.e. for the purpose of production or processing of the chemical tests in the laboratory premises leading to the production of the stocks, they must be categorized as plant and machinery. The impugned items like the case of 'fan' held as plant and machinery by the Jurisdictional High Court in the case of Park Davis, supra have both factory and office functions depending on the place of use and the employees using them. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of product development expenses as revenue in nature. The assessee in its books of account has claimed the said expenditure as capital. However, while filing revised return of income the assessee treated the said expenditure as revenue. The ld. AR of the assessee submitted that the assessee is engaged in manufacturing of life saving drugs. The development of new drugs or vaccines require time span of 2-3 years. There are certain expenditure while development of new products which are revenue in nature like purchase of raw material, chemical, consumables, salaries, testing charges, expenses on clinical trials, stationery etc. These expenses were capitalized in the books as per AS-26 although these expenses are revenue in nature. The Assessing Officer has held expenditure to be capital in nature primarily on the ground that the assessee in its books of account has shown the expenditure as capital. The accounting treatment in the books of account is not decisive factor for determining the nature of expenditure. The ld. AR in support of his submissions placed reliance on the following decisions : i. Transweeigh (India) Ltd. Vs. Income Tax Officer, 22 SOT 338 (Mumbai); ii. Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details of product development expenses. A perusal of the same shows that primarily the expenditure is towards payment of salaries, testing charges, R D expenses, repairs and maintenance, consumption of raw material, etc. The nature of expenditure is clearly revenue in nature. It is not the case of the revenue that the expenditure incurred by the assessee on product development is not genuine or has not crystallized during the period relevant to assessment year under appeal. The ld. AR of the assessee in support of his submissions has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Transweeigh (India) Ltd. Vs. Income Tax Officer reported as 22 SOT 338 (Mumbai). In the said case the assessee in its books of account classified the expenditure on research and development as capital in nature. While filing return of income the assessee claimed research and development expenses as revenue allowable u/s. 37 or in alternate u/s. 35(1) of the Act. The Assessing Officer disallowed the claim of the assessee and held the expenditure as capital. In first appeal, the Commissioner of Income Tax (Appeals) affirmed the findings of Assessing Officer. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to further state that R D activities carried on by the assessee resulted into product development, process development, indigenization, product support and these activities have been carried on by the assessee in a continuous manner for years together and no material has been brought on record by the Revenue to controvert these claims of the assessee, hence, merely for the reason that assessee is having a technical collaboration or is developing various prototypes, these activities cannot be termed as not of the nature of scientific research. In this view of the matter, we hold that the expenditure claimed by the assessee as revenue is allowable under s. 35(1) of the Act and capital expenditure incurred by the assessee in this regard is allowable under s. 35(1)(iv) r/w s. 35(2) of the Act. Thus, this ground of the assessee stands accepted. Since we have held so, therefore, the alternate contention raised by the assessee by way of additional ground is not adjudicated. Accordingly, ground No.1 stands accepted. 44. The Chandigarh Bench of the Tribunal in the case of Glaxo Smith Kline Consumer Healthcare Ltd. Vs. Assistant Commissioner of Income Tax reported as 112 TTJ (Chd) 94 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of is to be treated as capital expenditure. On this aspect we are unable to appreciate as to how can it be said that mere development and introduction of new varieties of products result in creation of a new line of business. Factually speaking, prior to the development and introduction of the impugned new products the assessee was in the business of manufacturing and sale of food and health care products. Even post development and introduction of new products, the business of the assessee remains that of manufacturing and sale of food and health care products. Therefore it is erroneous to conclude that the assessee acquired a new line of business by merely developing and introducing new products in the existing line of business. The new products clearly relate to the same line of business that the assessee has been hitherto carrying on. Therefore, on above consideration also the plea of the assessee that the expenditure in question is a revenue expenditure deserves to be upheld. 45. In so far as the argument of the ld. DR that the assessee has shown product development expenditure in its books of account as capital in nature and subsequently while filing revised return of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by the Revenue in appeal is as under : iv. Whether Ld. CIT(A) was correct in deciding that expenditure on freight insurance has to be excluded from both side i.e. export turnover total turn for claiming deduction u/s. 10B/10AA? 50. The issue relating to exclusion of freight and insurance from both numerator and denominator i.e. export turnover and total turnover while claiming deduction u/s. 10B/10AA of the Act has been laid to raised by the Special Bench of the Tribunal in the case of ITO Vs. Sak Soft Ltd. reported as 121 TTJ 865. The Commissioner of Income Tax (Appeals) has decided this issue by following the decision of Special Bench of the Tribunal in the case of ITO Vs. Sak Soft Ltd. (supra) and the decision of Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. reported as 330 ITR 175. We do not find any infirmity in the order of Commissioner of Income Tax (Appeals) in directing the Assessing Officer to exclude freight and insurance charges both from export turnover and total turnover while allowing deduction u/s. 10B and 10AA of the Act. Accordingly, ground No. 4 raised by the Department in its appeal is dismissed. 51. The ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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