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TMI Blog2017 (4) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... rading operation of the implants. The ‘loaner’ or ‘demo’ sets are not instruments of earning income so as to qualify as capital asset but those are for encouraging the use of assessee’s products in doctor community, which in turn would recommend for the sale of the products of the assessee. The ‘loaner’ sets have been found to have average life of 36 months. In such circumstances, merely because the assessee has amortized the expenditure, it does not warrant the conclusion that such expenditure is capital expenditure. The assessee has consistently disclosed the said loaner sets as ‘inventory’ and valued the same in accordance with the Accounting Standard-2 of ICAI, which prescribes an assessee to value the ‘inventory’ at cost or net realizable value, whichever is lower. Moreover, the finding of the Ld. CIT-A that the claim of assessee is based on the principle of deferred revenue expenditure, is not correct. It is a case of valuation of inventory and the method of valuation has been consistently accepted by the Revenue. Moreover even otherwise expenditure on purchase of ‘loaner’ sets is not capital expenditure and therefore eligible for deduction as revenue expenditure, which at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iency, which aspect has not been disputed in this appeal. The payment was not paid for rendering any managerial, technical or consultancy services. In such circumstances, the expenditure incurred towards payment to the overseas education foundation, cannot be held as fee for technical services provided to the assessee - Decided in favour of assessee. Disallowance expenses on training of doctors in India - Held that:- We find that the Assessing Officer has made disallowance on ad-hoc basis at the rate of 25% of the total expenses of ₹ 34,08,154/-. We also find that the assessee has claimed of reimbursing the expenses incurred by the doctors on their stay in hotels etc, while attending the conference seminars organized by the assessee or other organizers. However, we find that the assessee has not linked all the expenses with any particular conference or training course for the doctors or any specific event related to the business of the assessee. In such circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer directing the assessee to produce all necessary evidence in support of its contentions of incurring expenses for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax (Appeals) has erred both in law and on facts in upholding disallowance of a sum of ₹ 50,33,418/- by restricting the claim of deduction in respect of loaner and demo sets at ₹ 40,28,706/- instead of claim of ₹ 93,97,124/- by the appellant company by holding that such assets are capital assets eligible for depreciation u/s 32(1) of the Act. ii. That in any case the learned Commissioner of Income Tax (Appeals) has failed to appreciate that expenditure claimed was eligible revenue expenditure incurred wholly and exclusively for the purpose of business and as such eligible for deduction u/s 37(1) of the Act. iii. That the learned Commissioner of Income Tax (Appeals) has further erred both in law and on facts in sustaining disallowance of sum of ₹ 11,49,037/- out of expenditure incurred of ₹ 22,98,075/- under the head advertisement and promotional expenses incurred by the appellant company. iv. That the learned Commissioner of Income Tax (Appeals) has further erred in not deleting disallowance of sum of ₹ 2,08,711/- representing expenditure incurred under the head selling commission by treating it as prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It was contended that after every use, the equipments were sterilized and then given to next customers and estimated useful life of such equipments/instruments was 36 months and the assessee has consistently amortized the cost accordingly. The Assessing Officer, however, was not convinced with the above explanation and held that since the assessee had itself accepted that the instruments/equipments were lasting more than a year and, therefore, there is no doubt that such equipments/instruments used by the assessee for its business interest were not consumed within the year. He, therefore, held that such equipment/instruments are capital assets of the assessee company and, therefore, should be treated under the head plant and machinery for the purpose of depreciation. He, accordingly, held that since the assessee claimed amortization of ₹ 93,97,124/- the same would translate into assets of ₹ 2,81,91,372/-and, therefore, after allowing depreciation at the rate of 15% on the aforesaid sum, which was computed at ₹ 42,28,706/-, he made disallowance of ₹ 50,33,418/- and added the same to the income of the assessee. The Ld. CIT-A confirmed the aforesaid disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is not correct and in this regard it was stated that the Revenue has not allowed depreciation on the estimated WDV of the instant year. Furthermore, it was also submitted that even the figures adopted by the Assessing Officer for computing the value of loaner sets at ₹ 28,19,137/- was based on assumption and the correct figure was of ₹ 4,18,66,126/- and on the basis, adopted by the Assessing Officer, the depreciation would be of ₹ 62,79,919/- and thus the disallowance at best could be of ₹ 31,17,205/- and not at ₹ 50,33,418/- computed by the Assessing Officer. 4.2 On the other hand, the Ld. Senior DR relied on the order of the lower authorities and submitted that claim of amortization was not in accordance with law. 4.3 We have considered the rival submission and perused the relevant material on record. We find that the assessee company was engaged in trading of medical implants, surgical instruments etc in the field of orthopaedic. The assessee in the course of trading operations, purchased equipments/instruments for fixing the implants in the human body and out of those few items were given as loaner sets to various hospitals/doctors on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,608 57,85,431 20,87,177 143(1) 2003-04 57,85,431 52,22,341 1,10,07,771 76,67,855 33,39,916 143(3) and 143(3)/147 2004-05 76,67,855 71,02,372 1,47,70,227 95,93,546 51,76,681 143(1) 2005-06 95,93,546 88,86,794 1,84,80,340 1,18,92,073 65,88,267 143(1) 2006-07 1,18,92,073 72,84,329 1,91,76,401 1,16,55,123 75,21,278 143(1) 4.3.1 The Ld. CIT-A has not accepted the claim by observing that the principle of res judicata does not apply to the income tax proceedings. We do agree with the said principle, however, the Hon ble Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year. According to the Revenue, since the assessee has accepted that useful life of the loaner set is 36 months, therefore, they are capital assets. The above conclusion to our mind is contrary to the judgment of the Hon ble Apex Court in the case of Empire Jute Company Limited Vs. CIT (supra) wherein it has been held that expenditure even if incurred for obtaining advantage of enduring benefit, may nonetheless, be on revenue account and the tests of enduring benefit may breakdown. It was held that if the advantage consists merely in facilitating, the assessee s trading operation or enabling the management and conduct of the assessee s business to be carried on more efficiently and more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the case of the assessee, we find that admittedly loaner sets are made available to the doctors for the purpose of encouraging sale of implants and therefore, advantage to the assessee is to facilitate the trading operation of the implants. The loaner or demo sets are not instruments of earning income so as to qualify as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC) . 20. At the most, an inference can be drawn that by showing this expenditure in a spread over manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that there is no concept of deferred revenue expenditure under the Act as held in the case of CIT Vs. Citi Financial Consumer Fin. Limited, 330 ITR 29. 5.2 On the contrary, the Ld. Senior DR submitted that the assessee has not furnished the details of expenditure incurred and failed to establish the nexus of expenditure incurred with the business of the assessee and therefore, in such circumstances the Ld. CIT-A was justified in restricting the claim of expenditure to the extent of 50%. 5.3 Having considered the rival submissions and perused the relevant material on record, we are of the opinion that no basis whatsoever has been stated by the authorities to restrict the expenditure to 50% of the claim or 1/5th of the claim. The reliance placed by the Assessing Officer on the judgment of the Madras Industrial Investment Corporation Limited Vs. CIT (supra) is misconceived, misplaced and contrary to the judgment of the Hon ble Apex Court in the case of the Taparia Tools Limited Vs. JCIT (supra), wherein it is laid down that there is no concept of deferred revenue expenditure and is only at the instance of the assessee, a revenue expenditure can be spread or under the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT-A and the ground of appeal is therefore rejected. 7. The ground No. 5 relates to disallowance of ₹ 7,07,209/- representing a provision for doubtful debts. During the course of assessment proceeding, it was contended that the entire provision had been added back by the assessee company in the computation of income. On the issue in dispute, The Ld. CIT-A observed as under: 7.3 After going through the observations of the A.O. and submissions of the A.R. of the appellant, it appears that the appellant has on its own already added back this amount of ₹ 7,07,209/- in the total addition of ₹ 29,45,009/-. The A.O. is directed to verify this contention of the A.R. of the appellant. If the amount has already been added back by the appellant, there is no justification for sustaining this addition. This ground is treated as partly allowed subject to verification. 7.1 Since the aforesaid issue in dispute has also been allowed by the Ld. CIT-A, subject to verification by the AO that the amount was already added back in the computation, we are not inclined to interfere in the finding of the Ld. CIT-A on the issue in dispute and accordingly, the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both in law and on facts in sustaining a disallowance of ₹ 13,31,716/- representing expenses on training of doctors in India viii. That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the disallowance of sum of ₹ 12,03,128/- representing the professional fees paid by the appellant company to M/s. S. R. Batliboi Co. in the year under consideration by the appellant company by invoking the provisions contained in section 40(a)(ia) of the Act. ix. It is therefore, prayed that, the disallowances sustained by the learned Commissioner of Income Tax (Appeals) and disputed in this appeal may kindly be deleted and appeal of the appellant company be allowed. 8. The grounds raised by the Revenue for assessment year 2008-09 are as under: i. On the facts and circumstances of the case, the learned CIT(A) erred in law and merits of the case in restricting the disallowance to 50% instead of 4/5th of ₹ 5121962/- total expenses claimed by the assessee on account of advertisement and publicity. ii. On the facts and circumstances of the case, the learned CIT(A) erred in law and merits of the case in deleting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expenditure on account of selling commission crystallized in the instant year and therefore, it was allowable in the instant year. 11.2 Having regard to the above and the contention not disputed by the Ld. Senior DR, we find that Ld. CIT-A has not correctly appreciated the factual metrics for the instant year. We therefore, consider it appropriate to restore the issue to the file of the Assessing Officer for considering afresh, who shall decide the issue after granting due opportunity of hearing to the assessee. The ground no. 4 of the assessee s appeal is accordingly allowed for statistical purpose. 12. The ground No. 5 relates to disallowance of a sum of ₹ 15,88,440/- representing expenditure incurred for holding sales conference by the assessee company. The Assessing Officer observed that the assessee debited a sum of ₹ 15,88,440/- to a company called, make my trip and stated that this sum was advanced to make my trip . As the assessee failed to furnish any explanation for allowability of the said claim, the Assessing Officer denied the claim of expenditure. Before the, Ld. CIT-A, the assessee contended that such expenditure pertain to travel expenses and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g training to doctors and it was not in any way in the nature of fee for technical services. In support of the contention, the counsel relied on the decision of the Mumbai bench of the Tribunal in the case of Holcim Services South Asia Ltd. Vs. DCIT 157 ITD 892. 3.2 On the contrary, the Ld. Senior DR relied on the finding of the lower authorities. 13.3 We have heard the rival submissions and perused the relevant material on record. We find that on the issue in dispute, the Ld. CIT-A has observed as under: 8.3 After going through the facts of the case, observations of the A.O. and submissions of the A.R. of the appellant, it is observed that the services for which the payment was made was provided to highlight trained doctors and professionals who were certainly imparted technical training and, therefore, the services could only be considered as technical services. Though the A.R. of the appellant has argued that this was only training and could no be construed as fee for technical services, since the nature of services were of technical nature having been imparted to specialized and technical people, including doctors and other specialized staff, I am inclined to agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clarificatory in nature which now provides that, the income of a non-resident shall be deemed to accrue in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included to the total income of the non-resident, whether or not the non-resident has resident (sic) or place of business or business connection in India or a nonresident has rendered services in India. Though, such an amendment has been brought in the statute with retrospective effect but at the time of making the payment there was no such provision under the Act and in fact, the law of the land as laid down by the Hon'ble Supreme Court was that, if the services has not been rendered in India and such services are not utilized in India then there is no liability for deducting TDS. The amendment has been brought specifically to negate the decision of Hon'ble Supreme Court. An assessee who has to make the payment cannot visualize or apprehend that in future a retrospective amendment would be brought whereby it would require withholding of tax. Even if the purported amendment has been brought with the intention to clarify the provision but there was no such judicial inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longwith copy of receipt was filed. The Ld. CIT-A confirmed the above disallowance. 14.1 We have heard the rival submissions and perused the relevant material on record. Regarding the disallowance of ₹ 8,52,186/- the Ld. Counsel contended that expenses incurred were towards the doctors who were highly claimed faculty and were invited from abroad in the interest of business of the assessee company. We find that the Assessing Officer has made disallowance on ad-hoc basis at the rate of 25% of the total expenses of ₹ 34,08,154/-. We also find that the assessee has claimed of reimbursing the expenses incurred by the doctors on their stay in hotels etc, while attending the conference seminars organized by the assessee or other organizers. However, we find that the assessee has not linked all the expenses with any particular conference or training course for the doctors or any specific event related to the business of the assessee. In such circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer directing the assessee to produce all necessary evidence in support of its contentions of incurring expenses for the purpose of business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and there was no justification for treating this amount as deferred revenue expenditure over 5 years. The A.R. also relied upon various judicial pronouncements to argue that since no asset was being created in this case, there was no reason for treating this as a capital expense. (b) It is pertinent to note that if the amount is treated as deferred revenue expenditure, then the whole accounting computations had to be altered over the next 4 years to allow the claim of expenditure in several years. This will create complications both for the department and the appellant and more importantly it will also disturb the consistent system of accounting on this issue as strongly argued by the A.R. of the appellant. The assessing officer has also not disputed this consistent method being followed by the appellant in the past. Considering the documents of the A.R. of the appellant as well as the reliance placed by the various judicial pronouncements, such expenses on training should be allowed as a revenue expense and the assessing officer has not justified as to why there is a reason for disturbing the consistent methodology on this issue. Since no unique training programme or ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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