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TMI Blog2017 (6) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to provide for the depreciation on goodwill - Held that:- From the record we found that the Hon'ble Mumbai ITAT, in the assessee's own case for AY 2002-03, has allowed depreciation on goodwill by placing reliance on the ruling of the Supreme Court in case of CIT vs Smifs Securities Limited (2012 (8) TMI 713 - SUPREME COURT ) wherein held in no uncertain terms has held that goodwill is in the nature of "any other business or commercial right of similar nature", hence, eligible for depreciation.- Decided in favour of assessee. Disallowance of contribution made to group gratuity scheme - Held that:- The gratuity payments totalling to INR 53,48,822 should be allowed under section 36 (1)(v) of the Act as the assessee has made payment to approved gratuity fund.- Decided in favour of assessee. Disallowance of legal and professional fee - Held that:- These expenses are incurred wholly and exclusively for the purpose of business and hence be allowed as a deductible expense under section 37(1) of the Act except an amount of INR 6,20,150 should be disallowed during the year under consideration. As the assessee has suo moto reversed and offered to tax an amount of INR 5,62,492 in AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 50 percent disallowance on contention that Assessee failed to justify the real intent behind the expenditure incurred is not tenable. Accordingly, we direct the AO to allow the entire expenditure incurred - Decided in favour of assessee. Expenditure on renovation of conference room - revenue or capital expenditure - Held that:- We found that during the year under consideration, the Assessee claimed INR 1,09,828 (INR 87,464 + INR 22,464) on account of renovation of conference room as revenue expenditure. However, the amount of INR 22,464 was written back in the books of accounts on 22 August 2002. The Department has not filed an appeal against the allowance of INR 87,464 made by the learned AO. As the expenditure is revenue in nature, we do not find any justification for disallowance of the same. Disallowance of staff welfare expenditure - Held that:- CIT (A) granted a relief of INR 80,000 and disallowed INR 20,000 contenting that the expenses on Ganpati festival, birthday celebrations, Diwali, marrage gifts, etc. ensures cordial employer-employee relationship, though the entire amount cannot be said to be incurred wholly and exclusively for business purpose. The Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) TMI 6 - SUPREME Court ] Disallowance of 50% of expenditure incurred for sponsoring the foreign trips of doctors - Held that:- We found that expenditure were incurred wholly and exclusively for the purpose of business. A company being an artificial juridical person cannot have personal expenses. All the expenses incurred by the company has to be for the purpose of the business of the company. Accordingly no adhoc disallowance can be mad. Thus direct the AO to delete the disallowance of expenditure incurred on foreign trips of doctors.- Decided in favour of assessee. Disallowance of expenditure incurred in respect of in-house IT resources Centre for abandoned project - Held that:- Expenditure incurred was not for new business, but was essentially a new venture undertaken by the existing business, accordingly same is liable to be allowed as revenue expenditure. The AO is directed to allow the same.- Decided in favour of assessee. Expenditure on software development - revenue or capital - depreciation claim - Held that:- CIT(A) has already allowed 60% depreciation on the amount so incurred. We do not find any valid reason to interfere in the order of CIT(A). - ITA No. 81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ld counsel for the assessee. 8. We have considered rival contentions and perused the record. Recently, the CBDT in its Circular No.21/2015 dated 10th December, 2015 have revised the monetary limit to ₹ 10 lakhs from ₹ 4 lakhs to file the appeal before the Tribunal by the Revenue. On scrutiny of appeal filed by the revenue, it is found that the total tax demand is below the prescribed limit of ₹ 10 lakhs. The CBDT also clarifies that this instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunal. The Income Tax Act was amended and Section 268A has been introduced on the Statute book with retrospective effect. Section 268A carves out an exception for filing of appeals and References under section 260A of the Act. The legislature has prescribed that the CBDT is empowered to issue circulars and instructions from time to time, with regard to filing of appeals depending on the tax effect involved. The relevant circular issued by CBDT reads as under: Reference is invited to Board's instruction No 5/2014 dated 10-07- 2014 wherein monetary limits and other conditions for filing departmental appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the 'tax effect' is less than the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which 'tax effect' exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately. 6. In a case where appeal before a Tribunal or a Court is not filed only on account of the tax effect being less than the monetary limit specified above, the Commissioner of Income-tax shall specifically record that even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Direct tax matters shall continue to be governed by relevant provisions of statute rules. Further, filing of appeal in cases of Income Tax, where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions under section 12 A of the IT Act, 1961, shall not be governed by the limits specified in para 3 above and decision to file appeal in such cases may be taken on merits of a particular case. 10. This instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/ Tribunals. Pending appeals below the specified tax limits in para 3 above may be withdrawn/ not pressed. Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed. 11. This issues under Section 268A (1) of the Income-tax Act 1961. 9. Considering the above CBDT Circular, we found that these appeals of the revenue are not maintainable as the tax effect in these appeals are below ₹ 10 lakhs. Accordingly, we dismiss the appeals of the revenue. 10. Learned AR also placed on record the order of the Tribunal in assessee s own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s view that section 38(2) deals with usage of assets for non-business purposes and does not refer to assets partly used during the year for business purposes. Accordingly, CIT(A) has allowed the depreciation claimed on plant and machinery during AY 2002-03. The Department has filed an appeal before the Hon'ble ITAT for AY 2007-08. However, the aforementioned issue was not taken in appeal by the Department before ITAT. In view of the above, based on a combined reading of all of the above, it is abundantly clear that depreciation is allowable on the plant and machinery, building, furniture and fixture and office equipment of INR 1,22,84,477 and the disallowance made by the AO was not justified. Thus, there is no merit for the disallowance so made. Respectfully, following the order of the Tribunal in assessee s own case, we delete the disallowance of depreciation so made by the AO. 13. With regard to disallowance of depreciation on goodwill amounting to ₹ 5.46.875/- in the A.Y.2003-04 on the plea that there was no provision under the Act to provide for the depreciation on goodwill. 14. We have considered rival contentions and found from record that the assessee has ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmed the addition by observing that approval has not been granted to the fund gratuity by the assessee. Assessee is in further before us. 20. We have considered rival contentions and found from record that the mount of INR 40,98,052 and INR 11,51,670 had been disallowed under section 43B of the Act in earlier years and the same had been paid in the year under consideration and accordingly, an amount of INR 40,98,052 and INR 11,51,670 should be allowed on payment basis. We also found that the gratuity trust maintained by IMPL has now been granted approval under the Act by Commissioner of Income Tax - 1, Baroda with retrospective effect from 01.03.2003. 21. In view of the above discussion, the gratuity payments totalling to INR 53,48,822 should be allowed under section 36 (1)(v) of the Act as the assessee has made payment to approved gratuity fund. 22. Assessee is also aggrieved for disallowance of legal and professional fee INR 11,82,642/-. Facts in brief are that the assessee had entered into consultancy agreement with Dr Ashok N. Johari to provide professional services (training etc) to the assessee. The learned AO issued notice under section 133(6) of the Act to Dr As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission of ₹ 11,19,811/-. AO disallowance assessee s claim of commission payment on the plea that notices issued u/s.133(6) to the payee were returned unserved. AO, therefore, observed that said expenditure were not genuine. By the impugned order CIT(A) confirmed the action of the AO. 27. It was contended by learned AR that the sales commission expenses were incurred by IMPL in order to increase the sales. The sales for the year under consideration were INR 1,25,09,31,683 vis-a-vis the sales for AY 2002-03 of INR 78,35,24,117. It was further submitted that assessee has been consistently following mercantile system of accounting. Based on this, the assessee has made a provision on an estimated basis for all known liabilities and accordingly had recognised an amount of INR 11,19,811 as expenditure payable to Radical Health Tech. We have considered rival contentions and found that the amount of INR 11,19,811 was not payable to Radical Health Tech. Accordingly, assessee had written back and offered to tax the said amount in A.Y.2004-05. In view of the above, we confirm the action of the AO for disallowance of sales commission during the Assessment Year 2003-04. 28. AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered rival contentions and found that foreign trips were undertaken for the purpose of business, therefore, keeping in view nature of commercial expediency and the decision of Supreme Court in case of Sassoon J David (118 ITR 261), we do not find any merit for the disallowance so made by the AO. Assessee being an artificial juridical person cannot have personal expenses. The expenditure so incurred by the company has to be for the purpose of business of the company. Accordingly, AO is directed to allow the same. 34. AO has also disallowed sales expenses of ₹ 9,17,951/-. The AO disallowed the same by observing that the Assessee failed to furnish any submission giving reasons explaining how the sales promotion expenses were incurred wholly and exclusively for the purpose of business of the assessee. The Assessee failed to explain the promotion in sales due to payments made to the hospitals and organisations as mentioned above. 35. By the impugned order CIT(A) confirmed the disallowance. It was contended by learned AR that since assessee is engaged in the business of life saving devices which are used during various types of surgery. The sales promotion expenses have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any justification for disallowance of the same. 40. The AO has also disallowed the staff welfare expenditure of ₹ 20,000/-. From the record, we found that the assessee has incurred certain expenses on account of ganpati festival expense, birthday celebrations, Diwali, marriage gifts etc. totalling to approx. INR 1,00,000. The AO disallowed entire expenditure holding that same was wholly and exclusively for the business purpose. The Hon'ble CIT (A) granted a relief of INR 80,000 and disallowed INR 20,000 contenting that the expenses on Ganpati festival, birthday celebrations, Diwali, marrage gifts, etc. ensures cordial employer-employee relationship, though the entire amount cannot be said to be incurred wholly and exclusively for business purpose. The Department has not filed an appeal against the relief granted by the CIT(A) of INR 80,000. Since the expenditure was incurred wholly and exclusively for the purpose of business, we do not find any merit for the disallowance of ₹ 20,000/-. 41. Assessee is also aggrieved for disallowance of non-compete fees. We found that during AY 2002-03, the Assessee had paid non-compete fees amounting to USD 1 million ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on a business to the exclusion of another assessee. A non-compete right encompasses a right under which one person is prohibited from competing in business with another for a stipulated period. It would be the right of the person to carry on a business in competition but for such agreement of non-compete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. The object of acquiring a know-how, patents, copyrights, trademarks, licences, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same ie., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being acquired, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl. (b) of Expin. 3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in tum confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec. 32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held. In our considered opinion, the aforesaid decision of the Hon'ble Kamataka High Court, squarely settles the issue in faovur of the assessee. Therefore, respectfully following the aforesaid decision of the Hon'ble Karnataka High Court, we hold that the assessee is entitled to depreciation on the payment of non-compete fee as the assessee has acquired intangible asset in the nature of any other business or commercial right. 42. Respectfully following the decision of the Tribunal in assessee s own case, we h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently introduced the other business segments in its distribution network which were part of the LO activities. The Assessee has started distribution for those products, which were not represented by LO. MIL-HK has sold goods in India through IMPL and also directly to customers (typically hospitals! intuitions at their own behest). MIL-HK had entered into an exclusive distribution agreement with Medtech on 1 May 1999 for distribution of products which was to continue in effect until 30 April 2002. This agreement was amended on 1 May 2001. As per the amendment, Medtech is eligible to earn commission for sales directly made by MIL-HK to customers introduced by Medtech. The learned Additional Commissioner of Income tax, TP-1 (TPO') has made an adjustment of INR 25,71,438 for notional commission income while determining the arm's length price under the transfer pricing regulations. Particulars Amount in INR Gross Margin on direct sales by MIL-HK in India 48,48,969 Gross Marqln on direct sales by Sofamor Danek in India 2,86,413 Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the commission supposedly earned by the assessee towards direct sales effected by the overseas entity to hospitals in India, he has not resorted to any of the methods approved under section 92C of the Act. At least, we have not found any such observations of the Transfer Pricing Officer in the order passed by him. As could be seen, the Transfer Pricing Officer has not disputed that the sales were directly made by overseas entity to the hospital in India. Therefore, there must be some basis for the Transfer Pricing Officer to conclude that the assessee has rendered services of any manner in relation to such transactions. Without bringing any material on record or applying any of the approved method for determining the arm's length price of the international transaction, if at all there is any, the Transfer Pricing Officer cannot determine the arm's length price on notional basis. We have noted that the Transfer Pricing Officer has not brought on record even a single comparable to justify the price determined by him. In the case of CIT v/s C.A. Computer Associates India Pvt. Ltd., the Hon'ble Jurisdictional High Court held that arm's length price of an internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red under the commercial expediency. Relying on the decision of Supreme Court in case of Dhanarajgirji Raja Narsingirji (91 ITR 544) Panipat Woolen and general Mills (103 ITR 66), Eastern Investments (20 ITR 1) and the decision of Bombay High Court in case of Dinshaw (F.E) Ltd., 36 ITR 114, we do not find any merit for disallowance of expenditure incurred on purchase of catalogues and brochures, which were wholly and exclusively for the purpose of business. Accordingly, AO is directed to delete the same. 57. Ground No.6 relates to disallowance of 50% of expenditure incurred for sponsoring the foreign trips of doctors. We have considered rival contentions and found that the AO disallowed the expenditure contenting that the assessee has not proved that the expenses were incurred wholly and exclusively for the purpose of business as the assessee has not adduced any evidence on record to show that such education imparted by it abroad t the medical professionals would culminate in assured business from these professionals upon their return. The CIT(A) held that while the assessee has failed to justify the real intended purpose behind such expenditure, it is also true that such expens ..... X X X X Extracts X X X X X X X X Extracts X X X X
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