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TMI Blog2009 (1) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... 07,22,625/- to the assessee u/s 37(1) of the Act? (b) Whether order passed by ITAT is perverse in law when it allowed deduction to the assessee of export commission ignoring the relevant facts recorded by the Assessing Officer in the assessment order and contrary to the provisions of Section 40A(2) of the Act? (c) Whether ITAT was correct in law in allowing depreciation to the assessee on training fee of Rs 2,18,48,700/- paid to Guardian USA, that was capitalized by the assessee as part of Plant and machinery? (d) Whether ITAT was correct in law in allowing deduction of lump sum prepayment premium of Rs 8 crores paid by the assessee to IDBI? (e) Whether ITAT was correct in law in allowing entire prepayment premium of Rs 8 crores to the assessee in the instant year or the same was to be spread over the period for which, borrowing was made? (f) Whether ITAT was correct in law in admitting the additional ground raised by the assessee and thereby directing the Assessing Officer to adjudicate upon the claim for depreciation on enhanced cost of plant and machinery due to exchange rate variation, if claimed by the assessee? 1(g) Whether order passed by ITAT is perverse in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to fulfill the export application undertaken by it, it would be required to pay the differential duty along with interest. 6. It is in this background that the assessee set up its plant which commenced commercial production on 01.03.1993. 7. At this stage it would be important to note two other aspects on which the Assessing Officer, as well as the Revenue, have laid great stress, which is, that as per the collaboration agreement dated 05.06.1990 the assessee was required to pay royalty to GIC at the rate of 3% on domestic sales and 4% on foreign sales. It seems that the financial institutions in India had an objection to the clause on payment of Royalty, which stood incorporated in the collaboration agreement. The financial institutions were of the view that the obligation of the assessee to pay royalty to GIC must necessarily be subordinate to its obligation to pay instalments, interest and other charges under the loan agreements executed by the assessee with the financial institutions. In order to meet the concerns of the financial institutions the assessee gave an undertaking on the aforementioned broad terms vide letter dated 27.02.1993, which inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was piling, the said objection had no merit. As regards the second objection of the Assessing Officer that GGE had not rendered any service the CIT(A) noted; the fact that the collaboration agreement which was executed prior in point of time to the Export Sales Agency Agreement, itself provided for appointment of an agent for the purposes of carrying out exports. The agent under the collaboration agreement could have been the foreign collaborator itself i.e., GIC or any of its affiliates. The said foreign collaboration agreement also provided for payment of commission to such an agent albeit at the rate of 5% which had the approval of Government of India. The CIT(A) also returned a finding that there had been a promotion of exports which was amply demonstrated by the fact that the assessee had achieved an export turnover of Rs 90 crores; the details with respect to which had been supplied by the assessee. The CIT(A) was thus of the view that there was no justification for disallowance of the entire commission, however, she restricted the allowable agency commission to the rate of 5%. The CIT(A) was of the view that assessee had failed to establish by adverting to evidence that pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly if the Revenue is able to establish that the expenditure in issue was excessive or unreasonable having regard to fair market value of the goods and services or facilities for which payment has been made or the legitimate needs of the business or provision of services or benefit derived by or accruing to the assessee from the said expenditure. In view of the fact that the Tribunal found that no evidence was placed by the Revenue as to what was the fair market value of the goods for which the assessee had paid commission, the claim of the assessee could not be restricted by resorting to the clause in the collaboration agreement in which the agency commission had been pegged at 5%, by treating the same as evidence of fair market value. The Tribunal also observed that Section 92 of the Act could not be invoked in the instant case as the Transfer Pricing Officer in assessment years 2002-03, 2003-04 and 2004-05 had accepted that the percentage of the commission paid by the assessee as one at arms length price. The Tribunal was thus, of the view that, the provisions of Section 92 were not attracted in the instant case. It thus concluded that there was no justification in restricting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at services have been rendered by the agent the discretion as to what commission has to be paid is a business decision of the assessee which cannot be interfered with unless there is evidence to show that it is unreasonable is, in our opinion the correct approach. 11.1 The Tribunal in the impugned judgment has returned a finding of that no evidence had been produced by the Revenue that the agency commission paid by the assessee at the rate of 12.5% was unreasonable. The Tribunal also noted that the Transfer Pricing Officer in the assessment years 2002-03, 2003-04, 2004-05 had accepted the percentage of agency commission paid by the assessee confirmed to the arms length price. 11.2 In view of the aforesaid findings and the reasoning adopted by the Tribunal, we find no fault with the conclusion arrived at by the Tribunal in the impugned judgment, which is, that there was no justification on the part of the CIT(A) in disallowing the claim of the assessee towards payment of commission over and above the rate of 5% by invoking Section 40A(2) or Section 92 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s admittedly incurred prior to the setting up of the plant and, therefore, had to be capitalized as part of plant and machinery. The Tribunal observed, the fact that, the payment had been made during the previous year or that tax at source had been deducted during the previous year would not convert a capital expenditure into one which is revenue in nature. It further observed that the provisions of Section 40(a)(i) are provisions which enable the Revenue to make a disallowance. The assessee cannot seek to rely on those provisions when the item of expenditure was admittedly a capital expenditure. The Tribunal thus permitted the training fee to be capitalized as part of plant and machinery with depreciation to be allowed to the assessee on the said capitalized amount. 12.2 We agree with the line of reasoning adopted by the Tribunal. It is well settled that pre-operative expenses incurred for setting up of a plant are to be capitalized. See observations in Challapalli Sugar Ltd vs CIT; (1975) 98 ITR 167 at pages 174-175. Thus, in our view, no substantial question of law arises for our consideration. Depreciation on adjusted cost of asset 13. This issue pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he additional ground raised by the assessee pertaining to claim of depreciation on actual cost of assets after they were adjusted for fluctuation in the rate of exchange, in terms of Section 43A of the Act. A bare perusal of paragraph 36 of the impugned judgment would show that the Tribunal as a matter of fact rejected the application of the assessee raising the additional ground for the reason that it did not arose out of the order of the CIT(A). All that the Tribunal has done is that, it has granted liberty to the assessee, to make its claim before the Assessing Officer who has been permitted to adjudicate upon the same in accordance with law. According to us this direction of the Tribunal cannot be found fault with. No substantial question of law has arisen for our consideration. Pre-payment premium 14. Briefly, the assessee in its profit and loss account has debited a sum of Rs 8 crores as pre-payment premium which is classified as an extraordinary item. The Assessing Officer sought justification from the assessee for claiming the entire amount as deduction in the previous year relevant to the assessment year under consideration in view of the judgment of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ones that obtained in the present case held that, the principle of law laid down in Madras Industrial Corporation (supra) is applicable to the present case and hence, did not find any error in the approach of the Assessing Officer in relying upon the said decision. The assessee carried the matter further, in appeal, to the Tribunal. The Tribunal in paragraph 31 of the impugned judgment has returned a finding of fact that the pre-payment premium paid by the assessee, in lieu of which IDBI reduced the rate of interest on the rupee term loan, represented present value of the differential rate of interest that would have been due had no restructuring of the loan had taken place. The relevant observations of the Tribunal are extracted hereinbelow:- "The prepayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loan aggregating to Rs 170.76 crores. The same, in other words, represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. In terms of S. 36(1)(ii) read with S. 2(28A) of the Act pre payment charges being interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer which was, according to us, erroneously sustained by the CIT(A). The ratio of the judgment of the Supreme Court in the case of Madras Industrial Corporation (supra) is not applicable to the present case. The facts of the instant case are different. Madras Industrial Corporation (supra) pertains to treatment of discount on debenture issued by the assessee. The Supreme Court's observations that a claim for deduction by an assessee be spread over as deduction in one year would distort the picture of profits, cannot be applied to the instant case, as the mechanism for claiming deduction on account of "interest" paid on loans obtained by the assessee from a public financial institution, is specifically provided for in the statute under Section 43B(d) of the Act. Therefore, in terms of Section 43B(d) once it is ascertained that the payment is in the nature of "interest" in terms of Section 36(1)(iii) read with Section 2(28A) of the Act, and the assessee fulfills the conditions provided in Section 43B(d), that is, it is the interest paid in respect of loans obtained from public institutions, it follows that, the interest will have to be allowed as a deduction only in the year of payme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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