Canon India Private Limited, Gurgaon v. DCIT, New Delhi

ITA 3497/DEL/2010 | 2001-2002
Pronouncement Date: 29-03-2012 | Result: Allowed

Appeal Details

RSA Number 349720114 RSA 2010
Assessee PAN AAACC4175D
Bench Delhi
Appeal Number ITA 3497/DEL/2010
Duration Of Justice 1 year(s) 8 month(s) 13 day(s)
Appellant Canon India Private Limited, Gurgaon
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 29-03-2012
Date Of Final Hearing 11-01-2012
Next Hearing Date 11-01-2012
Assessment Year 2001-2002
Appeal Filed On 16-07-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI EFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA ITA NO.3497/DEL/10 ASSTT. YR: 2001-02 CANON INDIA PVT. LTD. VS. DCIT CIR. 3(1) 2 ND FLOOR TOWER A & B NEW DELHI. CYBER GREEN DLF CYBER CITY PHASE-III GURGAON. PAN/GIR NO. AAACC4175D ITA NO.3374/DEL/10 ASSTT. YR: 2001-02 DCIT CIR. 3(1) VS. CANON INDIA PVT. LTD. NEW DELHI. 2 ND FLOOR TOWER A & B CYBER GREEN DLF CYBER CITY PHASE-III GURGAON. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI S.K. AGARWAL CA & SH. NAVEEN KR. GUPTA & TUSHAR GUPTA CAS REVENUE BY: MS. Y. KAKKAR SR. DR O R D E R PER R.P. TOLANI J.M : THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AS W ELL AS THE REVENUE AGAINST CIT(A)S ORDER DATED 12-4-2010 RELA TING TO A.Y. 2001- 02. RESPECTIVE GROUNDS RAISED ARE AS UNDER: ASSESSEES APPEAL (ITA NO. 3497/DEL/10) : APPORTIONMENT OF INTEREST AND FOREIGN EXCHANGE LOS S OF RS. 14 53 324/- TO STP UNIT WHILE COMPUTING DEDUCTION U /S 10A OF THE ACT. ITA 3497/DEL/10 CANON INDIA PVT. LTD. 2 A) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW THE LD. CIT(A) HAS ERRED IN PARTLY SUSTAINING THE DISALLOWANCE AT THE RATE OF 3.39% OF THE TOTAL INTE REST AND FOREIGN EXCHANGE LOSS BASED ON THE PROPORTIONATE TURNOVER OF THE STP UNIT IN RELATION TO THE TOTAL T URNOVER OF THE APPELLANT. B) THE LD. CIT(A) HAS ERRED IN BOTH LAW AND IN FACT S OF THE CASE IN PARTLY SUSTAINING THE DISALLOWANCE WHEN THE RE WAS CLEARLY NO NEXUS BETWEEN THE INTEREST AND FOREIGN EXCHANGE LOSS EXPENSES WITH THE STP UNIT AND ACCORDINGLY SUCH DISALLOWANCE IS BASED ON SURMISES AND CONJECTURES AND DESERVES TO BE QUASHED. REVENUES APPEAL (ITA NO. 3374/DEL/10) 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS. 805267 ON ACCOUNT OF DELAYED DEPOSI T OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND IGNORING THAT AS PER SECTION 36(VA) ANY DEDUCTION ON ACCOUNT OF EMPLOYEE S CONTRIBUTION TO PF IS TO BE ALLOWED ONLY IF SUCH S UM IS PAID ON OR BEFORE THE DUE DATE PRESCRIBED. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS. 490414/- ON ACCOUNT OF CAPITALIZAT ION OF LEASEHOLD IMPROVEMENT EXPENSES IGNORING THE FACT TH AT BENEFIT OF ENDURING NATURE WAS DRAWN BY THE ASSESSEE WHILE INCURRING SUCH AN EXPENDITURE. ASSESSEES APPEAL : 2. APROPOS ASSESSEES APPEAL BRIEF FACTS ARE: ASSE SSEE COMPANY WAS INCORPORATED ON 11-12-1996 AS A SUBSIDIARY COMPANY OF CANON SINGAPORE PTE. LTD. IT IS INTO THE BUSINESS OF MANUFACTURING AND TRADING OF PHOTOCOPIERS TRADING OF FAX MACHINES PRINTING AND ACCESSORIES SOFTWARE DEVELOPMENT AND ITS EXPORT. DURING THE YEAR UNDER C ONSIDERATION ASSESSEE SHOWED TOTAL RECEIPTS OF RS. 144 CRORES WHICH INCL UDED RECEIPTS OF RS. ITA 3497/DEL/10 CANON INDIA PVT. LTD. 3 4.55 CRORES FROM STP UNIT ENGAGED IN THE PRODUCTION OF EXPORT OF COMPUTER SOFTWARE. DEDUCTION U/S 10A WAS CLAIMED FR OM THIS UNIT. AO OBSERVED THAT ASSESSEE HAD CLAIMED HUGE INTEREST AND LOSS ON EXCHANGE FLUCTUATION. HOWEVER WHILE CALCULATING ELIGIBLE PR OFITS OF STP UNIT NO ALLOCATION OUT OF THESE EXPENSES WAS MADE TO STP UN ITS PROFIT. AO THUS PROPOSED TO ESTIMATE THE ALLOCABLE PROPORTION OF TH ESE EXPENSES TO STP UNIT. ON THE BASIS OF TURN OVER OF STP AT 3.39% OF TOTAL TURNOVER AND FIXED ASSET PROPORTION AT 10.5% OF THE TOTAL FIXED ASSETS OF THE COMPANY AO THUS ARRIVED AT AN ESTIMATE OF 7% OF TOTAL EXPENSES ON ACCOUNT OF INTEREST AND FOREIGN EXCHANGE LOSS ALLOCABLE TO STP UNIT. AC CORDINGLY AN AMOUNT OF RS. 30 12 415/-WAS ALLOCATED TO STP UNIT WHICH WAS REDUCED FROM ITS PROFIT AND ACCORDINGLY THE ASSESSEES CLAIM U/S 10 A WAS REDUCED TO THIS EXTENT. 2.1. AGGRIEVED ASSESSEE PREFERRED FIRST APPEAL WH ERE THE LD. CIT(APPEALS) HELD THAT AO HAD NOT POINTED OUT ANY N EXUS BETWEEN STP UNITS FUND REQUIREMENTS AND THE ECB LOAN AND HELD THE DISALLOWANCE TO BE AD HOC IN NATURE. HOWEVER DESPITE THESE OBSERVA TIONS CIT(A) ALLOCATED EXPENSES OF 3.39% TO STP UNIT PROFITS AND REDUCED THE CLAIM U/S 10A ACCORDINGLY BY FOLLOWING OBSERVATIONS: 3.4. THE LD. AR ALSO FURNISHED A CHART OF THE INTE REST-COST INCURRED VIS--VIS THE BORROWING MADE BY THE APPELL ANT COMPANY OVER VARIOUS YEARS SINCE ITS INCEPTION TO SHOW THAT BORROWINGS THAT EXISTED DURING THE YEAR WERE ESSENT IALLY REFINANCING OF LOANS TAKEN IN EARLIER YEARS TO FUND THE TRADING AND MANUFACTURING OPERATIONS CARRIED OUT IN THOSE Y EARS PRIOR TO THE SETTING UP OF THE STP UNIT. THE LD. AR HAS EMPH ASIZED THAT NO NEXUS WAS ESTABLISHED BY THE AO BETWEEN THE BORR OWINGS MADE AND THE OPERATIONS OF THE STP UNIT. IT WAS ALS O SUBMITTED BY THE LD. AR THAT THE AO HAS MERELY MADE A SWEEPIN G STATEMENT (CONTRARY TO THE FACTS ON RECORD) THAT TH E APPELLANT ITA 3497/DEL/10 CANON INDIA PVT. LTD. 4 INCURRED INTEREST COST AS IT HAD TO MOBILIZE INITIA L CAPITAL FROM EXTERNAL RESOURCES FOR CREATION OF THE INFRASTRUCTU RAL FACILITIES OF THE STP UNIT. IN THIS REGARD MY ATTENTION WAS INVI TED TOWARDS DETAILS FILED IN PAPER-BOOK WHICH SHOWS THAT ALL T HE FIXED ASSETS ACQUIRED BY THE STP UNIT OF THE APPELLANT COMPANY A MOUNTING TO RS. 54 49 852/- WERE FINANCED OUT OF THE ADVANCE S RECEIVED FROM ITS CUSTOMERS WHICH STOOD AT RS. 1 29 12 257/- . THUS THE LD. AR SUBMITTED THAT THIS AGAIN GOES TO PROVE THAT NO PART OF THE BORROWED FUNDS WERE UTILIZED BY THE APPELLANT F OR ACQUIRING ANY FIXED ASSETS OF THE STP UNIT AND NO ALLOCATION OF INTEREST COST TOWARDS THE STP UNIT OF THE APPELLANT IS CALLE D FOR. THE LD. AR SUBMITTED THAT IN ANY CASE THE ESTIMATE OF 7% OF THE ABOVE EXPENDITURE IS EXCESSIVE. 3.5. I AM INCLINED TO AGREE WITH THE ARGUMENTS OF T HE LD. AR TO THE EXTENT THAT THERE HAS TO BE A REASONABLE BAS IS FOR ALLOCATION OF INTEREST EXPENSES AND FOREIGN EXCHANG E LOSS ON ECB TO ALLOCATE FUNDS TO THE STP UNIT OF THE APPELL ANT. THE AO HAS NOT PIN POINTED ANY EXACT NEXUS BETWEEN STP UNI TS FUNDS REQUIREMENT AND THE ECB LOAN. THE RATE OF 7% ESTIMA TED BY THE AO TO APPORTION INTEREST EXPENSES AND FOREIGN EXCHA NGE LOSS ON ECB TO THE STP UNIT IS AD HOC AND BEING SO CANNOT BE SUSTAINED PARTICULARLY WHEN NO BORROWINGS WERE USE D FOR SETTING UP STP UNIT. 3.6. HOWEVER IT CANNOT BE IGNORED THAT THE FUNDS O UT OF COMMON PROFITS POOL OF FUNDS OF THE COMPANY ARE AVA ILABLE TO THE STP UNIT. THAT BEING THE CASE THE ELEMENT OF B ORROWINGS IN THE COMMON FUNDS UTILIZED BY THE STP UNIT FOR ITS W ORKING CAPITAL CANNOT BE RULED OUT. IN MY VIEW IT IS REAS ONABLE TO ESTIMATE THE INTEREST COSTS AND FOREIGN EXCHANGE LO SS ALLOCABLE TO THE STP UNIT ON THE BASIS OF PROPORTIONATE TURNO VER OF THE STP UNIT IN RELATION TO THE TOTAL TURNOVER OF THE A PPELLANT. HENCE THE DISALLOWANCE IS RESTRICTED TO 3.39% OF T HE INTEREST AND FOREIGN EXCHANGE LOSS EXPENSES. MY ATTENTION HA S ALSO BEEN DRAWN TO THE FACT THAT AN AMOUNT OF RS. 1 63 582/- PAID TO SSIS WAS ALREADY ADDED BACK TO THE COMPUTATION OF INCOME BY THE APPELLANT AND HENCE COULD NOT BE RECONSIDERED FOR ANY DISALLOWANCE. THEREFORE IT IS DIRECTED THAT THE AM OUNT OF RS. 163 582/- SHOULD BE REDUCED FROM THE TOTAL AMOUNT O F EXPENSES ON WHICH DISALLOWANCE IS COMPUTED. 2.2. AGGRIEVED ASSESSEE IS BEFORE US. 3. LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT CIT(A) HAS NOT DISPUTED FOLLOWING FACTS: ITA 3497/DEL/10 CANON INDIA PVT. LTD. 5 (I) FIXED ASSETS AMOUNTING TO RS. 54 49 852/- WERE ACQU IRED BY STP UNIT BY WAY OF FINANCING OUT OF THE ADVANCES RECEIV ED FROM ITS CUSTOMERS AMOUNTING TO RS. 1 29 12 257/-. THUS NO PART OF THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF ACQ UIRING ANY FIXED ASSET OF STP UNIT. (II) THE STP UNIT WAS BROUGHT INTO EXISTENCE W.E.F. 2-6- 1999 WHICH IS EVIDENT FROM THE CERTIFICATE OF GOVERNMENT APPRO VAL WHICH IS ON RECORD. THE ASSESSEES SUMMARY OF BORROWINGS IS AS UNDER: ITEM LOANS AS ON 31-03- 1998 LOANS AS ON 31-03-1999 LOANS AS ON 31-03-2000 LOANS AS ON 31-03-2001 REMARKS 1. NCD AND LOAN FROM BANKS 2 437 500 15 54 96 996 367 392 716 2. ECBS (INTEREST FREE) - - - 467 900 000 NCDS AND BANK LOAN REDEEMED BY ISSUING FRESH ECBS IN FY 2000- 01. 3. BANK OVERDRAFT 68 277 008 59 528 662 89 627 047 86 877 547 TOTAL LOANS 68 277 008 59 528 662 89 627 047 554 777 547 (III) FROM THE ABOVE CHART IT IS CLEAR THAT BORROWINGS WE RE INITIALLY MADE BY THE ASSESSEE SINCE F.Y. 1997-98 AND 1998-9 9 I.E. PRIOR TO SETTING UP OF THE STP UNIT TO FINANCE ITS MANUF ACTURING AND TRADING OPERATIONS OF PHOTOCOPIERS AND FAX MACHINES WHICH WERE AT THE EXPANDING STAGE AT THAT TIME. THESE BOR ROWINGS HAVE ITA 3497/DEL/10 CANON INDIA PVT. LTD. 6 LARGELY CONTINUED TILL THE YEAR UNDER CONSIDERATION . AN AMOUNT OF RS. 46.79 CRORES INTEREST FREE EXTERNAL COMMERCIAL BORROWING WERE RECEIVED BY ASSESSEE. THIS WAS UTILIZED TO REP AY THE EARLIER BORROWINGS BY WAY OF NCDS AND BANK LOANS. THERE IS NO FINDING THAT ANY FUNDS WERE DIVERTED FROM ASSESSEES BUSINE SS OPERATIONS OF MANUFACTURING & TRADING OF OFFICE AUTOMATION EQ UIPMENTS TO STP UNIT. (IV) CIT(A) WAS SATISFIED THAT NO NEXUS HAS BEEN ESTABL ISHED BY AO BETWEEN BORROWINGS MADE AND OPERATIONS OF STP UNIT AND ATTRIBUTION OF 7% EXPENSES TO STP WAS AD HOC IN NAT URE. AFTER THESE OBSERVATIONS NO PORTION SHOULD HAVE BEEN ATTR IBUTED TO STP UNIT. THEREFORE RATE OF 7% ESTIMATED BY AO AND THE N BY CIT(A) TO 3.39% TO APPORTION INTEREST EXPENSES AND FOREIGN EXCHANGE LOSS TO STP UNIT WAS AD HOC AND COULD NOT BE SUSTAI NED AS THERE IS NO EVIDENCE THAT ANY BORROWINGS WERE USED FOR SE TTING UP STP UNIT. CIT(A) IS NOT JUSTIFIED IN UPHOLDING THE DISA LLOWANCE AT 3.39% OF INTEREST AND FOREIGN EXCHANGE LOSS EXPENSE S. 4. LD. DR ON THE OTHER HAND SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE CHART MENTI ONED ABOVE AND FACTS AVAILABLE ON THE RECORD IT EMERGES THAT ASSESSEES CONTENTION THAT STP UNIT WAS FINANCED BY INTERNAL RESOURCES AND NO BORR OWED FUNDS WERE ATTRIBUTABLE TO SETTING UP OF STP UNIT HAS NOT BEEN CONTROVERTED ON ANY INSTANCE OR EVIDENCE. CIT(A) WHILE CONCLUDING THO UGH ACCEPTED THESE ITA 3497/DEL/10 CANON INDIA PVT. LTD. 7 FACTS HOWEVER WITHOUT ASSIGNING ANY REASON OR NEX US UPHELD ATTRIBUTION OF INTEREST ON BORROWINGS AND FOREIGN EXCHANGE FLUC TUATION LOSS @ 3.39%. IN OUR VIEW CIT(A)S ORDER ITSELF BECOMES AD HOC AS WITHOUT ESTABLISHING NEXUS SUCH DISALLOWANCE CANNOT BE MADE. IN VIEW T HEREOF WE DELETE THE ALLOCATION OF THESE EXPENSES @ 3.39% AS MADE BY THE CIT(A). GROUND IS ALLOWED. 6. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. REVENUES APPEAL : 7. COMING TO REVENUES APPEAL LD. DR SUPPORTED THE ORDER OF AO ON BOTH THE GROUNDS RAISED. 8. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSES SEE APROPOS GROUND NO. 1 CONTENDS THAT EMPLOYEES CONTRIBUTION TO PF HAS BEEN DEPOSITED BY THE ASSESSEE BEFORE FILING OF THE RETURN AND THUS T HE ISSUE IS COVERED IN ITS FAVOUR BY THE RATIO OF DECISION OF HONBLE DELHI HI GH COURT IN THE CASE OF CIT VS. AMIL LTD. 321 ITR 508. 9. APROPOS GROUND NO. 2 LEARNED COUNSEL FOR THE AS SESSEE CONTENDS THAT THE EXPENDITURE IN QUESTION WAS IN THE NATURE OF ALTERATION OF FLOORING INTERIOR WORK WOODEN PARTITION GLASS WORK FALSE CEILING ETC. WHICH WERE NECESSARY TO MAINTAIN ASSESSEES DAY TO DAY SMOOTHI NG WORKING AND FELICITATE THE CARRYING ON OF THE BUSINESS WHICH N ECESSITATED THE EXPENDITURE AND IN ASSESSEES OWN CASE FOR A.Y. 19 98-99 ITAT HAS ALLOWED THE SAME EXPENDITURE. CIT(A) RELYING ON ITA T ORDER AND HONBLE ITA 3497/DEL/10 CANON INDIA PVT. LTD. 8 SUPREME COURT JUDGMENT IN THE CASE OF CIT VS. EMPIR E JUTE CO. 125 ITR 1 HAS HELD THAT EXPENDITURE HAS BEEN INCURRED FOR THE PROFIT GENERATING APPARATUS OF THE ASSESSEE AND IN SUCH CASE THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. ON THIS BASIS THE ORDER OF CIT(A) I S RELIED ON. 10. LD. DR RELIED ON HONBLE DELHI HIGH COURT JUDGM ENT IN THE CASE OF BIGJOS INDIA LTD. VS. CIT (2007) 293 ITR 170 (DEL .) FOR THE PROPOSITION THAT THIS TYPE OF EXPENDITURE IS TO BE TREATED AS C APITAL IN NATURE. 11. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT HAS NOT BEEN DISPU TED THAT THE EMPLOYEES CONTRIBUTION TO PF WAS DEPOSITED BY THE ASSESSEE BE FORE THE DUE DATE OF FILING OF THE RETURN. IN VIEW THEREOF RESPECTFULLY FOLLOWING HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF AMIL LTD. (SUPRA ) WE UPHOLD THE ORDER OF CIT(A) ON THE ISSUE OF ADDITION ON ACCOUNT OF PF CONTRIBUTION. GROUND IS DISMISSED. 12. APROPOS SECOND GROUND I.E. LEASEHOLD IMPROVEMEN T EXPENSES ALSO WE FIND NO INFIRMITY IN THE ORDER OF CIT(A). ASSESS EE BEING A REPUTED COMPANY FOR ITS DAY TO DAY EFFICIENT WORKING HAS T O MAINTAIN A CERTAIN DEGREE OF UPKEEP AND PRESENTATION. THE EXPENDITURE INCURRED FOR THIS OBJECT WHICH HAS A BEARING ON THE PROFIT GENERATIN G APPARATUS IS TO BE ALLOWED AS REVENUE EXPENDITURE. IN SUCH CIRCUMSTANC ES THE THEORY OF ENDURING NATURE SHALL BREAK DOWN AS HELD BY HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. (SUPRA). 13. THE FACTS IN THE CASE OF BIGJOS INDIA LTD. (SU PRA) ARE ITA 3497/DEL/10 CANON INDIA PVT. LTD. 9 DISTINGUISHABLE AS IN THAT CASE HONBLE HIGH COUR T HELD THAT THERE WERE STRUCTURAL CHANGES MADE IN THE PREMISES. IT HAS FUR THER BEEN HELD THAT THE ISSUE OF DEPRECIATION WAS PURELY A QUESTION OF FACT CONSEQUENTLY THE FACTS OF EACH CASE ARE TO BE CONSIDERED CAREFULLY. 14. IN VIEW THEREOF ON THE ISSUE OF DEPRECIATION A LSO WE UPHOLD THE ORDER OF CIT(A). GROUND IS DISMISSED. 15. IN THE RESULT ASSESSEES APPEAL IS ALLOWED AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 29-03-2012. SD/- SD/- (B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 29-03-2012. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR ITA 3497/DEL/10 CANON INDIA PVT. LTD. 10