DCIT, New Delhi v. M/s. EKL Applicances Ltd., New Delhi

ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI I.P. BANSAL JUDICIAL MEMBER AND SHRI SHAMIM YAHYA ACCOUNTANT MEMBER I.T.A. NO. 4878/DEL/2009 A.Y. : 2002-03 AND ITA NOS. 3895 421 & 4333/DEL/2010 A.YRS. 2002-03 & 2003-04 DCIT CIRCLE 11(1) C.R. BUILDING NEW DELHI 110 002 VS. M/S EKLA APPLIANCES FORMERLY KNOWN AS M/S ELECTROLUX KELVINATOR LTD. VIDEOCON TOWER 12 TH FLOOR BLOCK E-1 RANI JHANSHI ROAD JHANDEWALAN EXTENSION NEW DELHI 110 055 (PAN/GIR NO. : AAACE7192G) (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : SH. SHAILESH S. SHAH/ AKASH SINGHAL CA DEPARTMENT BY : SH. STEPHEN GEORGE C.I.T.(D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THESE APPEALS BY THE REVENUE EMANATE OUT OF THE RE SPECTIVE ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (APPEAL S). SINCE THE ISSUES ARE CONNECTED AND THE APPEALS WERE HEARD TOG ETHER THESE APPEALS ARE BEING DISPOSED OF BY THIS COMMON ORDER F OR THE SAKE OF CONVENIENCE. ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 2 ITA NO. 487 ITA NO. 487 ITA NO. 487 ITA NO. 4878 88 8 2. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 27.102 .2009 PERTAINING TO ASSESSMENT YEAR 2002-03 ARISING OUT O F THE ASSESSING OFFICERS ORDER PASSED U/S 143(3) OF THE ACT. 3. THE FIRST ISSUE IS THAT THE LD. COMMISSIONER OF I NCOME TAX (APPEALS) HAS ERRED IN DELETING THE ADDITION AS DEE MED DIVIDEND U/S. 2(22)(E) AMOUNTING TO ` 49 35 59 040/-. 3.1 ASSESSEE COMPANY IN THIS CASE IS ENGAGED IN TH E BUSINESS OF MANUFACTURING OF REFRIGERATION WASHING MACHINE AND SPARE PARTS TRADING OF REFRIGERATION WASHING MACHINE AND OTHER GOODS LIKE ACS MICROWAVES DEEP FREEZER ETC. AND PROVIDING AFTER SA LE SERVICES. ASSESSING OFFICER IN THIS CASE MADE A DISALLOWANCE OF ` 49 35 59 040/- BY PLACING RELIANCE OF PROVISIONS OF SECTION 2(22)( E) OF THE ACT. 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) NOTED THAT ASSESSEE COMPANY WAS NOT A SHA RE HOLDER OF M/S HUSQVARNA AB FROM WHOM EXTERNAL COMMERCIAL BORROWING HAD BEEN MADE. BUT THE SAME WAS SUBSIDIARY OF AB ELECTROLU X WHICH HAD 51% SHARE OF THE SHARE HOLDING IN THE ASSESSEE COMPANY. THUS THE ASSESSEE WHICH HAD OBTAINED EXTERNAL COMMERCIAL BOR ROWING WAS NOT SHARE HOLDER OF M/S HUSQVARNA AB. IN THIS REGARD L D. COMMISSIONER OF INCOME TAX (APPEALS) PLACED RELIANCE OF THE SPECIAL BENCH DECISION OF THE ITAT IN THE CASE OF ACIT V BHAUMIK COLOURS (P) LTD. 27 SOT 270 . ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 3 BOTH THE COUNSEL FAIRLY AGREED THAT THE PRESENT ISS UE IS COVERED BY THE SAID SPECIAL BENCH DECISION IN FAVOUR OF THE ASSESS EE. IN THIS CASE THE SPECIAL BENCH HAS HELD AS UNDER:- * DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HAND S OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN T HE HANDS OF A PERSON THAN A SHAREHOLDER; AND * THE EXPRESSION SHAREHOLDER REFERRED TO IN SECT ION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREH OLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THAN THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SH AREHOLDER THE ALSO THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. 4.1 RESPECTFULLY FOLLOWING THE PRECEDENT FROM THE SP ECIAL BENCH DECISION WE UPHOLD THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE. 5. THE NEXT ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE DISALLOWANCE OF ` 9 56 62 981/- BEING PROVISION FOR EXPENSES MADE BY THE APPELLANT ON THE GROUND THE SAME ARE ON AN ESTIMATED BASIS AND NOT THE PRECISE ASCER TAINMENT OF LIABILITY. 6. ASSESSING OFFICER IN THIS CASE NOTED THAT ASSESS EE HAD MADE PROVISION FOR EXPENSES AMOUNTING TO ` 9 56 62 981/- CLAIMED DURING THE YEAR. THESE EXPENSES WERE BEING INCURRED ON ACCOUNT OF TRAVELLING CONVEYANCE OFFICE ADMINISTRATION AND MARK ETING ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 4 EXPENDITURE ETC. ASSESSING OFFICER WAS OF THE OPI NION THAT SINCE THE ASSESSEE HAS FAILED TO GIVE THE SPECIFIC ACCOUNTS O N WHICH THE PROVISION WAS MADE. HE MADE THE DISALLOWANCE OF ` 9 56 62 98 1/-. 7. BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ASSESSEE MADE THE ELABORATE SUBMISSIONS AND BILLS WERE ALSO SU BMITTED WHICH WERE PAID SUBSEQUENTLY BUT THE PROVISION OF THE SA ME WAS MADE DURING THE YEAR AS THE LIABILITY HAD ARISEN DURING THE YEAR. IN THIS REGARD LD. COMMISSIONER OF INCOME TAX (APPEALS) PREP ARED A CHART WHICH SHOWED THAT BILLS WERE VERIFIED BY THE ASSES SING OFFICER AS PER THE REMAND REPORT ACTUAL PAYMENT MADE SHOWN IN THE BANK STATEMENTS AND OTHER PROOF OF PAYMENT OTHER THAN TH E BANK STATEMENT AMOUNTING TO ` 65983858/-. THUS ACCORDING TO THE L D. COMMISSIONER OF INCOME TAX (APPEALS) THESE EXPENSES WERE ALLOWABL E. HOWEVER REGARDING THE BALANCE AMOUNT PROVISION LD. COMMISSION ER OF INCOME TAX (APPEALS) NOTED THAT DETAILS IN THIS REGARD WER E NOT AVAILABLE AND HENCE HE DISALLOWED A SUM OF ` 29679723/-. 8. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 9. WE NOTE THAT AS PER THE LD. COMMISSIONER OF INCOME TAX (APPEALS)S OWN ADMISSION BILLS VERIFIED BY THE ASSE SSING OFFICER AS PER HIS REMAND REPORT AMOUNTED TO ` 39166616/- AND G OOD PART OF THE BALANCE AMOUNT WHERE LD. COMMISSIONER OF INCOME TAX ( APPEALS) HAS PROVIDED RELIEF WERE NOT BEFORE THE ASSESSING OFFI CER. IN OUR CONSIDERED OPINION THIS RESULTED IN THE VIOLATION OF RULE 46A. HENCE WE DIRECT THAT THE TOTAL DETAILS BE FURNISHED BEFO RE THE ASSESSING OFFICER WHO SHALL VERIFY THE SAME AND ALLOW ACCORD INGLY. 10. THE NEXT ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DELETING THE ADDITION BEING PROVISION FOR ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 5 DOUBTFUL DEBTS - ` 12 33 24 025/- PROVISION FOR GR ATUITY - ` 1 24 53 119/- AND PROVISION FOR EXPENSES - ` 9 56 62 981/- FROM THE BOOK OF PROFIT COMPUTED U/S 115JB. 11. AT THE OUTSET IN THIS REGARD LD. DEPARTMENTAL RE PRESENTATIVE SUBMITTED THAT PURSUANT TO THE AMENDMENT OF THE INC OME TAX ACT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS PASSED AN O RDER U/S 154 CONFIRMING THE ABOVE SAID DISALLOWANCE. HENCE HE S UBMITTED THAT THIS GROUND HAS THUS BECOME INFRUCTUOUS. ACCORDINGL Y WE DISMISS THIS GROUND AS INFRUCTUOUS. 12. THE LAST ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DELETING THE DISALLOWANCE OF ` 3 99 51 000/- ON ACCOUNT OF ROYALTY PAYMENT. 13. ON THIS ISSUE ASSESSING OFFICER NOTED THAT REF ERENCE HAS BEEN MADE TO THE TPO FOR DETERMINING THE ARMS LENGTH PRICE U/S 92CA(3) IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO B Y THE ASSESSEE DURING THE FINANCIAL YEAR 2001-02. ASSESSING OFFICE R REFEREED TO THE TPOS ORDER THE ROYALTY PAYMENT DURING THE YEAR TO THE ASSOCIATED ENTERPRISES AB ELECTROLUX SWEEDEN IS CONSIDERED U NJUSTIFIED AND THE ARMS LENGTH PRICE OF THESE TRANSACTIONS IS CONSIDER ED AT NIL. THIS AMOUNT OF ` 39951000/- IS TO BE ADDED BACK TO THE TO TAL INCOME. ACCORDINGLY THE ASSESSING OFFICER ADDED BACK THIS AMOUNT TO THE INCOME OF THE ASSESSEE. 14. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) ELABORATELY DISCUSSED THE ISSUE. LD. COM MISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT HE HAS GONE THROUGH THE ORDER OF THE TPO FOUND THAT TPO HAS DETERMINED THE ARMS LENGTH PRICE FOR THE ROYALTY PAYMENT TO BE NIL VALUE PRIMARILY ON THE GROUND THA T THE ASSESSEE ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 6 HAS NOT BEEN BENEFITED FROM THE TECHNICAL KNOW HOW R ECEIVED FROM THE AE (ASSOCIATED ENTERPRISES) AND THERE IS NO JUSTI FICATION FOR PAYMENT OF ROYALTY BECAUSE INSPITE OF HAVING PURCHASED THE TECHNICAL KNOW HOW THE ASSESSEE HAS INCURRING CONTINUES LOSSES. LD. COMMISSIONER OF INCOME TAX (APPEALS) FURTHER NOTED THAT THE ROYALTY PAYMENT WAS APPROVED BY THE GOVERNMENT OF INDIA. A LIST OF COMP ANIES WHICH WERE MAKING ROYALTY PAYMENT DESPITE PERSISTENT LOSSES WAS ALSO SUBMITTED BY THE ASSESSEE TO THE TPO. LD. COMMISSIONER OF INCOM E TAX (APPEALS) REFERRED TO THE ASSESSEES SUBMISSION THAT BECAUSE OF THE INCREASE IN COMPETITION DUE TO CHANGE IN THE CUSTOMER PREFERENCES FROM DIRECT COOLING REFRIGERATOR TO FROST FREE REFRI GERATOR AND ENTRY OF LARGE NUMBER NEW OF ENTRANTS IN THE MARKET THEY HAD TO UPGRADE THEIR TECHNOLOGY IN ORDER TO MEET THE CUSTOMER PREFERENCE S AND ACCORDINGLY ENTERED INTO AN AGREEMENT WITH AB ELECTROLUX FOR UP GRADING ITS TECHNOLOGY AND KNOWHOW. 14.1 LD. COMMISSIONER OF INCOME TAX (APPEALS) FURTHER REFERRED TO THE LOSSES INCURRED BY THE COMPANY AND MENTIONED THE LOS SES HAVE COME DOWN AFTER ACQUISITION OF THE TECHNOLOGY SIGNIFICAN TLY AND TURNOVER HAS ALSO INCREASED. ASSESSEE FURTHER SUBMITTED THAT INC REASES IN THE OPERATING LOSSES HOWEVER WAS ON ACCOUNT OF NUMEROUS INTERNAL OR EXTERNAL FACTORS WHICH INCLUDED INCREASE IN EMPLOYEE S COST INCREASE IN FINANCE CHARGES INCREASE IN ADMINISTRATIVE EXPENSES INCREASE IN DEPRECIATION COST AND INCREASE IN INSTALLED CAPACIT Y. LD. COMMISSIONER OF INCOME TAX (APPEALS) OBTAINED THE DETAILS REG ARDING THE ABOVE FROM THE ASSESSEE. HE NOTED THAT ASSESSEE WAS DERI VING GROSS PROFIT FROM THE OPERATIONS. HOWEVER IT WAS INCURRING LOS SES DUE TO OTHER EXPENSES AND FACTOR. THE ASSESSEE WAS ALREADY INCU RRING HUGE LOSSES AT THE TIME OF ENTERING THE AGREEMENT. SUCH LOSSES WERE INCURRED BY ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 7 THE ASSESSEE AT THE OPERATING LEVEL DUE TO SEVERAL INTERNAL AND EXTERNAL FACTORS. HE FOUND THAT ASSESSEE HAS WITNESSED RED UCTION IN LOSSES IMMEDIATELY FOLLOWING THE TECHNICAL UPGRADATION. H ENCE HE FOUND IT WOULD NOT BE INAPPROPRIATE TO STATE THAT THE ASS ESSEE HAD STARTED DERIVING SIGNIFICANT MONETARY BENEFITS DUE TO TECHN ICAL UPGRADATION RECEIVED UNDER ITS COLLABORATION WITH ITS AE. 14.2 IN THIS REGARD LD. COMMISSIONER OF INCOME TAX (APPEALS) FURTHER MENTIONED THAT IT IS AN ACKNOWLEDGED FACT THAT TRANS FER PRICING HAS MORE TO DO WITH ECONOMIC PRINCIPLES AND BUSINESS CON DITIONS THAT PREVAIL IN AN UNCONTROLLED SITUATION. HE FURTHER R EFERRED TO CERTAIN OECD GUIDELINES ISSUED IN THIS REGARD. HE OBSERVED THAT TPO HAS COMPLETELY DISREGARDED THE BUSINESS AND COMMERCIAL ST RATEGY/ REALITIES BEHIND THE TRANSACTION AND ACTED IN A C OMPLETELY MECHANICAL MANNER WITHOUT GIVING REGARD TO THE ECONOMIC CIRCUMSTA NCES SURROUNDING THE TRANSACTION AND THE BUSINESS DECISI ON TAKEN BY THE ASSESSEE. FURTHER LD. COMMISSIONER OF INCOME TAX (APP EALS) OPINED THAT TPO CANNOT QUESTION THE JUDGEMENT OF THE ASSESSEE AS TO WHEN IT IS NECESSARY AND EXPEDIENT TO EXPAND ITS BUSINESS WHEN AND FROM WHOM OR FROM WHICH SOURCES THE TECHNOLOGY OR TECHNI CAL KNOW HOW IS TO BE TAKEN AND AT WHAT COST ETC. OR WHAT STEPS SH OULD BE TAKEN TO MEET THE NEEDS OF THE MARKET FORCES AND TO FACE THE COMPETITORS ETC. LD. COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT R OYALTY PAYMENT WAS INCURRED FOR GENUINE BUSINESS PURPOSE AND THE D ISALLOWANCE WERE UNCALLED FOR AND UNJUSTIFIED. 15. AGAINST THIS ORDER THE REVENUE IS IN APPEAL BEF ORE US. 16. LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE TPO. ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 8 17. LD. COUNSEL OF THE ASSESSEE SUBMITTED TO THE EL ABORATE SUBMISSIONS AND ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS). 18. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE RECORDS. WE FIND THAT LD. COMMISSIONER OF I NCOME TAX (APPEALS) HAS GIVEN THE CORRECT FINDING IN THIS REG ARD THAT ROYALTY PAYMENT IN THIS CASE WAS JUSTIFIED AND THE TPO WA S TOTALLY WRONG IN DISALLOWING THE ROYALTY PAYMENT ON THE GROUND THAT THE COMPANY HAS INCURRED LOSSES. WE DO NOT FIND ANY INFIRMITY IN T HE WELL REASONED ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) AND ACCORDINGLY WE UPHOLD THE SAME. 19. IN THE RESULT THIS REVENUE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 3895 ITA NO. 3895 ITA NO. 3895 ITA NO. 3895 20. THIS APPEAL BY THE REVENUE AGAINST THE ORDERS O F THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 3.6.2010 PERTAINING TO ASSESSMENT YEAR 2002-03 EMANATING OUT OF ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) READ WITH SEC TION 263 OF THE IT ACT. 21. THE FIRST ISSUE RAISED IS THAT LD. COMMISSIONER O F INCOME TAX (APPEALS) HAS ERRED IN DELETING THE ADDITION OF ` 108 63 504/- ON ACCOUNT OF ROYALTY EXPENSES BY TREATING THE SAME AS REVENUE EXPENDITURE. 22. ASSESSING OFFICER IN THIS CASE NOTED THAT ASSE SSEE HAS PAID ROYALTY OF ` 108 63 504/- WHICH IN ASSESSING OFFIC ERS OPINION CANNOT BE CONSIDERED TO BE REVENUE EXPENDITURE. IN ASSESSI NG OFFICERS ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 9 OPINION THE SAID EXPENDITURE FELL INTO THE CAPITAL FIELD. ACCORDINGLY HE DISALLOWED THE SAME AND ADDED TO THE INCOME OF THE ASSESSEE. 23. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOM E TAX (APPEALS) ELABORATELY CONSIDERED THE SUBMISSIONS. HE NOTED THAT IN THE PRESENT CASE AS PER THE TERMS OF THE AGREEMENT THERE IS NO QUESTION OF ASSESSEE HAVING SECURED BY THE PAYMEN T OF THE ROYALTY ANY EXCLUSIVE PRIVILEGE OF EITHER THE MANUFACTURE OR THE SALE OF THE PRODUCTS. THE TERMS AND CONDITIONS OF THE AGREEMENT PROVIDE THAT THE RIGHT TO USE THE TECHNOLOGY AND TECHNICAL INFORMATI ON PROVIDED TO THE ASSESSEE WAS FOR A PRESCRIBED PERIOD. HENCE IT WA S NOT PERPETUAL. FURTHER THE ROYALTY WAS BASED UPON THE CERTAIN PERC ENTAGE OF THE PRODUCTION/SALES EVERY YEAR. IN THESE CIRCUMSTA NCES LD. COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT IT IS OBSERVED FROM THE DETAILS PROVIDED THAT THE TERMS AND CONDITIONS OF THE AGREEMENT IN THE PRESENT CASE ARE SIMILAR TO THOSE IN THE CASE OF C.I.T. V IAEC (PUMPS) LTD. (1997) 232 ITR 316. IN THE SAID CASE S UPREME COURT HELD THAT THE SALIENT FEATURES OF THE AGREEMENT EXAMINED BY THE COURT WOULD GO TO SHOW THAT THE ASSESSEE THEREIN OBTAINE D A LICENCE AND WHAT WAS PAID BY THE ASSESSEE TO THE FOREIGN COMPANY WAS ONLY A LICENCE FEE AND NOT THE PRICE FOR ACQUISITION OF AN Y CAPITAL ASSET. 23.1 LD. COMMISSIONER OF INCOME TAX (APPEALS) CONCLU DED THAT HENCE FROM THE ABOVE DISCUSSION AND RESPECTFULLY FOLLOWING THE SUPREME COURTS DECISION IN THE CASE OF C.I.T. VS. IAEC (PUMPS) LTD. (1997) 232 ITR 316 I HOLD THAT SINCE THE APPELLANT COMPANY HAS NOT ACQUIRED ANY EXCLUSIVE RIGHT TO MANUFACTURE AND TO SELL THE PRODUCTS THE TECHNOLOGY AND TECHNICAL KNOWLEDGE WAS IN A FO RM OF LICENSE FEES THE ENTIRE ROYALTY PAYMENT MADE BY THE ASSESSEE IN THE RELEVANT ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 10 ASSESSMENT YEAR IN QUESTION IN TERMS OF THE AGREEME NT IS TREATED AS HAVING BEEN INCURRED IN CONNECTION WITH THE RUNNING OF ITS BUSINESS AND IS DEDUCTIBLE REVENUE EXPENDITURE. THEREFORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DELETED. 24. AGAINST THIS ORDER THE REVENUE IS IN APPEAL BEF ORE US. 25. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. BOTH THE COUNSEL FAIRLY AGREED THAT THE ROYALTY IN THIS CASE IS BASED UPON THE PERCENTAGE OF PRODUCTION/SALES AND IT CANNOT BE SA ID TO BE RESULTING IN A BENEFIT OF ENDURING NATURE AND AS SUCH THE SAME IS ALLOWABLE. ACCORDINGLY WE UPHOLD THE ORDER OF THE LD. COMMISSI ONER OF INCOME TAX (APPEALS) AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 26. THE NEXT ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE DISALLOWANCE OF DOU BTFUL DEBTS/ ADVANCE WRITTEN OFF OF ` 66 86 974/- BY TREATING THE SAME A S REVENUE EXPENDITURE. 27. ON THIS ISSUE THE ASSESSING OFFICER HELD THAT CLAIM OF THE ASSESSEE CANNOT BE ALLOWED AS NO DETAILS REGAR DING THESE EXPENSES HAVE BEEN FILED WHETHER THESE WERE ACTUALLY TRAD E DEBTS INCURRED IN THE COURSE OF BUSINESS WHAT STEPS WERE TAKEN TO RE COVER THE AMOUNT AND WHY THESE HAVE BEEN WRITTEN OFF. HENCE HE DIS ALLOWED A SUM OF ` 66 86 974/-. 28. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) ELABORATELY CONSIDERED THE ISSUE AND CONC LUDED AS UNDER:- 1. THE APPELLANT HAD SUBMITTED THE DETAILS AND EX PLANATIONS WITH REGARD TO THE CLAIM FOR DEDUCTION IN RESPECT O F ADVANCES WRITTEN OFF OF ` 66 68 LACS OUT OF ` 66.87 LACS. NO ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 11 FURTHER SPECIFIC DETAILS WERE CALLED FOR BY THE ASS ESSING OFFICER. EVEN DURING REMAND PROCEEDINGS THE ASSESS ING OFFICER HAS NOT DOUBTED THE GENUINENESS OF THE PAY MENTS MADE BUT HAS SIMPLY STATED THAT IT IS NOT KNOWN WHETH ER THESE WERE TRADE DEBTS INCURRED IN THE COURSE OF TH E BUSINESS OF THE APPELLANT COMPANY. 2. ALL THE SAID PAYMENTS MADE WERE MADE BY ACCOUNT PA YEE CHEQUES. THE COPIES OF CHEQUES BANK ENTRIES IN RE SPECT OF ` 66 68 000/- BEING PAYMENTS TOWARDS ADVANCES FOR PURCHASE OF PACKING MATERIALS HAVE BEEN SUBMITTED. 3. THE BOOKS OF ACCOUNT OF THE APPELLANT COMPANY ARE AUDITED BY STATUTORY AUDITORS BOTH UNDER THE INCOME TAX AC T AND THE COMPANIES ACT. 4. COMPANY FOLLOWS CONSERVATIVE METHOD OF ACCOUNTING AND HAS MADE ALL THE PROVISIONS AND WRITE OFF FOR DEBTO RS AND ADVANCES WHICH WERE NOT RECOVERABLE. THE SAME I S DULY APPROVED BY THE BOARD OF DIRECTORS OF THE COMPANY. 5. HAD THERE BEEN ANY EXCESS WRITTEN OFF THE SAME W OULD HAVE BEEN WRITTEN BACK AND TAXED U/S 41(1) OF THE I NCOME TAX ACT. I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND ALSO PERUSED THE ASSESSMENT ORDER. T HE ASSESSEE HAS GIVEN DETAILS SUCH AS NAME OF THE PAR TY AND THE PURPOSE FOR WHICH IT IS GIVEN IN RESPECT OF AD VANCE WRITTEN OFF AMOUNTING TO ` 66 68 000/-. THE PURPOSE OF ADVANCE HAS ALSO BEEN EXPLAINED VIDE AFORESAID LE TTERS. ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 12 FURTHER IT IS SUBMITTED THAT THE ASSESSEE COMPANY W AS A SUBSIDIARY OF A FOREIGN COMPANY AND IT CANNOT BE SA ID THAT NO EFFORTS WERE MADE TO RECOVER THE SAID AMOUNT BEFO RE THE WRITE OFF. THE CORRESPONDENCE COULD NOT BE PRODU CED AS THIS MATTER IS OLD AND THERE WAS A CHANGE IN THE MANAGEMENT ALSO. I AGREE WITH THE CONTENTIONS OF TH E APPELLANT THAT THE SAME WERE GIVEN WHOLLY FOR THE PURPOSE OF THE BUSINESS AND IN THE ORDINARY COURSE OF BUSIN ESS. IT IS A COMMON FEATURE OF BUSINESS AND PARTICULARLY IN SUC H BUSINESS CARRIED ON BY THE APPELLANT THAT SOME OF TH E ADVANCES BECOME UNREALIZABLE AND ACCORDINGLY HAVE B EEN WRITTEN OFF AS BUSINESS LOSS. IT IS NOT THE CASE T HE ASSESSING OFFICER THAT THE SAID AMOUNT WAS RECOVERED BY THE ASSESSEE AT A LATER DATE. HENCE THE SAME ARE ALLOW ABLE U/S 28 AND 37(1) OF THE ACT. IN RESPECT OF OTHER AMOUNTS OF ` 18 974/- IN THE ABSENCE OF DETAILS THE DISALLOWANC E MADE BY THE ASSESSING OFFICER IS PROPER AND CLAIM FOR DEDUCTION U/S 36(1)(VII) OR 28 HAS RIGHTLY BEEN REJECTED. AS A RESULT OUT OF THE DISALLOWANCE MADE BY THE AS SESSING OFFICER OF ` 66 86 974/- ` 66 68 000/- STANDS DEL ETED AND THE BALANCE ` 18 974/- IS CONFIRMED. 29. AGAINST THIS ORDER THE REVENUE IS IN APPEAL BEF ORE US. 30. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. BOTH THE COUNSEL FAIRLY AGREED THAT AS PER SECTION 36(VII) DEDUCTION IS TO BE PROVIDED FOR AMOUNT OF ANY BAD DEBT AND PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE IN THE PREVIOUS YEAR. WE NOTE THAT ASSESSEE HAS DULY WR ITTEN OFF ALL THE ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 13 AMOUNTS UNDER CONSIDERATION IN THE BOOKS OF ACCOUNTS . LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS HIMSELF ELAB ORATELY CONSIDERING ALL THE VARIOUS OTHER ASPECTS. ACCOR DINGLY WE UPHOLD THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 31. THE LAST ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE DISALLOWANCE OF ` 1 41 89 000/- BEING RESEARCH AND DEVELOPMENT EXPENSES BY TREATING AS RE VENUE EXPENDITURE. 32. ON THIS ISSUE THE ASSESSING OFFICER NOTED THAT REGARDING RESEARCH AND DEVELOPMENT EXPENDITURE OF ` 1 41 89 000/- THE A SSESSEE HAS STATED THAT THE EQUIPMENT PURCHASED FOR RESEARCH AN D DEVELOPMENT IS CAPITALIZED WHEN COMMISSIONED AND REVENUE EXPENSES I S CHARGED IN THE PERIOD IN WHICH IT WAS INCURRED. ASSESSING OFF ICER HELD THAT ARGUMENTS OF THE ASSESSEE CANNOT BE ACCEPTED AS ASS ESSEE HAS NOT FILED NO DETAIL OF RESEARCH AND DEVELOPMENT EXPENSE S. ACCORDINGLY HE MADE THE DISALLOWANCE OF ` 1 41 89 000/- 33. UPON ASSESSEES APPEAL ASSESSEE SUBMITTED THAT EXPENDITURE WAS INCURRED FOR DEVELOPMENT AND IMPROVEMENT OF THE EXISTING PRODUCTS AS WELL AS THE NEW PRODUCTS IN THE APPELLA NTS EXISTING LINE OF BUSINESS. IT WAS FURTHER SUBMITTED THAT EXPENDITUR E WAS INCURRED WITH A VIEW TO RUN ITS EXISTING BUSINESS IN THE MORE PROF ITABLE MANNER. LD. COMMISSIONER OF INCOME TAX (APPEALS) FURTHER NOTED T HAT THE ASSESSEE ACCOUNTING POLICY IN THIS REGARD AND BY REFERRING T HE SEVERAL CASE LAWS HE HELD THAT THE ASSESSING OFFICER HAS ERRED IN DISALLOWING THE RESEARCH AND DEVELOPMENT EXPENDITURE BY TREATING IT AS CAPITAL EXPENDITURE. ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 14 34. AGAINST THIS ORDER THE REVENUE IS IN APPEAL BEF ORE US. 35. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. ADMITTEDLY IN THIS CASE THE DETAILS REGARDING RESEA RCH AND DEVELOPMENT EXPENDITURE WERE NOT PRODUCED BEFORE THE ASSESSING OFFICER LD. COMMISSIONER OF INCOME TAX (APPEALS)S ORDER IN THIS REGARD IS ALSO SILENT REGARDING DETAILS. UNDER THESE CIRCUMSTANCES BOTH THE COUNSEL FAIRLY AGREED THAT THE ISSUE MAY B E REMITTED TO THE FILES OF THE ASSESSING OFFICER TO EXAMINE THE ISSUE AFRESH. ACCORDINGLY THE ISSUE STANDS REMITTED TO THE FILES OF THE ASSESSING OFFICER. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN ADEQUATE OPPORTUNITY OF BEING HEARD. 36. IN THE RESULT THIS REVENUE APPEAL IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ITA NO. 421 ITA NO. 421 ITA NO. 421 ITA NO. 421 37. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 27.11. 2009 AND PERTAINS TO ASSESSMENT YEAR 2003-04. 38. THE FIRST ISSUE RAISED IS THAT LD. COMMISSIONER O F INCOME TAX (APPEALS) HAS ERRED IN DELETING THE ADDITION OF 3 42 97 940 ON ACCOUNT OF ARMS LENGTH PRICE OF THE BRAND FEES/ ROYALTY TRA NSACTION. 39. IN THIS CASE DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THE FOLLOWING INTERNATIONAL TRANSAC TIONS ENTERED INTO BY THE APPELLANT DURING THE FINANCIAL YEAR 2002-03 AS REPORTED IN FORM 3CEB FILED ALONG WITH THE RETURN OF INCOME: S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE & (IN `) 1 PURCHASE OF COMPONENTS TNMM 9 15 101 ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 15 2 SALE OF COMPONENTS TNMM 53 206 3 PURCHASE OF FINISHED GOODS TNMM/RPM 16 16 966 4 RETURN OF FINISHED GODS - 36 68 825 5 SALES OF FINISHED GOODS TNMM 35 62 974 6 PURCHASE OF FINISH GOOD (SAMPLES) - 1 62 436 7 BRAND FEES/ ROYALTY PAYMENTS CUP 3 42 97 940 8 SERVICES RENDERED (RECEIVED) TNMM 27 64 434 9 REVENUE GRANT - 50 00 00 000 10 SERVICE RENDERED (PAID) - 20 82 258 11 COST RE-CHARGE (RECEIVED) - 1 38 05 241 12 COST RECHARGE (PAID) - 1 37 79 105 13 INTEREST PAID ON LOAN CUP 2 99 30 583 39.1 A REFERENCE WAS MADE BY THE ASSESSING OFFICER UNDER SECTION 92(CA(1) OF THE ACT TO THE TRANSFER PRICIN G (TPO) FOR COMPUTATION OF ARMS LENGTH PRICE IN RESPECT OF THE ABOVE INTERNATIONAL TRANSACTIONS. THE TPO ACCEPTED THE TR ANSACTIONS AT S.NO. 1 TO 6 AND 8 TO 13 TO BE ARMS LENGTH HOWEVER IN RE SPECT OF BRAND FEES/ ROYALTY PAID BY THE APPELLANT TO ITS AE ON A CCOUNT OF RECEIVING THE BRAND NAME KELVINATOR THE TPO IN ITS ORDER HA S CONCLUDED THAT THE ROYALTY PAYMENT MADE BY THE APPELLANT TO ITS ASS OCIATED ENTERPRISE (AE) IS UNJUSTIFIED ON THE GROUND THAT: (A) THE ACQUISITION OF TECHNICAL KNOW HOW/ BRAND FE ES HAS NOT RESULTED IN ANY FINANCIAL BENEFIT TO THE APPELLANT IN TERMS OF PROFIT (B) THE APPELLANT BECAUSE OF FINANCIAL CRUNCH SHO ULD HAVE DISCONTINUED THE PAYMENT TO ITS AE ON ACCOUNT OF BRA ND FEES ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 16 (C) THERE WAS NO NECESSITY FOR PAYMENT OF ROYALTY T ILL THE COMPANY ACTUALLY SHOWED PROFIT AFTER BENEFITING FROM SUCH BRAND FEES. ON ACCOUNT OF THE ABOVE REASONS THE TPO DETERMINED T HE ARMS LENGTH PRICE OF THE BRAND FEES/ ROYALTY TRANS ACTIONS AT NIL AND THEREBY MADE AN ADJUSTMENT OF ` 3 42 97 940/-. 39.2 FROM THE ABOVE ASSESSING OFFICERS ORDER IT IS NOTED THAT TPO OBJECTION REGARDING THE ARMS LENGTH PRICE PERTAIN TO ROYALTY TRANSACTION. ACCORDING TO THE TPO THE SAME SHOULD HAVE BEEN NIL AND HENCE HE MADE ADJUSTMENT OF ` 3 42 97 940/-. BOTH T HE COUNSEL FAIRLY AGREED THAT ISSUE IS IDENTICAL TO THE ISSUE RAISED IN PARA 12 IN ITA NO. 4878. THE SAID ISSUE WE HAVE ELABORATELY EXAMINED T HE LD. COMMISSIONER OF INCOME TAX (APPEALS)S ORDER AND DE CIDED THAT THERE IS NO INFIRMITY IN THE ORDER OF THE LD. COMMISSIONER O F INCOME TAX (APPEALS). ACCORDINGLY ON THE SAME REASONING AS M ENTIONED IN PARA 14 TO 18 WE UPHOLD THE ORDER OF THE LD. COMMISSIONE R OF INCOME TAX (APPEALS) AND DECIDE THE ISSUE IN FAVOUR OF THE ASS ESSEE. 40. THE NEXT ISSUE RAISED IS THAT LD. COMMISSIONER O F INCOME TAX (APPEALS) IN DELETING THE ADDITION OF ` 365701/- O N ACCOUNT OF LATE PAYMENT TOWARDS ESI AND PF. 41. AT THE OUTSET LD. COUNSEL OF THE ASSESSEE SUBMIT TED THAT THESE AMOUNTS WERE PAID BEFORE FILING OF THE RETURN AND THE MATTER WAS SQUARELY COVERED BY THE DECISION OF THE HONBLE APE X COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. [2009] 319 ITR 306 (SC). IN THIS CASE HONBLE APEX COURT ELABORATELY ANALYSED SCHEME OF S ECTION 43B AND HELD THAT AMOUNTS WHICH FALL IN THE REALM OF SECTION 43B HAVE TO BE ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 17 ALLOWED SO FAR AS THEY ARE ACTUALLY PAID UPTO THE DATE OF FILING OF RETURN. 42. RESPECTFULLY FOLLOWING THE HONBLE APEX COURT DECISION ABOVE WE UPHOLD THE DECISION OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 43. THE NEXT ISSUE RAISED IS THAT LD. COMMISSIONER O F INCOME TAX (APPEALS) ERRED IN DELETING THE ADDITION OF ` 1 73 07 866/- ON ACCOUNT OF PROVISION OF GRATUITY. 44. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) ELABORATELY CONSIDERED THE ISSUE. HE NOTE D THAT AS PER SECTION 115JB OF THE INCOME TAX ACT ONLY IN CERTAIN CASE PROVISION OF LIABILITY ARE REQUIRED TO BE ADDED BACK WHILE COMPUT ING BOOK PROFIT U/S 115JB OF THE ACT. FROM THE RECORDS HE FOUND THAT PR OVISION OR GRATUITY WAS MADE ON THE BASIS OF CALCULATION GIVEN BY ACTUA RY. THEREFORE HE HELD THAT IT IS A ASCERTAINED LIABILITY AND THEREFO RE IT SHOULD BE TAKEN INTO CONSIDERATION FOR DETERMINING THE PROFIT U/S 11 5JB. 45. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEA L BEFORE US. 46. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT THE PROVISION FOR GRATUITY IN THIS CASE C ANNOT BE SAID TO BE ASCERTAINED LIABILITY. IT HAS BEEN DETERMINED ON THE BASIS OF THE CALCULATION GIVEN BY THE ACTUARY AND IN SUCH CIRCUM STANCES WE DO NOT FIND ANY INFIRMITY IN THE FINDING OF THE LD. COMMISSIO NER OF INCOME TAX (APPEALS) THAT THE SAME SHOULD BE CONSIDERED AS ASC ERTAINED LIABILITY. 47. IN THE RESULT THIS REVENUES APPEAL STANDS DIS MISSED. ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 18 ITA NO. 4333 ITA NO. 4333 ITA NO. 4333 ITA NO. 4333 48. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 30.7.2 010 PERTAINING TO ASSESSMENT YEAR 2003-04. 49. THE ISSUE RAISED IS THAT LD. COMMISSIONER OF IN COME TAX (APPEALS) HAS ERRED IN DELETING THE DISALLOWANCE O F 1 73 74 416/- ON ACCOUNT OF RESEARCH AND DEVELOPMENT EXPENSES. 50. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. WE FIND THAT THE ISSUE IS IDENTICAL TO THE ISSUE RAISED IN THIS ORDE R IN ITA NO. 3895 VIDE PARA 31 ABOVE. BOTH THE COUNSEL FAIRLY AGREED THAT THE FACTS ARE IDENTICAL. IN THE ABOVE SAID DECISION WE HAVE RE MITTED THE MATTER TO THE FILES OF THE ASSESSING OFFICER TO CONSIDER THE ISSUE AFRESH AS THE DETAILS WERE NOT PROVIDED. ACCORDINGLY WITH THE S AME DIRECTIONS THE ISSUE STANDS REMITTED TO THE FILES OF THE ASSESSING OFFICER. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GRANTED ADEQUATE OP PORTUNITY OF BEING HEARD. IN THE RESULT THIS REVENUES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ITA NOS. 4878/DEL/2009 & 3895 421 & 4333/DEL/2010 19 51. IN THE RESULT THE REVENUES APPEALS BEING ITA NO 4878 & 3895 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES; ITA NO . 421 IS DISMISSED AND ITA NO. 4333 IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11/2/2011 UPO N CONCLUSION OF HEARING. SD/ SD/ SD/ SD/- -- - SD/ SD/ SD/ SD/- -- - [ [[ [I.P. BANSAL I.P. BANSAL I.P. BANSAL I.P. BANSAL] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 11/2/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR ITAT TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT DELHI BENCHES