M/s. Cummins generator Technologies India Ltd., Pune v. Asst CIT , Circle 1(1),, Pune

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B PUNE BEFORE SHRI I. C. SUDHIR JUDICIAL MEMBER AND SHRI G.S. PANNU ACCOUNTANT MEMBER ITA NO 474/PN/09 (ASSTT. YEAR 2003-04) M/S CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. (FORMERLY KNOWN AS NEWAGE ELECTRICAL INDIA LTD) PUNE .. APPELLANT PAN AABCC1533E VS. ASSTT. COMMISSIONER OF INCOME-TAX CIR. 1(1) PUNE .. RESPONDENT APPELLANT BY : SHRI R R VORA RESPONDENT BY : SHRI A S SINGH ORDER PER G S PANNU A.M: THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-I PUNE DATED 23.1.2009 WHICH IN TURN HAS ARISEN FROM AN ORDER DATED 24.3.2006 PASS ED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME-TAX ACT 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2003-04. 2. IN BRIEF THE FACTS ARE THAT THE ASSESSEE IS A J OINT VENTURE COMPANY FORMED BY CROMPTON GREAVES LTD. AND NEWAGE INT. LTD. U.K. IN THE YEAR 1993-94 FOR THE MANUFACTURE OF STAMFORD AC GENERATORS. FOR THE ASSESSMENT YEAR 2003-04 ASSESSEE FILED A RETURN OF INCOME DECLARING THE INCOME AT RS 6 26 70 300/-. THE ASSESSMENT WAS COMP LETED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE ACT O N A TOTAL INCOME OF RS 11 77 61 840/- VIDE ORDER DATED 24.3.2006. ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 2 3. THE FIRST GRIEVANCE OF ASSESSEE IS THAT THE COM MISSIONER OF INCOME-TAX (APPEALS) WAS NOT JUSTIFIED IN CONFIRMIN G THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING 10% OF COMMISSION AND BROKERAGE PAID TO CROMPTON GREAVES LTD. OF RS 40 93 862/- BEING R S 4 09 386/- BY TREATING IT AS EXCESSIVE AND UNREASONABLE BY INVOKI NG THE PROVISIONS OF SECTION 40A(2) OF THE ACT. 4. BEFORE THE ASSESSING OFFICER IT WAS SUBMITTED BY THE ASSESSEE THAT IT IS A JOINT VENTURE COMPANY OF TWO INDUSTRIAL GIANTS I.E. CROMPTON GREAVES LTD. (CGL FOR SHORT) AND NEWAGE INC. LTD. FOR PUTTING TOGETHER THEIR STRENGTH FOR COMMON BENEFIT. NEWAGE HAD PROVIDED THE TECHNOLOGY FOR THE MANUFACTURE OF STAMFORD AC GENER ATORS AND THE MARKETING AND AFTER SALES SERVICE WAS DONE BY CGL. THE ADVANTAGE OF COMBINING OF TECHNOLOGICAL AND MARKETING STRENGTH O F BOTH THE COMPANIES WAS THAT IN A SPAN OF EIGHT YEARS THE TURNOVER INC REASED FROM RS 50 LAKHS TO RS 95.47 CRORES. AS PER THE ARRANGEMENT IN EXIST ENCE SINCE THE FORMATION OF JOINT VENTURE COMPANY CGL HAVING WIDE SALES AND SERVICE NET WORK IN INDIA WAS SELLING THE GENERATORS TO RET AIL CUSTOMERS AND ALSO PROVIDING AFTER SALE SERVICE TO ALL THE CUSTOMERS. THE ASSESSEE WAS ALSO SELLING TO THE ORIGINAL EQUIPMENT MANUFACTURERS (OE M) DIRECTLY WHICH CONTRIBUTED THE MAJOR BUSINESS. CGL IS ENTITLED TO A FLAT RATE OF BROKERAGE @ 15% ON THE SALES EFFECTED THROUGH THEM. ACCORDIN G TO ASSESSEE SINCE IT DID NOT HAVE MARKETING OR SERVICING SET UP IT C OULD NOT HAVE BEEN POSSIBLE TO ACHIEVE SUCH EXCELLENT PERFORMANCE WITH OUT THE PROPER SALES AND SERVICE NET WORK. THE COMMISSION AND SERVICE CH ARGES PAID TO CGL WAS AS PER THE INDUSTRY NORMS AND IT WAS NEITHER EX CESSIVE NOR UNREASONABLE AND THAT SUCH PAYMENT WAS ALLOWED IN E ARLIER ASSESSMENT YEARS. THE ABOVE SUBMISSIONS DID NOT FIND FAVOUR WI TH THE ASSESSING OFFICER WHO HELD THAT THE PROVISIONS OF SEC. 40A(2 )(A) OF THE ACT WERE APPLICABLE AND ACCORDINGLY DISALLOWED 10% OF THE AG GREGATE CLAIM OF ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 3 COMMISSION AND BROKERAGE OF RS 40 93 862/- WHICH RE SULTED IN A DISALLOWANCE OF RS 4 09 386/-. 5. BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) IN ADDITION TO THE ABOVE SUBMISSIONS IT WAS ALSO SUBM ITTED BY THE APPELLANT THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DIS ALLOWING 10% OF THE COMMISSION OF RS 40 93 862/- I.E. RS 4 09 386/- WI THOUT APPRECIATING THE FACTS PROPERLY AND WITHOUT PINPOINTING THAT THE PAY MENT OF COMMISSION WAS EXCESSIVE AND UNREASONABLE AND WITHOUT CONSIDERING THE FACT THAT SIMILAR DISALLOWANCE WAS DELETED BY THE COMMISSIONER OF IN COME-TAX (APPEALS) IN EARLIER YEARS. IT WAS FURTHER CONTENDED THAT THE COMMISSION IS PAID SINCE FORMATION OF THE JOINT-VENTURE COMPANY AS PER THE A PPROVAL FROM THE CENTRAL GOVERNMENT (COMPANY LAW BOARD) AS REQUIRED UNDER THE COMPANIES ACT 1956. IT WAS SUBMITTED THAT SAME ISS UE HAD COME UP FOR CONSIDERATION BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) IN EARLIER YEARS AND THE ISSUE WAS DECIDED IN FAVOUR OF THE AS SESSEE AND IN FURTHER APPEAL TO THE TRIBUNAL BY THE REVENUE THE TRIBUNAL HAD DECIDED THE ISSUE REGARDING AFTER SALE SERVICES IN FAVOUR OF THE ASSE SSEE AND RESTORED BACK THE ISSUE OF PAYMENT OF COMMISSION TO THE FILE OF T HE COMMISSIONER OF INCOME-TAX (APPEALS) FOR RE-VERIFICATION. THE RE-AD JUDICATION IN CONSEQUENT TO THE TRIBUNALS ORDER DATED 31.7.2006 IN ITA NO 1 045/PN/02 PERTAINING TO ASSESSMENT YEARS 1997-98 1998-99 AND 1999-2000 IS PENDING. AFTER CAREFULLY CONSIDERING THE ABOVE SUBMISSIONS OF THE ASSESSEE THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT IT I S A FACT THAT CGL TO WHOM THE PAYMENTS WERE MADE IS A PERSON COMING WITH IN THE PURVIEW OF SECTION 40A(2)(B) OF THE ACT AND THAT BEING SO TH E ONUS WAS ON THE ASSESSEE TO ESTABLISH THAT THE PAYMENT MADE TO CGL WAS NOT EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE O F THE SERVICES AND LEGITIMATE NEEDS OF BUSINESS WITHIN THE MEANING OF SEC. 40A(2)(A) OF THE ACT WHICH THE ASSESSEE HAS FAILED TO ESTABLISH. AC CORDINGLY THE ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 4 COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE ASSESSING OFFICER WAS FULLY JUSTIFIED ON FACTS AND IN LAW IN DRAWING AN ADVERSE INFERENCE AND MAKING DISALLOWANCE OF 10% OF COMMISSION PAID/CREDI TED TO CGL. THE DISALLOWANCE SO MADE WAS THUS UPHELD BY THE COMMISS IONER OF INCOME- TAX (APPEALS). BEING AGGRIEVED THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 6. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE AT THE FIRST INSTANCE NARRATED THE BACKGROUND OF THE CASE WHIC H WE HAVE ALREADY STATED IN THE EARLIER PART OF THIS ORDER. THE LEARN ED COUNSEL NEXT SUBMITTED THAT AS PER THE ARRANGEMENT BETWEEN THE ASSESSEE AN D GCL GCL WAS TO SELL THE GENERATORS TO RETAIL CUSTOMERS AND ALSO TO PROVIDE AFTER SALE SERVICE TO ALL THE CUSTOMERS. ON THE SALES MADE BY GCL TO RETAIL CUSTOMERS GCL WAS ENTITLED TO A FLAT RATE OF BROKE RAGE @ 15%. DURING THE YEAR THE ASSESSEE PAID A COMMISSION OF RS 40 93 86 2/- TO CGL. HOWEVER THE ASSESSING OFFICER DISALLOWED 10% OF CO MMISSION OF RS 40 93 862/- WHICH CAME TO RS 4 09 386/- ON THE GROU ND THAT OUT OF TOTAL TURNOVER OF RS 95.47 CRORES SALES TO THE EXTENT IF RS 7.75 LAKHS WAS THROUGH GCL AND THAT IF THE ASSESSEE COULD ACHIEVE MAJORITY OF THE SALES ON ITS OWN THE ARRANGEMENT OF PAYMENT OF COMMISSIO N WAS FOR DIVERSION OF SOME PROFITS TO CGL. THE COMMISSIONER OF INCOME- TAX (APPEALS) AFFIRMED THE DECISION OF THE ASSESSING OFFICER. THE LEARNED COUNSEL SUBMITTED THAT SIMILAR ADDITION MADE BY THE ASSESSI NG OFFICER IN EARLIER ASSESSMENT YEARS 1997-98 TO 2001-02 HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL AND THE TRIBUNAL HAS REMITTED T HE ISSUES BACK TO THE FILE OF THE COMMISSIONER OF INCOME-TAX (APPEALS) WI TH A DIRECTION THAT HE SHOULD DE NOVO EXAMINE THIS ISSUE AS PER LAW AND PA SS A SPEAKING ORDER AFTER GIVING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. HE FURTHER SUBMITTED THAT THE COMMISSIONER OF INCOME-T AX (APPEALS) HAS NOT YET PASSED ORDER IN THE LIGHT OF DIRECTIONS ISSUED BY THE TRIBUNAL. IT WAS ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 5 SUBMITTED THAT THE ASSESSING OFFICER HAVING ACCEPT ED THE FACT THAT SERVICES HAVE BEEN RENDERED BY CGL THERE WAS NO JU STIFICATION FOR HIM TO DISALLOW PART OF THE BROKERAGE OR SERVICE CHARGES. LASTLY IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT SINCE IN THE YEAR UNDER CONSIDERATION THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS HELD THAT 10% COMMISSION IS DISALLOWABLE UNDER SECTION 40A(2) OF THE ACT THE I SSUE BE NOW DECIDED BY THE TRIBUNAL ON MERITS. ALTERNATIVELY IT WAS PLEAD ED THAT IN LINE WITH THE PRECEDENT THE ISSUE FOR THE YEAR UNDER CONSIDERATI ON MAY ALSO BE RESTORED BACK TO THE FILE OF THE COMMISSIONER OF IN COME-TAX (APPEALS) WITH SPECIFIC DIRECTION TO DECIDE THE ISSUE ON MERITS AL ONGWITH EARLIER YEARS MATTERS. 7. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPR ESENTATIVE APPEARING FOR THE REVENUE DEFENDED THE ORDERS OF T HE AUTHORITIES BELOW. HE SUBMITTED THAT THE ASSESSING OFFICER FOR THE DET AILED REASONING GIVEN IN THE ASSESSMENT ORDER WAS RIGHT IN INVOKING THE PROV ISIONS OF SECTION 40A(2)(A) OF THE ACT AND DISALLOWING 10% OF COMMISS ION AND BROKERAGE PAID TO CGL OF RS 40 93 862/- BEING RS. 4 09 386/- . 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY THE ASSESSEE HAS MARKETING ARRANGEMENT WITH CGL. IN TERMS OF THE ARRANGEMENT CGL SELLS THE PRODUCTS OF THE ASSESSEE TO RETAIL CUSTOM ERS AND ALSO PROVIDES AFTER SALES SERVICE TO ALL THE CUSTOMERS. THE ASSES SEE SELLS TO ORIGINAL EQUIPMENT MANUFACTURERS (OEMS) DIRECTLY WHO ARE WHO LESALE BUYERS OF ITS PRODUCTS. ON THE SALES MADE BY CGL TO RETAIL CUSTOM ERS IT WAS ENTITLED TO BROKERAGE AT THE RATE OF 15%. COMMISSION IS PAID IN RESPECT OF DIRECT SALES MADE BY THE ASSESSEE TO THE RETAIL CUSTOMERS AND SE RVICE CHARGES ARE PAID ONLY IN RESPECT OF DIRECT SALES MADE BY THE AS SESSEE TO THE OEMS. ON SALES MADE TO OEMS DISCOUNTS ARE GIVEN TO THEM A ND ON SALES MADE THROUGH CGL DISCOUNTS ARE GIVEN FOR MAKING EFFORTS OF SALES AND SERVICES. IN CASE OF SALES THROUGH CGL NO SERVICE CHARGES AR E PAID. THE ASSESSING ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 6 OFFICER HAS DISALLOWED 10% OF THE COMMISSION OF RS 40 93 862/- ON THE GROUND THAT THE SAME IS AN ARRANGEMENT FOR DIVERSIO N OF SOME PROFITS TO CGL AND PROVISIONS OF SECTION 40A(2)(B) HAVE BEEN INVOKED SINCE CGL IS A RELATED PARTY. THE SIMILAR DISPUTE HAD ARISEN IN THE ASSESSEES CASE IN THE ASSESSMENT YEARS 98-99 97-97 AND 99-2000 VIDE ITA NO 405/P/02 & OTHERS DATED 31.7.2006 WHEREIN THE MATTER WAS REMA NDED BACK TO THE FILE OF THE COMMISSIONER OF INCOME-TAX (APPEALS) FOR RE- EXAMINATION OF THE ISSUE RELATING TO PAYMENT OF BROKERAGE IN THE LIGH T OF THE PROVISIONS OF SECTION 40A(2) OF THE ACT. IN THE SAID PRECEDENT T HE DISALLOWANCE RELATING TO THE PAYMENT OF CHARGES FOR AFTER SALE SERVICE TO CGL AT 2% WAS HOWEVER DECIDED IN FAVOUR OF THE ASSESSEE WHEREBY THE DISALLOWANCE MADE WAS DIRECTED TO BE DELETED. IN THIS BACKGROUND OF THE MATTER IN THIS YEAR TOO WE RESTORE THE MATTER TO THE FILE OF THE COMMISSIONER OF INCOME- TAX (APPEALS) WITH DIRECTIONS TO ADJUDICATE THE CON TROVERSY IN THE SAME MANNER AS DIRECTED BY THE TRIBUNAL VIDE ITS ORDER D ATED 31.7.2006 (SUPRA). NEEDLESS TO SAY THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY OF BEIN G HEARD AND THEREAFTER PASS AN ORDER KEEPING IN MIND THE ORDER OF THE TRIB UNAL DATED 31.7.2006 (SUPRA) AND IN ACCORDANCE WITH LAW. THUS ON THIS G ROUND THE ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 9. THE NEXT GRIEVANCE OF THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFI RMING THE DISALLOWANCE OF RS 4 90 00 000/- PAID TO CGL AS FEE S/COMPENSATION FOR TERMINATION OF MARKETING AGREEMENT (DISTRIBUTION AG REEMENT) WITH THEM WITHOUT CONSIDERING THE DETAILED SUBMISSIONS AND NA TURE OF EXPENDITURE INCURRED. 10. BEFORE THE ASSESSING OFFICER THE SUBMISSIONS OF ASSESSEE IN RELATION TO THIS ISSUE WERE ON THE FOLLOWING LIN ES. THAT VIDE AGREEMENT DATED 11.6.1992 ASSESSEE COMPANY HAD ENTERED INTO AN AGREEMENT WITH ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 7 GCL FOR DISTRIBUTION OF ITS PRODUCTS AND ALSO FOR R ENDERING OF INSTALLATION AND AFTER SALES SERVICES AS ASSESSEE COMPANY DID NO T HAVE ITS OWN SALES AND SERVICING DEPARTMENT FOR CARRYING OUT ITS ACTIV ITIES; THAT THIS ENABLED THE CUSTOMERS OF THE ASSESSEE TO AVAIL OF AFTER SAL ES SERVICE FACILITIES FROM CGL; OVER THE PERIOD OF TIME KEEPING IN MIND THE L ONG TERM INTERESTS ASSESSEE DEVELOPED ITS OWN SALES AND SERVICE DEPART MENT; THAT THERE WAS SOME DIFFERENCES BETWEEN ASSESSEE AND CGL OVER THE POLICY ISSUES; THEREFORE ASSESSEE DECIDED TO TERMINATE THE DISTRI BUTION AGREEMENT. AFTER DUE DELIBERATIONS BOTH THE PARTIES AGREED TO MUTUA LLY SETTLE THE DISPUTE AND FOR PREMATURE TERMINATION OF THE AGREEMENT ASS ESSEE PAID COMPENSATION OF RS 4 90 00 000/- VIDE AGREEMENT DAT ED 5.7.2002 TO CGL. IT WAS STATED THAT CGL WAS NO MORE SHAREHOLDER OF T HE ASSESSEE COMPANY WHEN THE SAID PAYMENT OF COMPENSATION WAS M ADE AND THE CLAIM AS REVENUE EXPENDITURE WAS SOUGHT TO BE DEFEN DED. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR WIT H ASSESSING OFFICER. THE ASSESSING OFFICER HELD THAT THE EXPENDITURE IN CURRED BY THE ASSESSEE WAS NOT AT ALL A LEGITIMATE NEED OF BUSINESS AND AS SUCH THE ENTIRE EXPENDITURE OF RS 4.90 CRORES WAS DISALLOWED UNDER SECTION 40A(2)(A) OF THE ACT. 11. THE ASSESSEE TOOK UP THE MATTER WITH THE COMMI SSIONER OF INCOME-TAX (APPEALS) AND MORE OR LESS REITERATED TH E ABOVE SUBMISSIONS. IT WAS BROUGHT TO THE NOTICE OF THE COMMISSIONER OF INCOME-TAX (APPEALS) THAT WITHOUT CONSIDERING THE BUSINESS NECESSITY AS WELL AS COMMERCIAL JUSTIFICATION FROM BUSINESSMANS POINT OF VIEW ASS ESSING OFFICER MADE CERTAIN UNSUBSTANTIATED COMMENTS OR REMARKS LIKE TH E PAYMENT HAS BEEN MADE UNDER THE COLOURFUL DEVICE FOR AVOIDING TAX AND THERE IS ELEMENT OF MALA FIDE MOTIVE INVOLVED IN THE TAX AVOIDANCE. IT WAS CONTENDED THAT ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY MAT ERIAL TO SHOW AS TO HOW THE SAID PAYMENT HAS BEEN EXCESSIVE OR UNREASON ABLE HAVING REGARD ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 8 TO BUSINESS OR COMMERCIAL NEEDS FROM BUSINESSMANS POINT OF VIEW. IT WAS FURTHER SUBMITTED THAT THE PAYMENT MADE TO WARD OFF OR TO AVOID COMPETITION OR FOR SMOOTH RUNNING OF BUSINESS IS A BUSINESS EXPENDITURE AND THAT PAYMENT TO GCL WAS MADE IN ORDER TO ENSURE THAT THERE IS NO DIRECT OR INDIRECT COMPETITION. ATTENTION OF THE CO MMISSIONER OF INCOME-TAX (APPEALS) WAS DRAWN TO CLAUSES 4 5 6 & 7 OF THE T ERMINATION AGREEMENT FORMING PART OF PAPER BOOK TO CONTEND THAT THE COMP ENSATION IN THE FORM OF NON-COMPETE FEE WAS PAID TO CGL ACCORDINGLY. THE CONTENTION RAISED WAS THAT EXPENDITURE WAS ALLOWABLE AS CONTRACTUAL R EVENUE EXPENDITURE AND IN SUPPORT RELIANCE WAS PLACED ON THE FOLLOWIN G CASE LAWS: I. CIT V COAL SHIPMENTS P LTD. 82 ITR 902 (SC) II. MADRAS INDUSTRIAL INVESTMENT CORPORATION 225 I TR 802 (SC) III. PATHARE DHRU 54 ITD 746 (MUM) IV. SREE ANNAPOORNA GOWRISHANKAR HOTELS P LTD 37 T D 541 (MAD) V. BEST & CO. 60 ITR 11 (SC) VI. NAIDU 165 ITR 63 (MAD) VII. SMARTCHEM TECHNOLOGIES 97TTJ 818 (AHD) VIII. EMPIRE JUTE CO LTD 124 ITR 1 (SC) THUS THE ASSESSEE CLAIMED THAT THE EXPENDITURE INC URRED WAS AN ALLOWABLE BUSINESS EXPENDITURE AND THEREFORE ENTI RE AMOUNT PAYABLE OF RS 4.90 CRORES LIABILITY OF WHICH HAD ACCRUED DURIN G THE YEAR AS PER THE TERMS OF THE AGREEMENT BE ALLOWED AS BUSINESS EXPE NDITURE. ALTERNATIVELY IT WAS SUBMITTED THAT IF FOR ANY REA SON PAYMENT MADE WAS NOT ALLOWABLE AS A REVENUE EXPENDITURE THE SAME BE CONSIDERED AS PAYMENT FOR ACQUIRING AN INTANGIBLE ASSET AND DEP RECIATION @ 25% BE ALLOWED IN TERMS OF SECTION 321)(II) READ WITH EXPL ANATION 3 THEREOF. 12. AFTER CONSIDERING THE DETAILED SUBMISSIONS OF THE ASSESSEE THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS SUSTAI NED THE DISALLOWANCE. AS PER COMMISSIONER OF INCOME-TAX (AP PEALS) THE CASE LAWS RELIED UPON BY THE ASSESSEE WERE DISTINGUISHAB LE AND DID NOT APPLY TO THE FACTS OF THE ASSESSEES CASE. ACCORDING TO T HE COMMISSIONER OF INCOME-TAX (APPEALS) IN THIS CASE THE TRANSACTION IS WITH A RELATED PARTY; ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 9 THAT THE MATTER WAS NOT EVEN REFERRED TO ARBITRATIO N WHICH WAS A PRE- REQUISITE IN CASE OF A NEED FOR TERMINATION OF THE AGREEMENT AS PROVIDED IN CLAUSE 17 OF THE SAID AGREEMENT; SINCE THE TRANS ACTION WAS BETWEEN RELATED PARTIES BURDEN OF PROOF OF A VERY HIGH ORD ER WAS CAST UPON THE ASSESSEE TO ADDUCE COGENT RELIABLE AND RELEVANT MA TERIAL IN RESPECT OF ITS CLAIM THAT THERE WAS A BUSINESS NEED TO TERMINATE T HE AGREEMENT BETWEEN THE TWO PARTIES AND TO PROVE THE REASONABLENESS OF SUCH PAYMENT HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINESS. IN THE FINAL ANALYSIS THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE ASSESSEE HAD FAILED TO PROVE THE NEED FOR TERMINATION OF THE AGREEMENT; AND SINCE THE BUSINESS NEED FOR TERMINATION OF THE AGREEMENT ITSE LF WAS NOT PROVED THE QUESTION RELATING TO REASONABLENESS OF SUCH PAYMENT WITHIN THE MEANING OF SEC. 40A(2)(A) WAS IRRELEVANT. IN THIS MANNER T HE COMMISSIONER OF INCOME-TAX (APPEALS) UPHELD THE DISALLOWANCE OF RS 4 90 00 000/- MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THIS ACTION OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ASSESSEE IS IN FURTHER APPEAL BEFORE US. 13. BEFORE US THE LEARNED COUNSEL FOR THE APPELLAN T HAS MADE DETAILED SUBMISSIONS INTER ALIA POINTING OUT THE BUSINESS RELATIONSHIP BETWEEN THE ASSESSEE COMPANY AND CGL AND THE OBJECTIVES BEHIND THE TERMINATION OF THE DISTRIBUTION (MARKETING) AGREEMENT. IT WAS POI NTED OUT THAT THE SHAREHOLDING AGREEMENT WITH THE CGL WAS ALSO TERMIN ATED WITH THE NECESSARY RBI APPROVALS. THAT THE TERMINATION OF TH E MARKETING AGREEMENT WAS A BUSINESS NECESSITY AND THEREFORE TH E EXPENDITURE INCURRED TOWARDS PAYMENT OF COMPENSATION TO CGL FOR PREMATURE TERMINATION OF THE AGREEMENT WAS WHOLLY AND EXCLUSI VELY INCURRED FOR THE PURPOSES OF BUSINESS. IT WAS CONTENDED WITH REFEREN CE TO VARIOUS CLAUSES OF THE TERMINATION AGREEMENT DATED 5.7.2002 THAT TH E PAYMENT WAS MADE TO AVOID COMPETITION DIRECT OR INDIRECT SO THAT T HE BUSINESS OF THE ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 10 ASSESSEE COULD RUN SMOOTHLY. THE FACTORS WHICH COMP ELLED THE ASSESSEE TO TERMINATE THE MARKETING ARRANGEMENT WERE EXPLAIN ED AS - THE NEED TO DEVELOP OWN SALES AND SERVICE DEPARTMENT; TO PROTEC T THE EXISTING AND FUTURE BUSINESS; AND FOR MAKING FUTURE SAVINGS IN COMMISSION PAYMENTS TO CGL. IT IS ARGUED THAT THE PRESENCE OF AFORESAID FACTORS SHOW COMMERCIAL EXPEDIENCY ON THE PART OF THE ASSESSEE I N PAYING COMPENSATION TO CGL AND THEREFORE THE EXPENDITURE QUALIFIES FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT AND ON THI S ASPECT RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE DELHI HIGH CO URT IN THE CASE OF MICROSOFT CORPORATION OF INDIA P LTD. 176 TAXMAN 39 5 (DEL). IT IS ALSO SUBMITTED THAT THE ASSESSING OFFICER ERRED IN INVOK ING SECTION 40A(2) OF THE ACT INASMUCH AS THIS IS NOT A CASE OF ANY TAX PLANNING TO DIVERT INCOME. THAT BOTH THE PAYER ASSESSEE AND THE PAYEE (CGL) WERE TAX PAYING ENTITIES SUBJECT TO SAME TAX RATES IN RESPE CT OF THEIR INCOMES AND THERE WAS NO TAX EVASION OR LOSS TO THE REVENUE BEC AUSE OF THE IMPUGNED ARRANGEMENT. FOR THE SAID REASONS IT WAS ALSO ARGU ED THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN OBSERVING THAT TH E INSTANT TRANSACTION WAS A COLOURABLE DEVICE FOR AVOIDANCE OF TAX LIABILITY. FURTHERMORE IT WAS SUBMITTED THAT THE REASONABLENESS OF AN EXPENDITURE HAS TO BE SEEN FROM THE PERSPECTIVE OF THE BUSINESSMAN AND NOT FROM THE POINT OF REVENUE OFFICER. IT IS POINTED OUT THAT IN THIS CASE THE AS SESSING OFFICER HAS FORMED AN OPINION FOR UNREASONABILITY OF THE EXPENDITURE W ITHOUT REJECTING THE EXPLANATION OF THE ASSESSEE OR BY BRINGING ON RECOR D ANY CONCRETE FACTS AND THUS WRONGLY INVOKED SECTION 40A(2)(A) OF THE A CT. ON THE ASPECT OF WRONG INVOKING OF SECTION 40A(2) RELIANCE WAS PLAC ED ON THE FOLLOWING DECISIONS: A. INDO SAUDI SERVICE TRAVEL P. LTD. 310 ITR 306 (B OM) B. LAXMI ENGINEERING INDUSTRIES 298 ITR 203 (RAJ) C. COMPUTER GRAPHICS LTD 285 ITR 84 (MAD) D. TALLY SOLUTIONS P. LTD 37 DTR 310 (BANG) E. SHAR-LEE FILTORITES P. LTD. 2008-TIOL-500-ITAT- DEL. ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 11 F. BATLIWLA AND KARNANI 2 SOT 379 (MUM) G. BETA NEPHTHOL P. LTD. 50 TTJ 375 (INDORE) IN THIS MANNER IN SUM AND SUBSTANCE THE PLEA OF T HE APPELLANT IS THAT THE LOWER AUTHORITIES HAVE ERRED IN NOT APPRECIATING T HE TRUE NATURE OF THE EXPENDITURE INCURRED AND DISALLOWING THE SAME WRONG LY HOLDING THE SAME TO BE NOT FOR LEGITIMATE NEED OF BUSINESS AND BEING UNREASONABLE IN TERMS OF SECTION 40A(2) OF THE ACT. 14. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE APPEARING FOR THE REVENUE HAS POINTED OUT THAT THE ASSESSING OFFICER HAS APPROPRIATELY VERIFIED AND APPRECIATED THE PLEAS OF THE ASSESSEE AND RIGHTLY CONCLUDED THAT THE EXPENDITURE INCURRED WAS NOT AT ALL A LEGITIMATE NEED OF THE BUSINESS AND THE SAME WAS DISALLOWABLE UNDER SECTION 40A(2) OF THE ACT. ACCORDING TO THE LEARNED DEPARTM ENTAL REPRESENTATIVE THE INITIAL AGREEMENT DID NOT CONTAIN ANY SPECIFIC CONDITION FOR TERMINATION AS THE SAME WAS AGREED TO BE IN FORCE FOR PERPETUIT Y. THEREFORE THE ASSESSING OFFICER INFERRED THAT THE TERMINATION ARR ANGEMENT VIDE AGREEMENT DATED 5.7.2002 WAS A VERY PRE-PLANNED AFFAIR RIGHT FROM THE BEGINNING. IT WAS ALSO POINTED OUT THAT THE YEAR-WISE SALES A CHIEVED AND COMMISSION PAID BY THE ASSESSEE SHOWED THAT THERE W AS A DOWNWARD TREND IN THE EXPENDITURE OF COMMISSION AND THEREFOR E THERE WAS NO NEED TO FORECLOSE THE AGREEMENT BY INCURRING THE IMPUGNE D EXPENDITURE BY WAY OF COMPENSATION. IT WAS ALSO POINTED OUT THAT THE I NITIAL AGREEMENT PROVIDED FOR SETTLEMENT OF DISPUTE BY THE PROCESS O F ARBITRATION AND SUCH PROCESS WAS NOT UNDERTAKEN WHICH SHOWED A NON-BUSI NESS INTENTION WHEREBY ASSESSEE AGREED TO PAY COMPENSATION TO A RE LATED PARTY BY BY- PASSING ARBITRATION CLAUSE OF THE INITIAL AGREEMENT . THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RELIED UPON THE OR DER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF TECUMESH INDIA (P) LTD 43 DTR ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 12 41(DEL) FOR THE PROPOSITION THAT A PAYMENT MADE TO AVOID COMPETITION CONSTITUTES A CAPITAL EXPENDITURE. 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND ALSO PERUSED THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE RELEVANT MATERIAL PLACED IN THE PAPER BOOK TO WHICH OUR ATTENTION WA S DRAWN DURING THE COURSE OF THE HEARING. THE ASSESSEE IS A JOINT VENT URE COMPANY FORMED BY CROMPTON GREAVES LTD (CGL) AND NEW AGE INTERNATIONA L LTD. UK IN 1993- 94 FOR THE MANUFACTURE OF STAMFORD AC GENERATOR. IT APPEARS THAT THE JOINT VENTURE COMBINED THE TECHNOLOGICAL STRENGTH OF NEW AGE AND MARKETING STRENGTH OF CGL WHICH POSSESSED A WIDE NET WORK AL L OVER INDIA OF BRANCHES/SALES OFFICES AND SERVICE CENTRES EQUIPPED WITH NECESSARY FACILITIES. THE ASSESSEE COMPANY MANUFACTURED PRODU CTS WITH THE TECHNOLOGY AVAILABLE WITH IT AND CGL PROVIDED ITS S ALES AND SERVICE NET WORK FOR MARKETING THE PRODUCTS. IT HAS BEEN EXPLAI NED THAT THE SHAREHOLDING AGREEMENT BETWEEN THE JOINT-VENTURE PA RTNERS AND ALSO THE MARKETING AGREEMENT BETWEEN THE ASSESSEE AND CGL WE RE TERMINATED. THE DISPUTE REVOLVES AROUND A PAYMENT OF RS 4 90 00 00/- MADE BY THE ASSESSEE COMPANY TO CGL FOR TERMINATION OF THE MARK ETING ARRANGEMENT. THE CLAIM OF THE ASSESSEE IS THAT SUCH PAYMENT IS A N EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ITS BUSI NESS NEEDS THEREFORE THE SAME WAS AN ALLOWABLE EXPENDITURE UNDER SECTION 37(1) OF THE ACT. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE EXPE NDITURE BY WAY OF COMPENSATION WAS UNREASONABLE AND INCURRED NOT FOR THE LEGITIMATE BUSINESS NEED AND HE DISALLOWED THE EXPENDITURE UN DER SECTION 40A(2)(A) OF THE ACT. THE COMMISSIONER OF INCOME-TAX (APPEAL S) HAS SUSTAINED THE DISALLOWANCE MORE OR LESS FOR THE SAME REASONS AS TAKEN BY THE ASSESSING OFFICER. AS PER THE COMMISSIONER OF INCOM E-TAX (APPEALS) AS THE TRANSACTION WAS WITH A RELATED PARTY THE ONUS WAS ON THE ASSESSEE TO PROVE ITS BUSINESS NECESSITY AND THAT THE ASSESSEE HAD FAILED TO PROVE SO. ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 13 16. IN THIS CONTEXT IT IS NOTABLE THAT VARIOUS JUD GMENTS OF THE SUPERIOR COURTS HAVE LAID DOWN SOME BROAD PRINCIPLES IN ORDE R TO DETERMINE WHETHER AN EXPENDITURE IS OF A REVENUE NATURE QUALI FYING FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT WHILE COMPUTING BUSI NESS INCOME OF AN ASSESSEE. INSPITE OF THE PRESENCE OF THE BROAD PRIN CIPLES DIFFICULTIES ARE EXPERIENCED IN DECIDING SUCH QUESTION HAVING REGAR D TO THE FACTS AND CIRCUMSTANCES OF A GIVEN CASE. ONE UNDERLYING PRINC IPLE WHICH IS JUDICIALLY ACCEPTED IS THAT AN ALLOWABLE EXPENDITURE MUST PASS THE TEST OF COMMERCIAL EXPEDIENCY OR IT SHOULD SERVE A BUSIN ESS PURPOSE. IN THE INSTANT CASE IT IS EVIDENT FROM THE DISCUSSION MAD E IN THE ORDERS OF THE AUTHORITIES BELOW THAT THERE IS NO DISPUTE ON THE R ELEVANCE OF THE AFORESAID PRINCIPLE THE ONLY DIFFERENCE BETWEEN THE REVENUE AND THE ASSESSEE BEING AS TO WHETHER THE IMPUGNED EXPENDITURE HAS BE EN INCURRED FOR COMMERCIAL EXPEDIENCY OR NOT. IN THIS BACKGROUND W E MAY NOW CONSIDER AND APPRECIATE THE FACTORS AND THE OBJECTIVES MADE OUT BY THE ASSESSEE FOR INCURRENCE OF THE IMPUGNED EXPENDITURE. THE FIR ST AND THE FOREMOST OBJECTIVE PLEADED BY THE ASSESSEE IS THAT IT INTEND ED TO DEVELOP ITS OWN SALES AND SERVICE DEPARTMENT TO CATER TO ITS CUSTOM ERS WHICH WAS HITHERTO BEING UNDERTAKEN THROUGH MARKETING ARRANGEMENT WITH THE CGL. IN OUR CONSIDERED OPINION THE PRESENCE OF SUCH FACTOR IS A BONA FIDE CONSIDERATION FOR A PRUDENT BUSINESSMAN INASMUCH AS IT REDUCED THE DEPENDENCE OF THE ASSESSEE ON ANOTHER ENTITY NAMEL Y CGL. THE BUSINESS PRUDENCE IN THIS REGARD GETS FURTHER FORTI FIED BY THE FACT THAT EVEN THE SHAREHOLDING ARRANGEMENT AGREEMENT BETWEEN CGL AND NEW AGE INTERNATIONAL LTD. UK WAS TERMINATED. SECONDLY IT HAS BEEN CANVASSED THAT THE ASSESSEE TERMINATED THE AGREEMENT TO PROTE CT ITS EXISTING AS ALSO THE FUTURE BUSINESS. IN THIS CONTEXT IT HAS BEEN P OINTED OUT WITH REFERENCE TO CLAUSE 4 OF THE TERMINATION AGREEMENT DATED 5.7. 2002 A COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 51 TO 59 THAT ON TERMINATION ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 14 AND PAYMENT OF COMPENSATION CGL WOULD NOT DIRECTLY OR INDIRECTLY ENTER INTO ANY ARRANGEMENT IN RESPECT OF MANUFACTURE SAL E DISTRIBUTION AFTER SALE SERVICE AND DEALINGS WITHIN INDIA IN RESPECT O F SPECIFIED PRODUCTS FOR A PERIOD OF THREE YEARS TO AVOID COMPETITION TO THE A SSESSEE COMPANY. FURTHER IN TERMS OF CLAUSE 5 CGL ALSO ACKNOWLEDGE D AND UNDERTOOK NOT TO COMPETE IN SPECIFIED PRODUCTS FOR A PERIOD OF TH REE YEARS WITHIN THE TERRITORY OF EUROPE. THESE CLAUSES HAVE BEEN REFERR ED BY THE ASSESSEE TO POINT OUT THAT THE TERMINATION ARRANGEMENT IMBIBIN G PAYMENT OF COMPENSATION WAS FOR BUSINESS CONSIDERATIONS. IN OU R CONSIDERED OPINION THE AFORESAID ARRANGEMENT CLEARLY BRINGS TO THE FOR E THE ANXIETY OF THE ASSESSEE TO PROTECT ITS OPERATIONS IN THE MARKET WI TH A VIEW TO SUSTAIN AND IMPROVE UPON THE REVENUES THAT IT WAS HITHERTO EARN ING THROUGH THE MARKETING ARRANGEMENT WITH CGL. THIRDLY IT WAS CAN VASSED BY THE APPELLANT THAT THE TERMINATION AND PAYMENT OF COMPE NSATION HAS BEEN EFFECTED TO ENSURE FUTURE SAVINGS IN PAYMENT OF COM MISSIONS TO CGL FOR THE SERVICES RENDERED BY IT. THE LEARNED COUNSEL FO R THE APPELLANT HAD REFERRED TO A CHART COVERING THE FINANCIAL YEARS 9 6-97 TO 2005-06 POINTING OUT THE SAVINGS MADE ON ACCOUNT OF STOPPAGE OF COM MISSION TO CGL POST THE TERMINATION AGREEMENT DATED 5.7.2002. THE FIGU RES DO BRING OUT A FACT-SITUATION THAT THE SAVINGS IN COMMISSION PAYME NT FAR OUTGROW THE COMPENSATION PAID FOR FORECLOSURE OF THE MARKETING AGREEMENT WITH CGL. WE FIND NO REASONS TO DIS-AGREE WITH THE PLEA OF TH E ASSESSEE THAT THE FACTORS AND CONSIDERATIONS FOR FORECLOSING THE MARK ETING ARRANGEMENT WITH CGL EVEN AFTER TAKING INTO ACCOUNT THE PAYMENT OF I MPUGNED COMPENSATION WAS PRUDENT AND INTENDED FOR FURTHERA NCE OF ASSESSEES BUSINESS. IN FACT AT THIS STAGE WE MAY MAKE REFER ENCE TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V BHOR INDUSTRIES LTD. 264 ITR 180(BOM) WHICH HAS BEEN CITED FOR THE PROP OSITION THAT PAYMENT MADE FOR TERMINATION OF AN UNPROFITABLE CONTRACT I S AN ALLOWABLE ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 15 EXPENDITURE. FACTUALLY SPEAKING IN THE PRESENT CAS E THE FUTURE RESULTS SHOWING SAVINGS ON ACCOUNT OF FORECLOSURE OF AGREEM ENT WITH CGL ESTABLISH THAT THE ARRANGEMENT INVOLVING INCURRENCE OF IMPUGNED EXPENDITURE HAS INDEED RESULTED IN AN ENHANCED PROF ITABILITY WHICH IS COUPLED WITH ACHIEVING INDEPENDENCE OF BUSINESS OPE RATIONS (I.E. SETTING UP OF OWN MARKETING AND AFTER SALES SERVICE NETWORK ) AND THEREFORE THE IMPUGNED EXPENDITURE CANNOT BE SAID TO BE DE HORSE THE BUSINESS CONSIDERATIONS. 17. IN FACT AT THIS POINT WE MAY REFER TO THE ARG UMENT OF THE ASSESSING OFFICER THAT FROM THE YEARS 1993-94 UPTO 2003-04 ( AS NOTED IN PARA 3 OF THE ASSESSMENT ORDER) THERE HAS BEEN AN UPWARD TREN D IN THE TURNOVER AND DOWNWARD TREND IN THE QUANTUM OF COMMISSION PAI D TO CGL AND THIS SHOWED THAT THE ASSESSEE HAD ESTABLISHED ITS OWN NE T WORK TO EFFECT SALES MARKETING AND AFTER SALES SERVICE WITHOUT TH E HELP OF CGL THUS THERE WAS NO NEED TO PAY THE COMPENSATION TO FORECL OSE THE MARKETING AGREEMENT. SECONDLY IT HAS ALSO BEEN NOTED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD FAILED TO EXPLAIN AND JUSTIFY THE BASIS OF CALCULATION OF AMOUNT OF COMPENSATION. WITH REGARD TO THE LATTER ASPECT WE FIND THAT CLAUSE 3 OF THE TERMINATION AGREEMENT DATED 5.7.200 2 CLEARLY BRINGS OUT THE RATIONALE AND CONSIDERATIONS FOR ARRIVING AT TH E PAYMENT OF COMPENSATION IN QUESTION. THE CONSIDERATIONS NOTED ARE NAMELY (I) THE PROFITABILITY OUT OF THE SAID DISTRIBUTION AGREEMEN T WHICH CGL WOULD STAND TO LOSE; (II) THE COVENANTS AS GRANTED BY CGL TO CG NEL IN TERMS OF CLAUSES 4 5 AND 6 OF THE AGREEMENT; AND (III) IN FULL AND FINAL SETTLEMENT OF THE ARBITRATION PROCEEDINGS AS INITIATED BY CGNEL . IN OUR CONSIDERED OPINION THE CONSIDERATIONS FORMING THE BASIS OF AR RIVING AT THE COMPENSATION CAN NEITHER BE CONSIDERED AS EXTRANEOU S AND NOR DOES IT COLOUR THE TRANSACTION AS A DEVICE FOR AVOIDING TAX ATION. IN SO FAR AS THE OTHER ASPECT REGARDING THE INCREASE IN TURNOVER AND DOWNWARD TREND IN ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 16 QUANTUM OF COMMISSION IS CONCERNED THE SAME IN OUR VIEW HAS NOT BEEN APPRECIATED BY THE ASSESSING OFFICER IN ITS PROPER PERSPECTIVE. THE ENTIRE FACTUAL MATRIX POINTS OUT THAT THE ASSESSEE CONSIDE RED THE MARKETING ARRANGEMENT AS UNPROFITABLE AND THEREFORE THE SAME WAS TERMINATED. AT THIS JUNCTURE WE MAY ALSO OBSERVE THAT THE BUSINES S PRUDENCE OR THE COMMERCIAL EXPEDIENCY FOR INCURRENCE OF AN EXPENDIT URE HAS TO BE VIEWED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT T HAT OF THE ASSESSING OFFICER AS RIGHTLY CONTENDED BY THE APPELLANT. 18. FACTUALLY SPEAKING IN THE FINAL ANALYSIS WE D O NOT FIND ANY SUBSTANTIVE MATERIAL OR REASONING WITH THE ASSESSIN G OFFICER TO SHOW THAT THE REASONS FOR TERMINATION OF MARKETING AGREEMENT WITH CGL AND THE TERMS AND CONDITIONS OF THE TERMINATION AGREEMENT D ATED 5.7.2002 WERE FOR CONSIDERATIONS EXTRANEOUS TO THE BUSINESS OF TH E ASSESSEE AND THEREFORE DEDUCTION FOR PAYMENT OF COMPENSATION AM OUNTING TO RS 4 90 00 000/- TO CGL CANNOT BE DENIED EITHER IN TER MS OF SECTION 37(1) OR 40A(2)(A) OF THE ACT. 19. APART FROM THE AFORESAID WE MAY ALSO REFER TO A PLEA SET UP BY THE REVENUE ON THE STRENGTH OF THE DECISION OF THE SPE CIAL BENCH OF THE TRIBUNAL IN THE CASE OF TECUMESH INDIA (P) LTD (SUP RA). AS PER THE REVENUE THE PAYMENT HAS BEEN MADE INTER ALIA FOR A RESTRICTED COVENANT GRANTED BY CGL REGARDING NON COMPETING IN THE SPEC IFIED AREAS AND PRODUCTS FOR A SPECIFIC PERIOD IN TERMS OF THE AGR EEMENT AND THEREFORE THE SAME WAS A CAPITAL EXPENDITURE AS PER THE DECIS ION OF THE SPECIAL BENCH OF THE TRIBUNAL. ON THE CONTRARY LEARNED COU NSEL FOR ASSESSEE SUBMITTED THAT THE DECISION OF THE SPECIAL BENCH CA NNOT BE APPLIED TO DENY THE INSTANT CLAIM HAVING REGARD TO THE FACTS A ND CIRCUMSTANCES OF THE ASSESSEE. WE HAVE PERUSED THE DECISION OF THE SPECI AL BENCH IN THE CASE OF TECUMESH INDIA (P) LTD (SUPRA). IN THE CASE BEFO RE THE SPECIAL BENCH THE FACTS WERE THAT PARENT COMPANY OF ASSESSEE HAD ENTERED INTO A MOU ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 17 TO PURCHASE ALL ASSETS OF A BUSINESS DIVISION IN IN DIA AND THE SAID MOU INCLUDED PAYMENT OF A NON-COMPETE FEE. SUBSEQUENTLY TO IMPLEMENT THE MOU ASSESSEE ACQUIRED THE BUSINESS CONCERN IN INDI A. ALONG WITH ACQUIRING THE BUSINESS CONCERN IN INDIA BY MAKING I NITIAL OUTLAY PAYMENT WAS ALSO MADE ON ACCOUNT OF NON-COMPETE FEE AND S UCH PAYMENT OF FEE WAS CLAIMED AS REVENUE EXPENDITURE. IN THIS BACKGRO UND THE TRIBUNAL UPHELD THE STAND OF THE REVENUE THAT SUCH PAYMENT O F NON-COMPETE FEE WAS CAPITAL IN NATURE. HOWEVER IN COMING TO SUCH C ONCLUSION CERTAIN CRITERION WAS REFERRED TO BY THE SPECIAL BENCH AND IN TERMS OF SUCH CRITERION THE EXPENDITURE THEREIN FAILED THE TEST O F BEING A REVENUE EXPENDITURE. ONE OF THE CRITERION WAS THAT IF THE P AYMENT IS MADE FOR INITIAL OUTLAY OF THE BUSINESS IT HAS TO BE HELD AS CAPITA L EXPENDITURE. IN THE PRESENT CASE THERE IS NO CASE MADE OUT BY THE REVE NUE THAT THE PAYMENT IN QUESTION HAS BEEN MADE AS INITIAL OUTLAY OF THE BUSINESS FOR ACQUIRING ANY ASSET. RATHER IN THE PRESENT CASE THE PAYMENT HAS BEEN MADE FOR TERMINATION OF AN EXISTING MARKETING ARRANGEMENT WI TH A VIEW TO FURTHER FUTURE SAVINGS IN COMMISSION PAYMENT AND PROTECTING THE CURRENT/EXISTING OPERATIONS IN THE MARKET. SECONDLY THE SPECIAL BEN CH EMPHASIZED THE CONSIDERATION OF AIM AND OBJECT OF INCURRENCE OF TH E EXPENDITURE. AS PER THE SPECIAL BENCH IF THE PAYMENT OF NON-COMPETE FE E IS TO ACQUIRE ANY BUSINESS OR INCREASE CAPITAL BASE IT WOULD BE CAPI TAL IN NATURE. IN THE PRESENT CASE THE FACTS DO NOT SHOW THAT THERE IS A CQUISITION OF ANY BUSINESS OR INCREASE IN CAPITAL BASE RATHER THE AI M AND OBJECT OF THE EXPENDITURE IS TO SAFEGUARD AND RUN THE BUSINESS M ORE PROFITABLY COUPLED WITH LESSER DEPENDENCE ON THE OTHER CONCERN BY SET TING UP OWN MARKETING ARRANGEMENTS. THIRDLY THE TEST OF ENDURING BENEFI T HAS ALSO BEEN REFERRED TO BY THE SPECIAL BENCH WHICH IN OUR VIEW HAS TO BE EXAMINED IN THE LIGHT OF FACTS AND CIRCUMSTANCES OF EACH CASE. IN THE PR ESENT CASE THE FACTUAL MATRIX CLEARLY BRINGS OUT THAT THE COMMERCIAL ADVAN TAGE TO THE ASSESSEE ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 18 RESULTS IN REVENUE FIELD INASMUCH AS THE INTENDED S AVING IN COMMISSION PAYMENT TO CGL AND SAFEGUARDING AND ENHANCING MARKE T OPERATIONS IN SPECIFIED AREAS THOUGH OVER A LIMITED PERIOD ONLY GOES TO SHOW THAT IT FACILITATES THE TRADING OPERATIONS OF THE ASSESSEE LEAVING UNTOUCHED THE CAPITAL FIELD OF THE ASSESSEE. THEREFORE HAVING REG ARD TO THE PROPOSITION LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO LTD. (SUPRA) AND WHICH HAS ALSO BEEN NOTED BY THE S PECIAL BENCH IN OUR VIEW THE IMPUGNED BENEFIT TO THE ASSESSEE IS IN TH E REVENUE FIELD AND THEREFORE THE PAYMENT CANNOT BE TERMED AS CAPITAL IN NATURE. FOR ALL THE ABOVE REASONS IN OUR CONSIDERED OPINION THE DECIS ION OF THE SPECIAL BENCH OF THE TRIBUNAL DOES NOT HELP THE REVENUE IN THE INSTANT CASE IN TREATING THE IMPUGNED PAYMENT AS A CAPITAL EXPENDIT URE. 20. IN THE RESULT WE THEREFORE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND DIRECT THE ASSESSING OF FICER TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS 4 90 00 000/- R EPRESENTING COMPENSATION PAID TO CGL AS AN ALLOWABLE EXPENDITUR E IN TERMS OF SECTION 37(1) OF THE ACT. THUS ON THIS GROUND THE ASSESSEE SUCCEEDS. 21. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF S CIENTIFIC RESEARCH EXPENSES OF RS 9 96 914/-. DURING THE YEAR UNDER C ONSIDERATION ASSESSEE INCURRED CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH REPRESENTING EXPENDITURE ON ACQUISITION OF FOLLOWING ASSETS FOR CONTINUOUS RESEARCH AND DEVELOPMENT CARRIED ON BY ASSESSEE: S.NO. DESCRIPTION AMOUNT (RS) 1 SOLDERING EQUIPMENT 71 626/- 2 LPG GAS FIRED OVEN 6 31 565/- 3 PAINTING INSPECTION DEVICE 3 11 723/- -------------- 9 94 941/- ======== IT WAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE ABOVE EXPENDITURE WAS OVER AND ABOVE THE NORMAL EXPENDITURE INCURRED BY THE R & D DEPARTMENT (KNOWN AS TECHNOLOGY DEPARTMENT) OF THE ASSESSEE AND THE ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 19 EXPENDITURE WAS INCURRED FOR ADOPTING THE ADVANCED TECHNIQUES OF PRODUCTION SO AS TO BE AT PAR WITH THE INTERNATIONA L LEVEL. IT WAS ALSO SUBMITTED THAT BECAUSE OF THE PECULIAR RAW MATERIAL AND PROCESS REQUIREMENT ASSESSEE SUFFERED A LOT IN THE PAST DU E TO VARIOUS DEFICIENCIES LIKE QUALITY CAPACITY CONSTRAINTS PR ODUCTIVITY ISSUES UNEVEN SUPPLIES ETC. LEADING TO HIGH AMOUNT OF REJECTION A ND TO OVERCOME THE ABOVE DEFECTS AS WELL AS FOR COST EFFECTIVENESS AS SESSEE HAD CARRIED OUT EXPENDITURE FOR RESEARCH. THE ASSESSING OFFICER DEN IED THE CLAIM OF DEDUCTION OF THE ASSESSEE ON THE GROUND THAT RESEAR CH FOR DEVELOPING A NEW PRODUCT TO IMPROVE THE QUALITY OF THE PRODUCTIO N AND TO REDUCE THE REJECTIONS IS NOT A SCIENTIFIC ACTIVITY ELIGIBLE FO R DEDUCTION UNDER SECTION 35 OF THE ACT. THE ASSESSEE HAS MERELY REPLACED THE CO NVENTIONAL MACHINES BY NEW MACHINES TO FACE STIFF COMPETITION AND TO IM PROVE THE QUALITY OF PRODUCTION. ACCORDING TO ASSESSING OFFICER THE EXP ENSES WERE ONLY TOWARDS FIXING THE AREAS OF COMPLAINTS THROUGH BETT ER METHODS/MODELS ALREADY AVAILABLE. THE ASSESSING OFFICER SUMMED UP HIS CONCLUSION BY HOLDING THAT THE ASSESSEE HAD NOT CARRIED OUT ANY B ASIC SCIENTIFIC RESEARCH AS ENVISAGED UNDER SECTION 35 OF THE ACT AND ALL TH E EFFORTS WERE ONLY TOWARDS FIXING THE AREAS OF COMPLAINTS THROUGH BETT ER METHODS/MODES ALREADY AVAILABLE. IN THESE CIRCUMSTANCES AND THE PAST RECORDS ASSESSING OFFICER DENIED THE CLAIM OF THE ASSESSEE AND AN ADDITION OF RS 9 96 914/- WAS MADE AGAINST WHICH ASSESSEE PREFERRE D AN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS). 22. THE COMMISSIONER OF INCOME-TAX (APPEALS) AFTER CONSIDERING THE SUBMISSIONS MADE BY ASSESSEE HELD THAT IN THE PREC EDING ASSESSMENT YEAR 2000-01 SAME ISSUE HAD BEEN ADJUDICATED BY TH E TRIBUNAL WHERE THE TRIBUNAL DIRECTED THE ASSESSING OFFICER TO REFE R THE MATTER TO THE CENTRAL BOARD OF DIRECT TAXES FOR REFERENCE OF THE QUESTION TO THE PRESCRIBED AUTHORITY AND THEREAFTER ON THE BASIS O F THE REPORT OF THE ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 20 PRESCRIBED AUTHORITY THE CBDT SHALL DECIDE THE ISS UE IN ACCORDANCE WITH LAW. FOLLOWING THE SAID ORDER THE COMMISSIONER OF INCOME-TAX (APPEALS) DIRECTED THE ASSESSING OFFICER TO REFER THE MATTER TO THE PRESCRIBED AUTHORITY AND DECIDE THE ISSUE IN ACCORDANCE WITH L AW. ASSESSEE IS IN APPEAL BEFORE US ON THIS ISSUE. 23. BEFORE US IT WAS A COMMON POINT BETWEEN THE PA RTIES THAT THIS GROUND IS LIABLE TO BE DECIDED IN THE LIGHT OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE VIDE ITA NO 1149/PN/03 DATED 2 8.2.2007 FOR THE ASSESSMENT YEAR 2000-01. WE FIND THAT THE TRIBUNAL CONSIDERED A SIMILAR ISSUE AND RESTORED THE MATTER BACK TO THE FILE OF T HE COMMISSIONER OF INCOME-TAX (APPEALS) WITH THE FOLLOWING OBSERVATION S: IN A PARTICULAR CASE IF THE ASSESSING OFFICER DOES NOT ACCEPT THE CLAIM OF THE ASSESSEE MADE U/S 35 OF THE ACT ON ANY OF THE GROUN DS REFERRED TO IN SUB-SECTION (3) OF SECTION 35 HE CANNOT OUTRIGHT REJECT THE CL AIM BUT HE HAS TO REFER THE MATTER TO THE CENTRAL BOARD OF DIRECT TAXES AND THE BOARD HAS TO REFER THE QUESTION TO THE PRESCRIBED AUTHORITY. THE COMMISSIO NER OF INCOME-TAX (APPEALS) DID NOT PASS A SPEAKING ORDER ON THIS ISSUE. IN TH E CIRCUMSTANCES THEREFORE WE CONSIDER IT APPROPRIATE TO REMIT THIS MATTER BACK T O THE FILE OF THE COMMISSIONER OF INCOME-TAX (APPEALS) WITH A DIRECTION THAT HE SHOUL D DE NOVO EXAMINE THIS ISSUE AS PER LAW AND SHOULD PASS A SPEAKING ORDER AFTER G IVING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THESE GROUNDS ARE DECI DED ACCORDINGLY. FOLLOWING THE AFORESAID PRECEDENT IN THIS YEAR ALS O WE DIRECT THE COMMISSIONER OF INCOME-TAX (APPEALS) TO RE-EXAMINE THE MATTER IN THE LIGHT OF THE DIRECTIONS OF THE TRIBUNAL IN THE ASSE SSMENT YEAR 2000-01 (SUPRA) AND ADJUDICATE THE ISSUE IN ACCORDANCE WITH LAW AFTER ALLOWING A REASONABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEA RD. THUS ON THIS GROUND THE ASSESSEE PARTLY SUCCEEDS. 24. THE NEXT ISSUE RELATES TO DEDUCTION UNDER SECT ION 80HHC VIS--VIS SECTION 80IB OF THE ACT. IT IS CONTENDED THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN ALLOWING THE DEDUCTION UNDER SECTION 80HHC ON THE P ROFITS AND GAINS AFTER REDUCING THE AMOUNT OF DEDUCTION GRANTED/ALLOWABLE UNDER SECTION 80IB WITHOUT APPRECIATING THAT SECTION 80HHC DOES NOT CO NTAIN ANY RESTRICTION ON CLAIMING DEDUCTION UNDER SECTION 80HHC FROM THE PROFITS BY REDUCING ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 21 THE DEDUCTION GRANTED UNDER SECTION 80IB OF THE ACT . IT APPEARS THAT THERE IS NO SEPARATE DISCUSSION OF THE ASSESSING OFFICER ON THE ISSUE OF DEDUCTION UNDER SECTION 80HHC IN THE ASSESSMENT ORD ER. WHILE COMPUTING THE TOTAL INCOME HE HAS SIMPLY ALLOWED T HE DEDUCTION UNDER SEC. 80HHC AS CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME. 25. ON APPEAL IT WAS CONTENDED BEFORE THE COMMISSI ONER OF INCOME- TAX (APPEALS) THAT SECTION 80HHC DOES NOT CONTAIN A NY RESTRICTIONS ON CLAIMING DEDUCTION OF SECTION 80HHC BY REDUCING DED UCTION UNDER SECTION 80IB OF THE ACT. HOWEVER THE COMMISSIONER OF INCOM E-TAX (APPEALS) HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY HO LDING THAT DEDUCTION UNDER SECTION 80HHC OF THE ACT HAS TO BE COMPUTED O N THE PROFITS AND GAINS AS REDUCED BY THE QUANTUM OF DEDUCTION UNDER SECTION 80IB OF THE ACT. 26. ON THIS ASPECT THE LEARNED COUNSEL FOR THE AS SESSEE POINTED OUT THAT THE ISSUE WAS DEBATABLE IN NATURE AND AS THERE WERE CONTRARY VIEWS FROM THE TRIBUNALS SO HOWEVER IT WAS POINTED OUT THAT LARGER BENCH OF THE TRIBUNAL IN THE CASE OF HINDUST AN MINT & AGRO PRODUCTS P LTD ITA NO 1537 TO 1539/DEL/07 HAS HELD THAT DEDUCTION UNDER SECTION 80HHC HAS TO BE COMPUTED ON THE PROFITS AND GAINS AFTER REDUCTION OF QUANTUM OF DEDUCTION UNDER SECTION 80I A/80IB OF THE ACT. FOLLOWING THE SAID DECISION OF THE LARGER BENCH OF THE TRIBUNAL WE THEREFORE AFFIRM THE ACTION OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ASPECT. ACCORDINGLY ASSESSEE FAILS ON THIS GROUND. 27. BY WAY OF GROUNDS NO 12 & 13 ASSESSEE HAS CHA LLENGED THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE DEDUCTION UNDER SECTION 80IB ON DEPB LICENSE OF RS 9 78 000/-. THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ALSO AFFIRMED THE DECISION OF THE ASSESSING OFFICER AND HAS NOT AGREED TO THE PLEA OF THE ASSES SEE THAT THE SAID AMOUNT WAS INEXTRICABLY LINKED TO INDUSTRIAL UNDERT AKING AND WAS MERELY A ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 22 RECOUPMENT OF THE DUTIES EMBEDDED IN THE INPUTS SO AS TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB OF THE ACT. 28. BEFORE US IT WAS A COMMON POINT BETWEEN THE P ARTIES THAT THE SAID ASPECT OF THE CONTROVERSY IS TO BE HELD AG AINST THE ASSESSEE FOLLOWING THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA V. CIT 317 ITR 218 (SC). ACCORDINGLY ON THIS GROUND ASSESSEE FAILS. 29. THE LAST GROUND RAISED BY ASSESSEE IS IN REGAR D TO THE LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT WHICH IN OUR VIEW IS CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ANY AD JUDICATION. 30. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 28TH DAY OF FEBRUARY 2011. SD/- SD/- (I C SUDHIR) (G.S. PA NNU) JUDICIAL MEMBER ACCOUNTANT ME MBER PUNE DATED: 28 TH FEBRUARY 2011. COPY TO:- 1) M/S CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. PUNE 2) ACIT CIR.1(1) PUNE 3) THE CIT (A) I PUNE. 4) THE CIT I PUNE. 5) THE DEPARTMENTAL REPRESENTATIVE B BENCH ITAT PUNE. BY ORDER TRUE COPY ASST. REGISTRAR I.T.A.T. PUNE B ITA NO 474/PN/09 M/S CUMMINS GENERATOR TECH. LTD. PUNE 23