Hella India Electronics Pvt. Ltd., ... vs Assessee

DCIT, Circle 12(1), Vs. M/s Hella India Electronics P. Ltd. New Delhi (formerly known as M/s Padmini Engg. Pvt. Ltd). B-13, Badarpur, Extn., New Delhi (PAN: AAACP5344H) (Appellant) (Respondent) And

ITA No. 2750/Del/2013 Assessment Year: 2005-06

M/s Hella India Electronics P. Ltd. Vs. DCIT, Circle 12(1), (formerly known as M/s Padmini New Delhi Engg. Pvt. Ltd). B-13, Badarpur, Extn., New Delhi (PAN: AAACP5344H) (Appellant) (Respondent)

Assessee by : Sh. Rajeev Jain, CA Department by: Sh. Gaurav Dudeja, Sr. DR

Date of hearing: 05.05.2015 Date of pronouncement: 08.07.2015

ORDER

PER INTURI RAMA RAO, A.M.:

These are the cross appeals for the assessment year 2005-06 filed by the

assessee as well as by the Revenue impugning the order of learned CIT(A)-X, 2 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

New Delhi,dated 26.02.2013. Appeal in ITA No.2585/Del/2013 is filed by the

Revenue and appeal inITA No. 2750/Del/2013 is filed by the assessee company.

2. In ITA no. 2585/Del/2013, the Revenue has raised the following grounds

of appeal:

i. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in granting relief of 50% out of disallowance of research & development expenses and TS Certificate expenses.

ii. On the facts & circumstances of the case and in law, the Ld. CIT(A) has erred in accepting the contention of the assessee that DEPB Incentives be not taxed on the accrual basis.

iii. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.

3. In ITA No. 2750/Del/2013, the assessee has raised the following grounds

of appeal:

i. That on the facts and in the circumstances of the case where the Id. AO made an addition of Rs 6,93,653/ - by disallowing the Research & Development expenses aggregating to Rs 9,24,871/ - which were treated as capital expenditure being classified as Intangible Assets after allowing depreciation @ 25%, the Id CIT(A)-X, New Delhi was wrong in directing the Id AO to treat 50% of expenses as capital in nature and the remaining as revenue.

ii. That on the facts and in the circumstances of the case where the Id AO made an addition of Rs 2,01,442/ - by disallowing TS 16949 certification charges of Rs. 2,68,589/- which were treated as capital expenditure being classified as Intangible Assets after allowing depreciation @ 25%, the Id CIT(A)-X, New Delhi was wrong in directing the Id AO to treat 50% of expenses as capital in nature and the remaining as revenue. iii. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of Rs 1,82,000/- made by the Id AO by disallowing Software development and maintenance charges amounting to Rs. 4,55,000/- which were treated as capital expenditure after allowing depreciation @ 60%. iv. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of Rs 7,19,675/- made by the Id AO by disallowing Building Repair and Maintenance Expenses amounting to Rs. 7,99,639/- which were treated as capital expenditure after allowing depreciation @10%.

3 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013 v. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of Rs 37,48,450/- made by the Id AO u/ s 36(1 )(ii) of the' Act' by disallowing commission paid to Managing Director being part of remuneration by treating the same as otherwise payable as dividend or profit.

vi. That the appellant crave leave of this Hon'ble court to add, amend, alter or withdraw any ground at the time of hearing.

4. The briefly stated facts of the case are that the appellant company is a private

limited company incorporated under the provisions of the Companies Act, 1956.

The assessee company is engaged in the business of manufacturing of auto

electronics parts and accessories. The return of income for the assessment year

2005-06 was filed on 28.10.2005 declaring income of Rs. 11,66,73,707/- and this

was revised on 23rd March, 2007 disclosing of Rs. 11,60,78,244/-. After processing

the said return of income under Section 143(1) of the Income-tax Act, 1961 (for

short "the Act"), the case was selected for scrutiny assessment and the assessment

was completed by the learned DCIT, Circle 12(1), New Delhi vide order dated 29th

November, 2007 at a total income of Rs. 12,97,00,073/-. While doing so, the

Assessing Officer had disallowed the research and development expenses of Rs.

9,24,871/- by the holding that the expenditure is in the nature of capital, however,

the Assessing Officer allowed the depreciation on such amount. Further, the

Assessing Officer also made disallowance of the expenditure incurred in

connection with the T.S. Certification and, however, allowed the depreciation and

thereby making addition of Rs. 2,01,442/-. Another item of disallowance of

software development expenditure incurred on the development of customized ERP

software of Rs. 4,55,000/- the Assessing Officer, however, allowed the 4 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

depreciation at the rate of 60% of Rs. 4,55,000/- and thereby making net

addition of Rs. 1,82,000/-. The Assessing Officer also disallowed a sum of Rs.

7,99,639/- incurred on the maintenance of building on the ground that the

expenditure in the nature of capital and the resultant in the creation of capital

asset. However, allowed the depreciation at the rate of 10% thereon. The

Assessing Officer also disallowed the commission paid to Managing Director to

the tune of Rs. 37,48,450/- on the provisions of Section 36(1)(ii) of the Act. The

Assessing Officer brought to tax sum of Rs. 80,76,609/- on the ground that the

assessee company should have accounted for the DEPB benefits on the accrual

basis. Aggrieved by the above additions, an appeal was filed before the CIT(A)

who vide order dated 13th February, 2013 partly allowed the grounds of appeal.

Aggrieved by this order, the assessee is before us with the present appeal, which

we shall now deal with ground-wise.

ITA No. 2750/Del/2013 for AY 2005-06:

5. Ground no. 1 relates to the disallowance of the research and development

expenditure. The submission made before the CIT(A) on this disallowance of

R&D expenditure are as follows:

"Addition of Rs. 6,93,653/-: Disallowance of Research and Development expenditure

The company has its own computerized R&D Department which test each and every component used in manufacturing process as well as the finished product to check whether the technical specifications are maintained or not. The basic function of the Research and Development Department is as under:

5 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013 a. To analyze the technical requirements of the final product as per the specifications of the Original Equipment Manufacturers and other customers and to design samples of finished product.

b. To devise details, design samples and other technical specifications and parameters for purchase of various components to be procured from the vendors.

c. To check whether the supplies from the vendors are in accordance with the technical specifications, drawings and design.

d. To check the finished products with respect to quality, shape and sharpness, loudness, accuracy as to whether the final product meets the technical requirements of the customers so as to avoid rejections."

5.1 The learned CIT(A) after considering the above submission held that 50%

of the expenditure under the head 'research and development expenditure'

would be capital in nature and accordingly directed the Assessing Officer to

allow the balance as a revenue expenditure.

5.2 It was submitted by the learned Authorized Representative before us that

the total expenditure relates to the Quality and Control Department though

termed as R & D expenditure and the copy of the ledger extract of the account is

placed vide page no. 82 to 105 of the paper book. Therefore, he submitted that

the entire expenditure should be allowed as deduction.

5.3 On the other hand, learned DR objected to even allowance of 50% of the

expenditure on the ground that the entire expenditure is in the nature of capital.

5.4 We have heard the rival submissions of the parties and perused the copy

of the ledger account of the R & D expenditure. From which, it is very clear that

the expenditure incurred is in the nature of routine expenditure for maintenance

of Quality Control Department. Obviously, this expenditure had not resulted in

creation of an asset of enduring nature and therefore, we hold that the entire 6 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

expenditure should be allowed as Revenue expenditure. Accordingly, the ground

no. 1 raised by the assessee is allowed.

6. Ground no. 2 relates to the disallowance of TS 16949 certification charges

of Rs. 2,68,589/-. The assessee company made the following submissions before

the CIT(A):

" 13. The company caters to OEM's customers in the domestic market as well as in the international market. The ISO/TS 16949 an international standard for technical specification which was jointly developed by the International Automotive Task Force (IATF) members. This document, coupled with customer-specific requirements defines quality system requirements for use in the automotive supply chain. TS 16949 applies to the design/development, production and, when relevant, installation and servicing of automotive-related products. All the leading automobile manufacturers support ISO/TS 16949 as a valid supplier approval mechanism. There are recognized certification bodies, which satisfies the supporting vehicle manufacturers, who after conducting audit issues the certificates. The certificate validity generally is three years. The audit may be necessary again in case or changes/modification in the ISO/TS 16949 document or as and when required by the customer.

14. During the year an amount of Rs 2,68,859/- was incurred under this head detailed as under:

a. Rs 1,80,570/- were paid to M/S Det Norske Veritas, the auditors for conducting audit.

b. Rs 84,600/- to M/s Goel Departmental Store on account of stationer used for compliance TS 16949 documentation, and c. Rs 3,419/- miscellaneous expenses.

15. The expenses are incurred on recurring basis as per the requirement of the automotive industry (lA TF) for the purpose of certification of existing systems which are in place as per the requirement of ISO TS 16949 document and the certification agency after conducting audit only certifies that the system as required are in place and this is not a case of one time expenditure once for all or acquiring any licenses/business or commercial rights or license fees for three years.

16. The expenses are purely of revenue expenses in nature which are incurred wholly and exclusively for the purpose of the business carried on by the assessee company and no intangible asset being know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature ever came into existence and are allowable u/s 37 of the Income Tax Act, 1961.

7 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013 17. In view of the above the action of the Id AO to treat the expenses aggregating to Rs 2,68,859/- incurred for quality audit for TS 16949 certification, as capital expenditure classified as Intangible Asset is wrong, unjustified, unwarranted and against the established law which deserves to be allowed and the addition of Rs 2,01,442/- after allowing depreciation @ 25% deserves to be deleted."

6.1 The learned CIT(A) after considering the above submissions, had held

that 50% of expenditure is capital in nature and balance was disallowed.

Aggrieved by this, the assessee had come up before us.

6.2 From the perusal of the material available on record as well as the

expenditure furnished before the Assessing Officer, we are of the opinion that

the expenditure incurred is revenue in nature and does not create an asset of

enduring nature and therefore, we direct the Assessing Officer to allow the entire

expenditure. Accordingly, the ground no. 2 raised by the assessee is allowed.

Ground no. 3 relates to the capitalization of the expenditure incurred on

software development to the tune of Rs. 4,55,000/-. The submissions made by

the assessee company before the learned CIT(A) are as under:

" 18. Ground no 4 challenges the disallowance of software development expenses amounting to Rs 4,55.000 - which were capitalized as computer software and after allowing depreciation @ 60% resulted into an addition of Rs. 1,82,000/-.

19. During the year a production software was developed for the company by M/s Neel Kamal Softwares Pvt Ltd. for Rs. 4,55,000/-. After installation it was found unsuccessful therefore its use was suspended and no asset of any enduring benefit came into existence.

20. In order to decide the nature of expenditure whether it is capital or revenue three tests i.e. ownership test, enduring benefit test and functional test have to be applied and if acquisition of a computer software results into accrual of advantage of enduring nature i.e. more than two years it may be capitalized provided functional test is also satisfied.

8 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013 21. In the present case 'a production software' is acquired, however, as the Software could not be used for the purpose of production no enduring benefit ever accrued to the company and keeping in view the fact that it also could not satisfy the functional test the amount of expenditure will remain a revenue expenditure which cannot be capitalized.

22. In view of the above, the action of Id. AO to treat the above expenditure as capital in nature was wrong, unwarranted and unjustified and the expenditure which is incurred wholly and exclusively for the purpose of business is a revenue expenditure allowable u/s 37(1) of the Act and the addition made on this account deserves to be deleted."

7.1 The learned CIT(A), after considering the submissions and the evidence

on record, had dismissed the ground of appeal. Hence, the assessee had come

before us raising this ground of appeal.

7.2 It was submitted before us by the learned AR that the software developed

was not successful and usage of software was suspended therefore, it cannot

held that the benefit of everlasting nature has been accrued to the assessee. He

further relied on the decision of Amway Products Vs. DCIT, Special Bench

decision, reported in 111 ITD 112 (Del.). The certificate from the management

to the effect that the software was unsuccessful was furnished vide page no. 122

of the paper book.

7.3 On the other hand, the ld. DR placed reliance on the order of learned

CIT(A) and argued that the CIT(A)'s order on this ground should be upheld.

7.4 We have considered the rival submissions of the parties and perused the

material on record. We are of the opinion that the issue in appeal is squarely

covered by the Special Bench decision in the case of Amway Products Vs. DCIT 9 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

(supra). Therefore, we direct the Assessing Officer to allow the same as a

revenue expenditure.

7.5 Respectfully following the ratio laid down in the above case, we allow

this ground of appeal filed by the appellant. Accordingly, ground no. 3 is

allowed.

8. Ground no. 4 relates to repair and maintenance expenditure of the

building to the tune of Rs. 7,99,639/-. The Assessing Officer disallowed these

expenditure by holding that the expenditure was in the nature of capital. During

the course of proceeding before the CIT(A), the assessee company made the

following submissions:

" 23. Ground No. 5 challenges the addition of Rs. 7,19,67, 674/- made by disallowing Building repair & Maintenance amounting to Rs. 7,99,639/- which were treated as capital expenditure u/h Factory Building after allowing depreciation @ 10%.

24. The factory building of the company with the gross block aggregating to Rs. 3,75,22,448/- came up in the earlier years. During the year under consideration no construction of any capital nature whatsoever has been undertaken by the company. The existing factory building as well as other facilities needs and require continuous sometimes maintenance/upkeepment and renovation/replacement in respect of any irreparable damages.

25. During the year under consideration certain expenditure were incurred for renovation/replacement of existing facilities as under:

S. No. Particulars Amount (in Rs. ) Remarks 1. Renovation of Scrap 78,000/- An existing facility which Store required major repairs. 2. Renovation of existing 56,179/- An existing facility which Actuator Line required replacement of existing old wooden partitions, plaster and replacement of ceiling. 3. Renovation of existing 94,560/- An existing facility where 10 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

lab existing plaster was replaced with tiles and replacement of old wooden partitions.

26. It is apparent that each and every expenditure incurred related to the existing structures/building and facilities, which required repair/replacement/renovation and no new/fresh structure of any nature whatsoever came into existence. Further, the expenses incurred are immaterial considering the magnitude and size of gross block of factory building.

27, In view of the above the Id AO was wrong and unjustified to disallow the expenses relating to repair and maintenance of building and capitalize them under the head factory building and hence the addition amounting to Rs. 7,19,675/- made by the Id AO by disallowing building repair and maintenance expenditure amounting to Rs. 7,99,639/- while allowing depreciation @ 10% deserves to be deleted.

8.1 The learned CIT(A) after considering the above submission, confirmed

the additions by holding that the expenditure resulted in creation of new asset.

Aggrieved by this order, the assessee company is before us.

8.2 It was submitted before us that the expenditure has not resulted in creation

of any new asset. This expenditure was incurred only for the maintenance of

existing buildings and he has relied upon the decisions of Hon'ble Supreme

Court in the cases of Ballimal Naval Kishore Vs. CIT, 224 ITR 414 in support

of the proposition that the expenditure for current repair charges.

8.3 On the other hand, learned DR relied on the order of the CIT(A) regarding

this issue.

8.4 We have heard the rival submissions of the parties and perused the

material on record. We are of the opinion that as a result of this expenditure no

new asset had been created and the expenditure was incurred mainly for the 11 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

purpose of maintaining the existing buildings. Therefore, the ratio laid down by

the Hon'ble Supreme Court in the case of Ballimal Naval Kishore Vs. CIT

(supra) is squarely applicable. Hence, this ground is allowed.

9. Ground no. 5 relates to the disallowance of commission paid to Managing

Director of Rs. 37,48,450/-. The Assessing Officer disallowed it on the ground

that the same was otherwise payable as dividend and profit and therefore

invoked the provisions of Section 36(1)(ii) of the Act. On appeal before the

learned CIT(A), the assessee company submitted as under:

"28. Ground No. 6 challenges the addition of Rs. 37,48,4501- made by disallowing the commission paid to the managing director Shri. Rahul Kabir Bhandari stating that the claim was not allowable u/s 36( I)(ii) of the Act as the sum was otherwise payable to him as profit or dividend.

29. During the year an amount aggregating to Rs. 53,35,450/- (PY Rs. 53,35,450/-) was paid as salary, commission and other allowances to the managing director of the company against the services rendered by him. The total remuneration included commission amounting to Rs. 37,48,450/- in respect of sales to OEM.

30. The total paid up capital of the company as at 31.03.2005 stood at Rs. 31,27,920/- divided into 3,12,792 equity shares of Rs 10/- each fully paid up as under:

Folio Name & Address No. of Shares (%) 4. Mr. R.K. Bhandari 138896 (44.41) 5. Ms. Sonia Bhadari 17500 (05.59) 6. M/s Hella Asia Pacific 56396 (50.00) Holdings Pvt. Ltd. Total 312792 (100.0)

Out of the total share capital. Shri Rahul Kabir Bhandari, MD was holding the 138896 equity shares i.e. 44.41% of the total shareholding of the company.

31. The Id. AO held that the commission has been paid to the Managing Director who was also a shareholder. Section 36(1)(ii) has been specially inserted to ensure that companies do not avoid tax by distributing profits to their members/shareholders as bonus or commission instead of dividend. In the instant case, it is clear that profit which would have been otherwise paid to the aforesaid managing director as dividend has been diverted in the form of 12 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

commission. By diverting the sum of Rs. 37,48,450/- as commission to director, the assessee has only reduced the corpus available for distribution as dividend. Thus, commission paid to the managing director at Rs 37,48,450/-was disallowed as not allowable u/s 36(1) (ii) of the Act.

32. The observation of the Id AO is against the legal provisions and settled law. Submitted that bonus or commission paid to an employee is allowable under this clause subject to the condition specified u/s 36(I)(ii) of the Income Tax Act 1961 (section 10(2) (x) of the Income Tax Act, 1922). The condition is that the sum paid to the employee as bonus or commission should not have been payable to him as profits or dividend if it had not been paid as bonus or commission. This is to prevent a private company or an association from escaping tax by distributing its profits, by way of bonus or commission, among the members as employees of their own concern, instead of distributing the money as dividends or profits. But unless the same sum as is paid by way of bonus or commission would otherwise have been payable to employees as profits or dividend, the assessee cannot be deprived of the benefit of such clause.

33. Therefore, where the shareholders of a private company are also employees in their own company and receive remuneration by reference to their services and not by reference to their shareholding in the company, the bonus or commission would be an admissible deduction under this clause. Because, in such a case the employees may get more or less by way of bonus or commission than what they would have got by way of dividend.

34. The law in this respect was settled by the Mumbai High Court in the matter of Loyal Motor Service Company vs CIT, 14 ITR 647 in the year 1946.

35. In view of the above the addition amounting to Rs. 37,48,450/- made by the Id AO is unwarranted, unjustified and against the settled law which deserves to be deleted."

10. The learned CIT(A), after considering the above submissions, dismissed

this ground of appeal. Hence, the assessee had come up before us with the

present ground of appeal.

10.1 The learned Authorized Representative reiterated the submissions made

before the CIT(A) and relied upon on the decisions of AMD Mertplas Pvt. Ltd.

Vs. CIT, 341 ITR 563 in support of the proposition that the provisions of

Section 36(1)(ii) of the Act are not applicable where the commission paid to the

Directors on par with the other means of the company.

13 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

10.2 We have heard the rival submissions of the parties and perused the material

on record. It appears from the material on record that the commission to the

Managing Director was paid on par with the other employees of the company and

therefore the provisions of Section 36(1)(ii) have no application. The ratio laid

down in the case of AMD Mertplas Pvt. Ltd vs. CIT, 341 ITR 563 (Del.) is

squarely applicable to the facts of the case. Therefore, we allow this ground of

appeal also.

10.3 Accordingly, the appeal of the assessee is allowed.

ITA No. 2585/Del/2013 for A.Y. 2005-06

11. Now, we shall deal with the appeal filed by the Revenue. The first ground of

appeal relates to the allowance of the deletion of 50% of addition out of

expenditure incurred for T.S. Certification. Since we have already held in the

assessee's appeal that the expenditures incurred in connection with the TS

Certification are revenue in nature, this ground of appeal filed by the Revenue is

dismissed.

12. The next ground of appeal is about the point of time of taxability of

DEPB incentives on the exports made by the appellant. This issues is no more

res integra and is covered by the Hon'ble Supreme Court decision in the case of

Topman Exports Pvt. Ltd. Vs. CIT, (2012) 342 ITR 49 (SC) wherein the

Hon'ble Supreme Court held that the DEPB credit chargeable as income under

Section 28(iiib) in the year in which the assesee applied for DEPB credit against the

exports made and therefore, we restore this issue back to the file of the

Assessing Officer with the direction that the income on account of DEPB credit 14 ITA No. 2585/Del/2013 & ITA No. 2750/Del/2013

should be taken into account only in the year in which the assessee had applied

for the credit against the export made. Accordingly, this ground of appeal is

partly allowed for statistical purposes. Thus, the appeal of the Revenue is partly

allowed for statistical purposes.

13. In the result, the appeal of the assessee is allowed and the appeal of the

Revenue is partly allowed for statistical purposes.

The decision is pronounced in the open court on 8 th July, 2015.

Sd/- Sd/- (G.C. GUPTA) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 8th July, 2015. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi