Expense on Installation of ERP package abandoned midway is revenue expenditure

DCIT Vs Landis+ Gyr Ltd. (ITAT Kolkata)

Expenditure incurred for construction / acquisition of new facility which had to be abandoned midway will be allowable as a revenue expenditure as incurred wholly or exclusively for the purpose of assessee’s business. It is to be noted that in the instant case also, the expenditure incurred by the appellant was for the purpose of installation of new ERP package which did not sail through and had to be abandoned midway. Hence, the expenditure incurred did not give rise to any enduring benefit to the appellant neither did it result in creation of a capital asset. The Hon’ble Calcutta HC, in the case of Graphite India Limited reported (221 ITR 420) has also held, that expenditure which did not result in bringing into existence if any capital asset of enduring nature would be admissible as revenue expenditure.

Assessee claimed deduction for expenditure of Rs. 28,18,250/- pertaining to installation of SCALA ERP software. The said project was abandoned during the year and SCALA ERP software was not installed. Hence, revenue deduction was claimed by assessee for the expenses incurred. Detailed reply was filed during assessment proceedings in support of the claim of the assessee. However, assessing officer disallowed the deduction for said expense stating that it is a capital expenditure which yields benefit for a longer period. However, AO allowed depreciation on the said expense @60%.

On appeal, the Ld. CIT(A) vide its order dated 11-08-2017 allowed the claim of the assessee stating that expense incurred by the assessee should be treated as revenue expenditure relying on the decision of Hon’ble Kolkata High Court in the case of Binani Cement Ltd. (2015) 233 Taxman 340 (Cal).We note that during the previous year under consideration, the assessee recognized an expenditure of Rs. 28,18,250/- in its profit and loss account. The said amount pertained towards an unsuccessful attempt to install an ERP package called SCALA. The said package failed to meet the requirements of the assessee and hence the project had to be abandoned midway. The expenditure incurred on said package was recognized in profit and loss account and was claimed as a revenue deduction u/s 37(1) of the Act. That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby accepted and the grounds of appeal raised by the Revenue is dismissed.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

The captioned appeal filed by the Revenue, pertaining to assessment year 2004-05, is directed against the order passed by the Commissioner of Income Tax (Appeals)-Kolkata, in appeal no. 211/CIT(A)-22/2004-05/14-15/Kol, which in turn arises out an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the ‘Act’), dated 29.12.2006

2. The grievance raised by the Revenue are as follows:

1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in holding that the expenditure for installation of an ERP package was capital in nature and also ignoring the fact that the Assessing Officer had little scope for verification?

2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of Rs. 1,67,60,563/- made on account of commission?

3. Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) was justified in deleting the addition of Rs. 30,46,678/- on account of Provision for Doubtful Debt?

4. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in deleting the addition of Rs.12,45,123/- and Rs. 9,55,455/- on account of delayed payment of gratuity and leave encashment respectively?

5. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the TP adjustment of Rs. 12,21,683/- on account of payment of Royalty by considering the payment of Royalty by the assessee @ 4.53% of the net sales?

6. Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) has erred in not considering the R&D Cess as intrinsically linked to the payment of Royalty and thereby excluding the same to arrive at the payment of Royalty @ 4.53% instead of 4.74% as computed by the TPO?

7. That it is prayed to set aside the order passed by the Ld CIT(A)-22 and restore the assessment order passed by the Assessing Officer in this case.

8. Department craves leave to add, alter or modify any or all of the above grounds of appeal at or before the time of hearing of the appeal.

3. Now we shall adjudicate these grounds one by one.

4. Ground No. 1 raised by the revenue reads as follows:

“Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in holding that the expenditure for installation of an ERP package was capital in nature and also ignoring the fact that the Assessing Officer had little scope for verification?”

5. Brief facts qua the issue are that on perusal of details of Misc. Expenses for Rs. 3,75,90,123/-, the assessing officer noticed that Software Expenses for Rs. 28,18,250/- is included in it. The AO was of the view that these software expenses were Capital Expenditure. However, assessee vide its letter contended that it should be treated as Revenue Expenditure. The Assessing Officer did not agree with assessee’s contention and held that these software expenses are of capital in nature which yields benefit for a longer period. However, depreciation @60% is allowed to the assessee. The assessing officer computed the disallowance as follows:

6. Aggrieved by the order of Assessing Officer the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition observing the followings:

06. DECISION:

3. I have carefully considered the action of the Ld. AO and the written submission filed by the appellant. The various documents filed, during the appeal, copies of which were also filed before the Ld. AO has also been examined. On careful consideration of all the documents, it is observed that the appellant had, incurred, certain expenditure for installation of an ERP package called SCALA, The SCALA ERP package was a failure since it failed to meet the requirements, of the appellant and the said project-was abandoned, midway. Hence, the cost incurred by the appellant on such project was written off in the hooks of accounts and claimed as deduction in the computation of total income treating it as revenue expenditure. This fact has not been disputed by the Ld. AO. The only contention of the Ld. AO was that the said expenditure is a capital expenditure which yields benefit for a longer period and hence disallowed the claim of deduction of the said expenditure made by the appellant.

4. The Appellant has brought my attention the judgment of Hon’ble jurisdictional High court in the case of Binani Cement Ltd (supra) and Graphite India Limited (supra) wherein the Hon’ble Court has held that expenditure incurred for construction / acquisition of new facility which had to be abandoned midway will be allowable as a revenue expenditure as incurred wholly or exclusively for the purpose of assessee’s business. It is to be noted that in the instant case also, the expenditure incurred by the appellant was for the purpose of installation of new ERP package which did not sail through and had to be abandoned midway. Hence, the expenditure incurred did not give rise to any enduring benefit to the appellant neither did it result in creation of a capital asset. The Hon’ble Calcutta HC, in the case of Graphite India Limited reported (221 ITR 420) has also held, that expenditure which did not result in bringing into existence if any capital asset of enduring nature would be admissible as revenue expenditure,

5. Respectfully following the judgment of jurisdictional High Court cited by the appellant, which in my considered view is squarely applicable in the facts relevant for its case, the disallowance of software expense amounting to Rs.11,27,300/-madeby the Ld. AO is found not to be sustainable, and therefore deleted.

Theground, as aresult stands allowed.”

7. Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.

8. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has relied on the order of the ld. CIT(A).

9. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other material available on record. We note that the assessee claimed deduction for expenditure of Rs. 28,18,250/- pertaining to installation of SCALA ERP software. The said project was abandoned during the year and SCALA ERP software was not installed. Hence, revenue deduction was claimed by assessee for the expenses incurred. Detailed reply was filed during assessment proceedings in support of the claim of the assessee. However, assessing officer disallowed the deduction for said expense stating that it is a capital expenditure which yields benefit for a longer period. However, AO allowed depreciation on the said expense @60%.

On appeal, the Ld. CIT(A) vide its order dated 11-08-2017 allowed the claim of the assessee stating that expense incurred by the assessee should be treated as revenue expenditure relying on the decision of Hon’ble Kolkata High Court in the case of Binani Cement Ltd. (2015) 233 Taxman 340 (Cal).We note that during the previous year under consideration, the assessee recognized an expenditure of Rs. 28,18,250/- in its profit and loss account. The said amount pertained towards an unsuccessful attempt to install an ERP package called SCALA. The said package failed to meet the requirements of the assessee and hence the project had to be abandoned midway. The expenditure incurred on said package was recognized in profit and loss account and was claimed as a revenue deduction u/s 37(1) of the Act. That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby accepted and the grounds of appeal raised by the Revenue is dismissed.

10. Ground No. 2 raised by the revenue relates to disallowance of commission of Rs. 1,67,60,563/-.

11. Brief facts qua the issue are that the assessee company has claimed expenses in form of commission for Rs. 6,53,82,426/-. During the assessment proceedings, the assessee submitted evidences like names and addresses of the parties to whom commission has been paid. The details filed also shows the amount of commission, TDS, nature of service rendered and also quantification of service rendered.

The AO was of the view that so far as allowability of expenses in form of commission is concerned, the main point to be satisfied is “Rendering of service”. The assessee although filed details of commission, but such details is not accompanied by any evidence towards rendering of service for which commission is claimed to have been allowed. However, in order to verify the transaction regarding payment / allowing of commission, notice u/s 133(6) were sent to following parties:

Notice sent to M/s Agnes Trade & Commerce Pvt. Ltd. returned unserved. Reply has been received from the four parties as mentioned in Sr. Nos. (i), (ii), (iii) & (iv). Reply is yet to come from M/s Stelmee Switchgear. On perusal of reply received from several parties, it was noticed by AO that those parties have admitted about the transaction regarding commission. They also explained the nature of service rendered. However, the assessing officer was of the view that essential conditions i.e. “Rendering of service” is not established in this case. Therefore, commission allowed to M/s Gayatri Trading Corpn., M/s SPS Metal Cast & Alloys Ltd, M/s Little Star Trade Investments Ltd., M/s Consolidated Construction Co. and M/s Agnes Trade & Commerce Pvt. Ltd. (all Kolkata-based parties) amounting to Rs. 1,67,60,563/- was disallowed by assessing officer.

12. On appeal, the ld. CIT(A) deleted the addition observing the followings:

09, DECISION:

1. I have carefully considered the action of the Ld. AO and the written submission filed by the appellant / Ld. A.R. for the appellant-company. The various documents filed during the appeal, copies of which were also filed before the Ld. AO, have been examined. After careful consideration of the facts, it is observed that the Ld. AO has made disallowance of commission expense incurred by the appellant during the previous year under consideration on the ground that noneof the agents to whom the amounts of commission were paid have produced any evidence to the effect that the service was actually rendered. Further, the Ld. AO has mentioned that payment made to M/s Consolidated Construction Co. and M/s SPS Metal Cast & Allots Ltd was also disallowed in the immediate preceding A.Y. 03-04 and confirmed by the Ld. CIT(A). The Ld AO has recorded that as the fact involved in AY 04-05 i.e. the assessment year under consideration are similar to the facts of A.Y. 03-04, the disallowance should sustain.

2. The Ld. Assessing Officer in the assessment order has also mentioned that all the parties except one to whom commission was paid confirmed that they had entered into the transaction with the appellant. The Ld. AO has not disputed this fact and made the disallowance mostly on the ground that the appellant has failed to adduce evidence that the agents have in essence rendered services to the appellant to be eligible for receipt of commission.

3. During the course of the hearing, the appellant / Ld. A.Rs, drew my attention towards the reply, dated 22^nd December 2006 (Annexed at Pg – 7-74 of the submission filed before me) which was also filed before the Ld. AO at the time of assessment proceedings. The appellant had furnished copies of several communicationsWhich took place with the agents. Some of the communications, filed are as follows:

• • ‘Letter dated 06-05-03 issued by SPS Metal Cast & Alloys Ltd communicating that they, have asked CESC Ltd to carry out inspection of the meters manufactured by appellant.
  • Letter dated 24-03-03 issued by CESC Ltd on the appellant communicating about collection of PO from their office. In the said letter, a copy is also marked to SPS Metal Cast & Alloys Ltd which establishes that the agent was communicating with CESC Ltd on behalf of the appellant.
  • Letter dated 30-11-03, 18-12-03 issued by SPS Metal Cast & Alloys Ltd communicating about collection of payment from CESC Ltd.
  • Tender filed by the appellant before Gujarat Electricity Board wherein they have mentioned that their liaison representative will be Stelmee Switchgears.
  • Letter dated 25-07-02 issued by the appellant communicating to Gujarat Electricity Board that Stelmee Switchgears will be their authorized representative for opening of tender.
  • Letter dated 30.08.03, 16-09-03 issued by Consolidated Construction Co.(Agencies) Private Limited communicating that they have collected payment from Eastern Power Distribution Co. of AP Limited.
  • Letter dated 17-03-03 issued by Gayatri Trading Corporation communicating to the appellant that they have asked, DVC to reschedule inspection of meters.

4. On perusal of the documents, it appears that the appellant has furnished variousinformation before the Ld. AO justifying the role of various parties in the process of co-ordination with the customers. It is always open for the Ld. AO to confirm from the agents whether the sum received by them has been appropriately offered to tax in their return. It is seen that the Ld. AO had issued notices to the agents who confirmed that they had entered into transactions with the agent. In the absence of any observation or recording by the Ld. Assessing Officer, it cannot be said, in my considered view that the Ld.AO has not rebutted the contentions of the appellant as made out before him during the scrutiny. It is also observed that the Ld. AO has not made any finding so as to suggest that the appellant has not made any paymentto the various third parties referred above, or that any of thepayments were bogus or not genuine. He went on to make the disallowance stating that the appellant has failed to furnish evidence of rendering of service by the commission agents;

5. It ispertinent that for the AY 05-06, which is also in appeal and being decided
simultaneously, also the Ld, AO had required the Departmental Inspector toconduct enquiry in respect of payment of commission to M/s Agnes Trade & Commerce Pvt. Ltd, Consolidated Construction. Co, Agency-Ltd, Cindy Engg. Pvt. Ltd, Omega .Venture Pvt. Ltd, SPS Metal Cast & Alloy Ltd, The Ld. AO had directedthe inspector to verify the existence of these persons, services rendered by them,and whether theseparties declared such income in the taxreturn, etc. It is pertinent to observe that in the assessment order dated 12.12.2008 passed for A.Y. 2005-06, no disallowance has been made on account of commission payment to above parties. This would clearly suggest that the Ld AO had satisfied himself about the genuineness of the commission payment made by the appellant and therefore did not make any adjustment on this front for theA.Y. 2005-06.

6. It is also, noted that several of the agents to whom the appellant paid commission in A.Y.05-06 were also the agents for the appellant in A.Y. 04-05. Hence, it is difficult to locate any good reason in order to take a different view from the one taken by the Ld. AO for this the assessment year under consideration. Since, the Ld, AO admitted the same facts in subsequent years and not made any disallowance in A.Y 05-06, I do not find anyjustification for not granting claim for similar expense in A.Y. 04-05. The Ld. AO has also recorded that the disallowance of commission paid to Consolidated Construction Co and M/s SP.SMetal Cast & Alloys Ltd were also made in A.Y. 03-04 and the facts being similar, accordingly, disallowance of commission paid to these parties should also be made in this A.Y. 2004-05. However, it is to be noted that the addition made by the Ld. AO has alreadybeen reversed by Hon’ble Calcutta High Court vide its order dated 22^nd; July 2016 (ITA No. 236 of 2000) which has adjudicated the, issue of disallowanceof commission paid to third parties in favour of the appellant, for AY -03-04. The relevant extract of the judgment of Hon’ble High Court is reproduced below:

“From the evidence disclosed by the assessee we are inclined to think that the assessee had adduced such proof as it was in its power to prove. It is at this juncture that the judgment relied upon by Mr. Khaitan in the case of Collector of Customs, Madras and Officers [supra] becomes relevant. It goes without saying that it wasin the power of the revenue to have contradicted the evidence adduced by the assessee and its agents to the extent that the income earned by them on account of commission paid by the assessee was not offered for taxation or that the particulars of the final accounts or the final accounts themselves disclosed by the agents were not in accordance with the Returns of income which, they may have filed. It is difficult to believe that it did not occur either to the Assessing Officer, or to the CIT(A) that they could seek these information from their counterparts who may have been in seisin of the income taxfiles of the aforesaid two agents. Therefore, the only inference, which may be drawn, is that these facts were not contradicted because they were factually undeniable.

Our attention was not drawn to any suggestion, far less any finding at any state to show that it was, even remotely suggested that the payment was collusive or the same was not genuine.

The fact that the agents made themselves liable to recover the price of goods sold and delivered pursuant to the orders procured by them is a pointer to show that they were del credere agents, well-known in the commercial world. This fact was not at all taken into consideration, nay, it did not occur to them when they held that “no evidence has been brought-on record to show that any services were rendered by the said agents to the assessee.

Moreover, reasonableness of an expenditure has tobe adjudged from the point of view of the businessman and not of the revenue.

In that view of the matter, we are of the opinion that the judgment under challenge is perverse and cannot be sustained. The question, reformulated by us, is answered in the affirmative. The question originally formulated is answered in the negative and in favour of the assessee.”

7. It is also a settled-principle that ordinarily, it is for the assessee to decide whether anyexpenditure should be incurred in the course of his business. The Hon’ble Apex Court in the case of Sassoon J David and Co. (P) Ltdvs CIT Bombay (118 ITR 261)(SC) held that expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business andto earn profits, the assessee can claim deduction for the same. Even the Karnataka HC in the case Commissioner of Income-tax vs Motor Industries Company Limited (1907) (223 ITR 112) was of the view that the commercial expediency of a businessman’s decision to incur, an expenditure cannot betested on the touchstone of strict legal liability to incur such an expenditure. Such decisions in the very nature of things have to be taken from a business point of view and have to be respected bythe authorities no matter that it may appear to the latter that the expenditure incurred was unnecessary or avoidable. The fact that the appellant has made payment to various commission agent was not been disputed by the AO. The fact of the matter is that the Ld.AO hashimself allowed deduction for such expenses in the subsequent year by making due verification from theparties.

Considering theabove facts and respectfully following the judgment of Hon’ble Calcutta High Court inappellant’s own case for A.Y. 2003-04, the disallowance made by the Ld Assessing Officer is found to be unsustainable, and therefore ordered to be deleted.”

13. Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.

14. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand the ld. Counsel for the assessee has relied on the order of the Ld CIT(A).

15. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee made payment on account of commission to various agents for carrying out various activities as per the agreed terms.The Ld. AO disallowed the payment of commission to five agents amounting to Rs. 1,67,60,563/- stating that the assessee could not produce evidences of the services rendered by the agents. The Ld. AO relied on the assessment order of AY 2003-04 wherein similar disallowance for commission expense was made.On appeal,the Ld. CIT(A) relied on the decision of the Kolkata High Court in assessee’s own case for AY 2003-04 and held that commission expense should be allowed as deduction. The Ld. CIT(A) also took note of the fact that in Assessment Year 2005- 06, the Ld. AO after making enquiry on the agents regarding the genuineness of the commission expenses, did not make any disallowance for commission expense in the Assessment order for AY 2005-06. Hence, the Ld. AO has himself accepted that the deduction for commission expense should be allowed. The fact that there was a transaction between the parties and the assessee have not been disputed by the Ld. AO.

The Ld. AO alleged that the parties did not produce any evidence to the effect that the services were actually rendered. However, this allegation is without merits as the assessee had duly submitted the relevant documents in support of the services obtained from the agent during the course of the assessment proceedings.

On perusal of the documents, it appears that the appellant has furnished various information before the Ld. AO justifying the role of various parties in the process of co-ordination with the customers. It is always open for the Ld. AO to confirm from the agents whether the sum received by them has been appropriately offered to tax in their return. It is seen that the Ld. AO had issued notices to the agents who confirmed that they had entered into transactions with the agent. In the absence of any observation or recording by the Ld. AO, it cannot be said, in my considered view that the Ld.AO has not rebutted the contentions of the appellant as made out before him during the scrutiny. It is also observed that the Ld. AO has not made any finding so as to suggest that the appellant has not made any payment to the various third parties referred above, or that any of the payments were bogus or not genuine. He went on to make the disallowance stating that the appellant has failed to furnish evidence of rendering of service by the commission agents.

The Ld. AO ought not to have questioned the commercial prudence of the transaction entered into by the assessee businessman when there was nothing on record to show that the transaction was not genuine. It is a settled principle of law that business or commercial expediency has to be judged from the perspective of the businessman and not of the Revenue, since it is the businessman who is being benefited from the services rendered and also it is he who knows to what extent the benefit ensures to him. Reliance in this regard may be placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Dhanrajgiri Raja Narasingirji, reported in 91 ITR 544 (SC), wherein it was held that “it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur the expenditure. Every businessman knows his interest best.”

Further, the Hon’ble Supreme Court in the decision rendered in the case of Eastern Investments Limited vs. CIT reported in 20 1TR 1 (SC) has opined that the aspect of prudency of entering into a transaction and making an expenditure in connection therewith will have to be judged from the point of view of the businessman and not of the Department. The ratio of the said decision clearly emanates the view that one should not be concerned with the legality or propriety of a transaction or whether the result could have been achieved in another way. What one should be concerned with is whether the transaction was done in the ordinary course of business, however mistaken an assessee might have been.

Attention in this regard may also be drawn towards the decision of the Hon’ble Supreme Court in the case of Sassoon J David & Co. P Ltd vs. CIT reported in 118 ITR 261 (SC) wherein it was held that “It has to be observed here that the expression ‘wholly and exclusively’ used in section 10(2)(xv) of the Act of the 1922 Act, corresponding to section 37(1) of the 1961 Act, does not mean ‘necessarily’. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure”.

During the course of assessment proceedings, the appellant duly furnished all the details of commission expense alongwith documentary evidence. Further, the Ld. AO also verified the transactions by issuing notice u/s 133(6) of the Act against which he received positive confirmation from the agents regarding the transactions. Hence, the disallowance made by the Ld. AO is on mere surmise and conjecture and the order of Ld. CIT(A) in deleting the said addition is to be sustained. Accordingly, we dismiss the ground raised by the Revenue.

16. Ground No. 3 raised by the revenue reads as follows:

“Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) was justified in deleting the addition of Rs. 30,46,678/- on account of Provision for Doubtful Debt?

17. Brief facts qua the issue are that on perusal of computation sheet of book profit u/s 115JB, the AO noticed that following amount although debited to P & L a/c was not

The AO was of the view that the above provisions as well as Interest u/s 234C of the Act are required to be added back to the book profit as per Explanation below second proviso to section 115JB of the Act. The assessee, was asked to offer explanation in this regard. The assessee vide its letter dated 28/12/2006 filed a detailed explanation containing that the above provisions, interest u/s 234C are not to be added back to Net profit, in view of Explanation below second proviso of section 115JB of the Act.

a) Interest u/s 234C of the IT Act does not amount to Income Tax.

b) Provision for leave encashment and provision for gratuity is an ascertained liability.

c) Provision for Bad Debt relates to decrease assets but not a provision towards liability.

The ld AO held that Assessee’s explanation is not tenable because of the following reasons:

a) “Interest u/s 234C of the Act represents Income-tax liability, and Income-tax is not an allowable deduction / expenses either in normal computation or in book profit.

b) The provision for gratuity and provision for leave encashment represent towards liability. Any provision for liability is to be added back to book profit as per Explanation below second provision to section 115JB.

c) Regarding provision for Bad debt, it is to be noted that such provision, although is in respect of decrease in value of assets, this provision, in fact, goes to increase the liability from accountancy point of view. So provision towards decrease in assets ultimately result in increase in liability.

In view of the above, Interest u/s 234C, provision for gratuity, provision for leave encashment and provision for bad debt were added to book profit within the terms of Explanation below second proviso to Section 115JB of the Act.

18. On appeal, the ld. CIT(A) deleted the addition observing the following:

“15. DECISION

1. I have carefully consideredthe action of the Ld. AO and the written submission filed by the appellant. After Careful consideration of the facts, it is observed that during the previous year; under consideration, the appellant had actually written off bad debt amounting toRs.30,46,678 in its profit and loss account;

2. The said fact is substantiated from the details of provision for doubtful debts, and bad debt furnished by the appellant during the course of the hearing and also, the financial statements of the company.

After examiningthe details submitted, I find myself agreeable with the appellant that no new provision for doubtful debts has been made in the accounts of the appellant during the financial year 2003-04 (relevant toassessment year 2004­05) and the charge of Rs.30,46,678/- made to the profit and loss account for the year ended 31.03.2004 was only on. account of writing off bad debts. This would be an allowable expenditure u/s.36(l)(vii) of the Income Tax Act, 1961.It is also to be said that the factual and legal matrix of the case of the appellant-company is well covered by the decision of the Hon’ble Supreme Court in the case-of T.R.F Ltd vs CIT reported in 323 ITR 397 where in it was held that after 1^st April 1989, bad debt claimed by the assessee company will be allowed if such bad debt is written off as irrecoverable in the books of accounts of the company and it is not necessary for the assessee to establish that the debt in fact has become irrecoverably. As has been submitted by, the appellant, a similar view has been taken by the Hon’ble Delhi High Court in the case of All Grow Finance; and Investment Pvt. Ltd. -vs.- CIT reported in (2011) 338,ITR 496 (Del.) wherein it has been held that writing off thebad debt by itself^:is enough to claim deduction of bad debt.

In view of above discussion, the addition made by the Ld AO is found to, be unsustainable, and therefore ordered to be deleted. The ground stands allowed.”

“para 21, I have carefully considered the action of the Assessing Officer and the written submission filed by the appellant. The various documents filed during the appeal, copies of which were also filed before the Assessing Officer has also been examined.

In para 15(supra) of this order, it has already been discussed and held that the Assessing Officer has erroneously treated the actual bad debt of Rs. 30,46,678/-as provision for bad debt. Hence, the very basis of the addition made by the ld. Assessing Officer was on an incorrect premise. Accordingly, the addition made on account of provision for bad debt amounting to Rs. 30,46,678/- while computing book profit u/s 115JB of the Act is deleted. “

19. Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.

20. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld. CIT(A) and other materials available  on record. We have gone through the order of ld CIT(A), it is a speaking order in respect of provision for doubtful debts/bad debts both under normal provision and section 115JB of the Act. Therefore, the reasoned order passed by the ld CIT(A) does not require any interference. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on these additionsare, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

21. Ground No. 4 raised by the revenue reads as follows:

“Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in deleting the addition of Rs.12,45,123/- and Rs. 9,55,455/- on account of delayed payment of gratuity and leave encashment respectively?

22. Brief facts qua the issue are that the assessing officer made addition of provision for gratuity and provision for leave encashment amounting to Rs. 12,45,123/- and Rs. 9,55,455/-respectively in the computation of book profit u/s 115JB of the Act.

23. On appeal, the ld. CIT(A) deleted the addition observing the following:

18. DECISION:

1. I have carefully considered the action of the AO and the written submission filed by the appellant. It is to be observed that Section 115JB of the Act deals with addition on account of provision for meeting liabilities other than ascertained liabilities. The relevant provisions is reproduced below:

“Explanation l.—For the purposes of this section, “book profit” means the profit-as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by—

(a)……………….

(b)……………………..

(c) the amount or amounts set aside to provisions made for meeting liabilities, other-than ascertained liabilities; or

2. Nowthe issue in hand, is whether provision for leave encashment and provision for gratuity can betermed as provision for ascertained liability so as to fall outside the ambit of clause (c) of Explanation 1 to Section 115JB of the Act. The issue on whether liabilty for leave encashment is contingent or not has been dealt by the Hon’ble Supreme Court in the case of Bharat Earth Movers vs CIT reported in 245 ITR 4218 wherein it had been held that if the liability is capable of being; estimated with reasonable certainty even though actual quantification may not/be possible,’ If these requirements are satisfied, the liability is not a contingentone.

3, The appellant has also invited my attention towards the judgment of Hon’ble Apex Courts’ in the case Metal Box Company of India Ltd vs Their Workmen Reported in73 ITR 53 Wherein provision for gratuity based on actuarial valuation was considered to be a real liability. Respectfully following the judgment of Hon’ble Apex Court in the case of Bharat Earth Movers (supra) and Metal Box Company (supra) and considering the fact that provision for gratuity and provision for leave encashment are valued by actuary, it is held that both are provision for ascertained liability and accordingly addition made by ld. A.O. on these front while computing book profit is deleted.”

24. Aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us.

25. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has relied on the order of the ld. CIT(A).

26. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that during the previous year under consideration, the assessee created provision for gratuity and provision for leave encashment which was not offered to tax under computation of book profit since both the sum are provision for ascertained liability.The Ld. AO added back provision for gratuity and leave encashment to the book profits of the assessee stating that provision for liability is to be added back while computing book profit. We note that Ld. CIT(A) held that in computation of book profit only provision for unascertained liability is required to be added back. Provision for gratuity and leave encashment, being ascertained liabilities are not required to be added back to book profits u/s 115JB of the Act. We note that ld CIT(A) relied on the judgment of the Hon`ble Supreme Court in the case of Bharat Earth Movers vs CIT reported in 245 ITR 421(SC) (supra), therefore we do not find any infirmity in the order of ld CIT(A).That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on these additionsare, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

27. Ground Nos. 5 and 6 raised by the revenue read as follows:

5. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the TP adjustment of Rs. 12,21,683/- on account of payment of Royalty by considering the payment of Royalty by the assessee @ 4.53% of the net sales?

6. Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) has erred in not considering the R&D Cess as intrinsically linked to the payment of Royalty and thereby excluding the same to arrive at the payment of Royalty @ 4.53% instead of 4.74% as computed by the TPO?

28. Brief facts qua the issue are that assessee`s case was referred to the Transfer Pricing Officer (TPO) for determining Arm’s length price. The TPO vide his order u/s 92CA(3) dated 05/12/2006, has determined that there was transfer pricing for Rs. 12,21,683/- on account of Royalty.Therefore, assessing officer made addition to the tune of Rs. 12,21,683/-.

29. On appeal, the ld. CIT(A) deleted the addition observing the following:

27. DECISION ,

1. I have carefully examined the action of the Ld. TPO as recorded in his order dated 5^thDecember,2006. The submission filed by the appellant has also been perused and it is observed that the appellant has paid effective rate of royalty @ 4.53% p.a, of sales to its AE, Landis+Gyr AG. Ithas been observed that the Ld. TPO has computed the effective rate of royalty as 4.74% wherein, in addition to considering the amount of royalty paid, he has also considered the amount of R&D cess paid onsuch royalty for thepurpose of royalty rate computation. The appellant, on the contrary, has not considered the R&D cess on royalty paid as liability to pay such cess is always on the Indian company importing such technology. The appellant submitted that R&D cess should not be considered while determining the effective rate of royalty paid by the appellant to its AE. The Ld. AR of the appellant has drawn support from ruling of Pune Tribunal: in case of Kirloskar Ebara Pumps Ltd. ([2011] 12 taxmann.com 241 (Pune))supporting the same view.

2. The appellant has ‘benchmarked the aforesaid¹ rate of royalty with ‘the royalty rates for comparable, uncontrolled transactions based on search conducted in , Royalty Statonline database. The appellant has contended that basis the search, the average rateof royalty paid in comparable uncontrolled transactions was determined to be 4.34% of Sales and the said benchmarking analysis has been affirmed by Hon’ble Kolkata Tribunal in appellant’s own ease for A.Y. 07-08 and

AY 08-09 while adjudicating the issue of payment of royalty. Considering that the rate of royalty after exclusion of R&D cess paid by the appellant is 4.53% during AY 2004-05 which falls within the +/-5% range in terms of the proviso to section 92C(2) of the IT Act, the transaction should be considered to be at arm’s length.

3. In my considered view, it is a settled principle that R&D cess represents a liability due to the Government and is not to be considered as income in the hands of the non-resident. In terms of section 3 of The Research & Development Cess Act. 1986:

“3. Levy and collection of cess on payments made towards import of technology. There shall be levied and collected, for the purposes of this Act, a cess at such rate not exceeding five per cent, on all payments made towards the import of technology, as the Central Government may from time to time, specify, by notification, in the official Gazette.

The cess shall be payable to the Central Government by an industrial concern which imports technology on or before making any payments towards such import and shall be paid by the industrial concern to any specified agency.”

4. It is clear that the liability to pay such cess is that of the importer i.e. the Indian company and accordingly the question of inclusion such cess in the amount of royalty paid by the appellant to Landis+Gyr AG would not arise. Thus, while arriving at the effective rate of royalty, amount of R&D cess, which is a liability of the importer of technology should not be taken into consideration. On exclusion of R&D cess from royalty paid by the appellant to Landis+Gyr AG, the effective rate of royalty would be 4.53% as against the rate of 4.74% determined by the TPO. Further, it is not in dispute that the arm’s lengths rate of royalty in the appellant’s own case has been considered to be 4.34% by the Hon’ble Tribunal in its own case [TS-518-ITAT-2016(Kol)- TP] for AY 2007-08 and AY 2008-09 on account of same payment.

5. Since that the aforesaid rate of 4.53% falls within the +/-5% range allowed as per the proviso to section 92C(2), the transaction for payment of royalty is considered to be at arm’s length.

In light of the above discussion, the Ld. AO / TPO are directed to delete theadjustment of  Rs.12,21,683/- made on the transaction of payment of royalty.

30. Aggrieved the order of the ld. CIT(A) the revenue is in appeal before us.

31. The ld. DR for the Revenue has primarily reiterated the stand taken by the TPO/Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has relied on the order of the Ld CIT(A).

32. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee has paid royalty @ 4% (net of taxes) on CM Meters and 5% (net of taxes on MM Meters). The total amount paid by the assessee by way of royalty for manufacturing of both the types of meters is Rs. 1,76,57,854/- plus income tax of Rs. 17,65,785/-(which is borne by the assessee). The assessee paid R&D Cess of Rs. 8,82,893/- directly to the government as it was the liability of importer of service. The Ld. AO followed the order of the Ld. TPO and made adjustment of Rs. 12,21,683/- on account of royalty. The Ld. TPO derived the percentage of royalty at 4.74% by considering the amount of royalty as Rs. 2,03,06,532/- (including income tax and R&D Cess). On appeal,the Ld. CIT(A) held that R&D cess is paid to the Government and not to the Associated Enterprise and hence, considered the percentage of royalty at 4.53% for the purpose of comparison of arm’s length price and provided relief to the assessee.

The ld Counsel submits before us that during the previous year under consideration, the assessee has paid Rs. 1,76,57,854/- towards payment of royalty to its Associated Enterprise (AE), Landis+Gyr AG. The assessee borne taxes of Rs.17,65,785/- on such royalty. The assessee also paid R&D Cess of Rs. 8,82,893/- to the government in terms of the provisions of The Research and Development Cess Act, 1986.The payment of royalty was consequent to the foreign collaboration agreement entered into between the assessee and Landis+Gyr AG signed in 1992, which is approved by the Ministry of Commerce & Industry, Department of Industrial Policy & Promotion. Pursuant to the agreement, Landis+Gyr AG provides technology, know-how etc. in relation to designing and manufacturing of electric meters. Hence, for receiving the aforesaid support, the assessee had paid Landis+Gyr AG, technology royalty fee ranging from 4% to 5% of the net sales of manufactured goods effected in the territory of India.The Ld Counsel would further like to submit that the Ld. TPO had erroneously computed the effective rate of royalty as 4.74% ignoring the fact that the R&D Cess paid by the assessee is not towards royalty and the same is required to be excluded. The said calculation is tabulated below:-

calculation is tabulated

33. The Ld Counsel submitted that from the aforesaid computation, it is evident that the Ld. TPO, while computing the effective rate of royalty, in addition to considering the amount of royalty paid and income tax, has also considered the amount of R&D cess paid by the assessee on such royalty. However, it may be noted that the aforesaid payments have been made to Government under statutory requirements and not to the Associated Enterprise. Hence, the same should not be considered while determining the royalty payment to AE since payment to Government of a sum which is the liability of the assessee does not fall within the ambit of international transaction as per the provisions of Transfer Pricing.

Reference in this regard is invited towards Sec. 3 of The Research And Development Cess Act, 1986, which reads as follows:

“3.Levy and collection of cess on payments made towards import of technology. —(1) There shall be levied and collected, for the purposes of this Act, a cess at such rate not exceeding five per cent, on all payments made towards the import of technology, as the Central Government may, from time to time, specify, by notification, in the Official Gazette.

The cess shall be payable to the Central Government by an industrial concern which imports technology on or before making any payments towards such import and shall be paid by the industrial concern to any specified agency.”

On perusal of the aforesaid section, it may be noted that the liability for payment of R&D Cess is that of the assessee and the same should not be covered within the contractual payment of royalty or as income of the foreign company. The Pune Tribunal in the case of Kirloskar Ebara Pumps Ltd. ([2011] 12 taxmann.com) held that “since research and development cess liability is payable by the assessee who imports technology no adjustment in the same can be made in the computation of arm’s length price for royalty.” Therefore, as the amount of cess could not be considered as an income for the foreign company, it should accordingly not be considered while computing the amount of royalty paid to the foreign company by the assessee Considering the facts narrated above and the case law applicable to the facts we note that order of the Ld. CIT(A) does not require any interference.

That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on these additionsare, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

34. Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co­ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JCB Limited in ITA No. 6264/Mum/2018 and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.

35. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Court on 28.07.2020