Whether non-competition fee paid to assessee allowable as revenue expenditure?

Procter & Gamble Distribution Co. Ltd. Vs JCIT (ITAT Mumbai)- Whether the non-competition fee paid to the assessee is allowable as revenue expenditure– Whether the amount paid for licence fee is revenue expenditure for the rights granted which are non-exclusive rights to use the trademarks- Whether the expenditure incurred for termination of manufacturing agreement and for termination of all other agreements is capital in nature as the payment was for termination of JVA and as per the terms of the JVA, no liability would be cast on any party towards the other party for loss of anticipated sale or prospective profits. – Assessee’s appeal partly allowed.

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, ‘F’, MUMBAI

BEFORE S/SHRI D.K.AGARWAL (JM) AND J.SUDHAKAR REDDY(A.M)

ITA No. 3596/Mum/2003

(Assessment Year: 1997- 98)

Procter & Gamble Distribution Company Limited,(since merged with Procter & Gamble Home Products Limited), P&G Plaza, Cardinal Gracias Road, Chakala, Andheri (East), Mumbai- 400099. PAN: AAACP4046L	V/s	Joint Commissioner of Income Tax, Spl. Rg. 5, Mumbai.
		RESPONDENT
APPELLANT

ITA No. 3661/Mum/2003
(Assessment Year:1997- 98)

Dy. Commissioner of Income Tax, Circle 7(1), 452, Aayakar Bhavan, M K Marg, Mumbai- 400020

V/s

M/s Procter & Gamble Distribution  Co. Ltd., Tiecicon House, Dr. E. Moses Road, Mumbai- 400025.

PAN: AAACP4046L APPELLANT  RESPONDENT

Date of hearing                     – 21.07.2011

Date of pronouncement     – 29.07.2011

Assessee by          : S/Shri Yogesh A.Thar and Haresh G.Buch

Revenue by          : Shri Subachan Ram

O R D E R

PER D.K. AGARWAL (JM)

These cross-appeals by the assessee and Revenue are directed against the orders dated 26.2.2003 read with order under section 154 dated 28.3.2003 passed by the Learned Commissioner of Income Tax (A) for the assessment year 1997- 98. Both these appeals are disposed of by this common order for the sake of convenience.

2. Briefly stated facts of the case are that the assessee company is engaged in the marketing, selling and distribution of consumer products including detergent, toilets soaps, toiletries etc. The assessee company was formed as a joint venture between P & G Group and Godrej Group in 1993. This joint venture was terminated in July 1996 and the shareholdings, as well as, the management was taken over by P and G Group of Companies. The return was filed declaring total income of Rs. 1,28,96,220/-. Subsequently, the said return was revised declaring the income of Rs. 6,60,07,130/- as the income under provision of section 115JA was more than the total income as determined by the assessee under the normal provisions of the Act. However, the assessment after making various dis allowances was completed at an income of Rs. 29,38,01 ,950/- vide order dated 30.3.2000 passed under section 143(3) of the Income Tax Act, 1961 (in short the Act). On appeal, the learned Commissioner of Income Tax (A) partly allowed the appeal.

3. Being aggrieved by the orders of the learned Commissioner of   Income Tax (A), the assessee and Revenue both are in appeal before us.

ITA No. 3596/Mum/2003(by assessee)

6. On the other hand, the learned D.R. while relying on the order of the AO and learned Commissioner of Income Tax (A) also relied  on the decision of the Special Bench of the Tribunal in M/s.Procter & Gamble Home Products Ltd. (in short M/s PGHPL) (supra) and submits that following the decision of the Tribunal, the issue may be decided against the assessee and in favour of the Revenue.

7. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merits in the plea of the parties that the issue is squarely covered against the assessee and in favour of the Revenue by recent decision of the Special Bench of the Tribunal in Tecumseh India (P.) Ltd. V/s Addl.CIT (supra) since reported in (2010) 127 ITD 1 (Delhi)(SB) and also by the decision in the case of M/s PGHPL (supra). In the case of M/s PGHPL, the Tribunal following the decision of the Special Bench of the Tribunal (supra) vide paragraph 2.4.2 of the order has held as under :

“2.4.2 We have perused the records and considered the matter carefully. In the case of Tecumseh, USA, a leading Global compressor manufacturer, the assessee had purchased the compressor related operations of Whirlpool India, a leading refrigerator manufacturer in India, for Indian compressor market. The assessee had paid the price of Rs.52.5 crores which included a sum of Rs.2.65 crores to be paid as non-compete fees. The issue was whether non compete fees which was in force for 5 years, could be allowed as revenue expenditure. The Special Bench after detailed examination held that the expenditure was capital in nature. It placed reliance on the judgement of Honourable Supreme Court in CIT Vs Coal Shipment Pvt. Ltd. (82 ITR 902) in which it was held that payment to ward off completion in business to a rival dealer would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating competition over some length of time. The Special Bench also observed that non compete period of five years had been considered as sufficient to give enduring benefits in case of Assam Bengal Cement Co. Ltd. (27 ITR 34). In that case, the assessee who was a manufacturer of Cement had paid protection fees to the lessor of quarries for lime stone, on annual payment of Rs.5000/- for the whole period of lease and another sum of Rs.35000/- p.a. as a further protection fees for five years for similar undertaking in respect of the whole district. The issue was whether the payment could be allowed as revenue expenditure. Honourable Supreme Court observed that the fact that the payment was recurring was immaterial. It was the nature of asset acquired which was material. The asset required was the right to carry on the business unfettered by any competition which was not a part of working of the business but went on to appreciate the whole of the capital asset and make it more profit yielding. The expenditure was thus hold as capital in nature by the Honourable Supreme Court. The Learned AR has not brought on record any distinguishing feature from the facts of Tecumseh (I) (P) Ltd. (supra). Therefore respectfully following the decision of Special Bench in case of Tecumseh (I) (P) Ltd. (supra), we uphold the order of CIT(A) confirming the dis allowance as capital expenditure.”

In the absence of any distinguishing features brought on record by the learned counsel for the assessee, we respectfully following the above decisions uphold the order of the leaned Commissioner of income Tax (A) confirming the dis allowance as capital expenditure and accordingly, ground No.1 (1) taken by the assessee is rejected.

8.   Ground No. 1 (2,3 and 4) are against the sustenance of dis allowance of amortisation of Trade Licence Fee of Rs. 25 lakhs or in the alternative, the deduction under section 35A be allowed as claimed.

9. Brief facts of the above issues are that the AO from the details of miscellaneous expenses filed by the assessee noted that the company has shown expenses of Rs. 25 lakhs claimed to be paid as Licence Fee. On being asked to explain, it was interalia submitted by the assessee that the Licence Fees have been paid for use of the Trade Mark of the products licensed from Godrej and Boyce Ltd. during the period April 1996 to June 1996 which expenditure is related to business and is not in any way capital in nature nor has it given an enduring benefit to the assessee company. Therefore, the Licence Fee which has been expended wholly and exclusively for the business should be allowed under section 37(1) of the Act. However, the AO after considering the assessee’s reply and the Trade Mark Licence Agreement observed that in the assessment years 1994-95 to 1996-97, the claim of the assessee of Licence Fees was examined and it was held therein that it was not an allowable claim being the expenditure in the nature of capital. Alternatively, it was held therein that Licence Fee paid is for the use of Trade Mark and is therefore covered by the section 35A of the Act, since, this expenditure incurred on acquisition of patent rights, trade marks  by the assessee, expenditure to the extent of 1/14^th of the expenditure can only be allowed as per section 35A of the Act. Therefore, following the findings recorded in the assessment order for Assessment years 1994-95 to 1996-97, the AO disallowed the claim of the assessee of Rs. 25 lakhs. On appeal, the learned Commissioner of Income Tax (A) following the appellate order for the assessment year 1996- 97 upheld the dis allowance made by the AO.

10. At the time of hearing, the learned  counsel  for the assessee submits that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case in Procter & Gamble Distribution Company Limited V/s DCIT in ITA No. 846/Mum/2003 (AY-1994-95) order dated 9.5.2008, wherein the Tribunal after examining the issue has deleted the similar dis allowance made by the AO. He has also placed on record the copy of the said order of the Tribunal.

11. On the other hand, the learned D.R. supports the order of the AO and the learned Commissioner of Income Tax (A).

12. Having carefully heard the submissions of the rival parties and perusing the material available  on record we find merit in the plea of the learned counsel for the assessee that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal in assessee’s own case (supra), wherein the Tribunal has held vide paragraph 9 at pages 6 and of its order as under :

“9 We find that the payments are staggered over the period of seven years. The rights granted to PGG are non-exclusive rights to use the trademarks.  In a sense, the assessee paying the instalment as he uses them, which shows that it is in the nature of Revenue only. Accordingly, the same is allowed”

Respectfully following the same and a keeping in view the rule of Consistency, we are of the view that the expenditure claimed by the assessee are revenue in nature and accordingly the dis allowance of Rs. 25 lakhs made by the AO and sustained by the learned Commissioner of Income tax (A) is deleted. Ground No. 1 (2 and 3) taken by the assessee are therefore allowed while Ground No.1(4) which is an alternative ground is rejected.

13. Ground No. 11 (1 and 2) are against the sustenance of addition of Rs. 20,39,899/- paid, on account of advertisement expenses in foreign currency to Asia Today Limited.

14. Brief facts of the above issue are that from the details filed by the assessee, it was noted by the AO that the assessee company has remitted total Rs. 61,12,561/- in foreign currency to foreign telecasting companies during the year under consideration. Out of this, Rs. 14,21,220/- was estimated to Asia Today Ltd., Hong Kong and Rs. 47,01,341/- to Star T.V., Singapore. The AO further noted that the assessee has filed details of TDS from remittances to Asia Today Ltd. and Star T.V. in foreign currency. The AO further noted that the assessee has deducted tax at source under section 195 of the Act @ 55% of the 10% of remittance after May 1996 as per the provisions of Circular No.742 issued by the CBDT on 2.5.1996. But on the remittances made up to May 1996 of Rs. 20,39,899/- to foreign telecasting companies, the assessee has neither deducted tax at source nor paid to the Central Government. The assessee was asked to explain. It was interalia submitted by the assessee that no part of the services in connection with the said advertising were rendered by Asia Today Ltd. in India, the said fee cannot be deemed to accrue or arise to Asia Today Ltd. in India. However, the AO was of the view that the assessee company is giving advertisements to Asia Today Ltd. to telecast on Zee T.V. Advertisement revenue is earned by foreign company which is doing the telecasting for Zee T.V. The income is deemed to accrue/arise to Asia Today Ltd. in India. Therefore the assessee was required to deduct tax at source under section 195. The assessee has failed to do so. The AO disallowed the deduction under section 40(a)(i) and made the addition of Rs. 20,39,899/- to the total income of the assessee. On appeal, the learned Commissioner of Income Tax (A) following the appellate orders for the earlier years upheld the dis allowance made by the AO.

15. At the time of hearing, the learned counsel for the assessee submits that the Tribunal in the assessee’s appeals (supra) in the earlier years on the similar facts and circumstances of the case has restored the issue to file of the AO, therefore, following the same, the issue may be restored to the file of the AO.

16. On the other hand, the learned D.R. supports the order of the AO and the learned Commissioner of Income Tax (A).

17. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that on the similar issue, the Tribunal in the earlier years has restored back the matter to the file of the AO vide finding recorded in paragraph 13, pages 7 and 8 of its order dated 9.5.2008 (supra) as under :

“13.   Ld.A.R. for assessee mentioned that the similar payments were made to M/s Asia Today Ltd. and issue came up before the Honourable Tribunal in the case of M/s PGHHPL vide ITA No. 5153/M/98 for AY 1995-96 and 5687 & 5688/M/99 for AY 1994-95 & 1996-97. In these appeals, on this issue, the Honourable ITAT has referred the issue to the files of the AO for the reason that the AO failed to pass a speaking order as to how the provisions of section 40(a) are applicable. The Tribunal held that the  place  of happenings are outside India and the payments have been made outside India. Following the above, AR for assessee fairly requested that the matter may be sent to the AO for fresh adjudication at the end of the AO. Ld. CIT-DR relied on the order of the CIT(A) in this regard and argued that the decision of Tribunal,Mumbai G- Bench, in the case of M/s Satellite Television Asia Region Ltd. vide ITA No.5066/M/2004 for the AY 2000-01 is applicable and he argued that the payment of advertisement expenses to Asia Today Ltd. without deduction of tax under section 40(a) is rightly disallowed by the AO. Accordingly, we restore this issue to the file of the AO for examining afresh after affording reasonable opportunity to the assessee of being heard. He shall also examine the revenue’s argument relying on the decision in the case of Satellite Television Asia Region Ltd (supra). Accordingly, this ground is set aside.”

In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the order of the Tribunal (supra) set aside the orders passed by the Revenue authorities on this account and restore the issue to the file of the AO for examination afresh in the light of the directions given by the Tribunal in the said order (supra) and according to law after providing reasonable opportunity of being heard to the assessee. The Ground No.11 ( 1 and 2) are therefore partly allowed for statistical purposes.

18. Ground No.111 (1 and 2) are against the sustenance of dis allowance of Rs. 12,26,40,000/- paid on termination of Joint Venture Agreement and other agreements.

19. Brief facts of the above issue are that from the Profit and Loss Account, the AO noted that the assessee company has spent an amount of Rs. 12,26,40,000/- paid to Godrej Soaps Ltd. on termination of Joint Venture as revenue expenditure. The assessee was asked to file full particulars of payments, method of working of the amount payable, copy of the agreement and in case any valuation was got done to assess the amount payable, to file copy of such reports and also to justify the claim of deduction of Rs. 12,26,40,000/-. In response, the assessee company has submitted as under (Paragraph 10.1 to 10.7, pages 12 to 14 of Assessment Order):

“10.1 “During the year under consideration the joint venture with Godrej family was terminated as per the terms of the Termination of JV agreement, a copy of which has already been submitted to you in Assessment year 1996-97. The said sum of Rs.12,26,40,000/- has been paid as per the terms of the said agreement as follows :

Rs. 11,26,40,000/- is towards  termination of  Manufacturing agreement which was a part of the Joint Venture Agreement  and Rs. 1,00,00,000/- is towards termination of all other agreements related to the Joint Venture Agreement. As is clear from the agreement this payment is towards termination of existing agreements which expenditure is required by commercial expediency and is not of an enduring nature or is not bringing into existence any capital assets and hence the same is claimed as revenue expenditure in the Return of Income.”

10.2 The assessee was again given another opportunity vide letter dated 7^th January, 2000 to explain why these expenses should not be treated as capital expenditure since the payments were made on termination of Joint Venture Agreement.

10.3 In response to the above, the assessee again filed written reply dated 14^th January, 2000 and submitted as under :

“As has already been stated the assessee company has paid to Godrej Soaps Ltd. (GSL) Rs.1 1,26,40,000/- towards termination of Manufacturing Agreement which was a part of the Joint   Venture Agreement and Rs. 1,00,00,000/- is towards termination of all other agreements related to the Joint Venture Agreement. In anticipation of the orders expected as per the Manufacturing Agreement GSL had invested capital to be able to meet the orders which is sunk cost of GSL on account of the termination of the agreement. Thus this is expenditure required by commercial expediency and is not of an enduring nature or is not bringing into existence any capital asset. On the contrary this is compensation for the loss on account of early termination of the agreement. Hence the same cannot be treated as capital expenditure”

10.4 The assessee has not furnished details regarding method/basis of working of amount payable or any valuation which was got done to assess the amount payable. The assessee was again given an opportunity vide note sheet entry dated 20.01.2000 to furnish the basis for working out the figure of compensation of Rs. 11.264 crores and Rs. 1 crore for termination of agreements and also to furnish reasons which resulted into termination of Joint Venture.

“Your good self has desired to know the reasons for the termination of the JV. In this respect we would like to state that it was a business and commercial agreement to terminate the JV. The amount of Rs. 11.264 crores paid to Godrej Soap Ltd. towards termination of the Manufacturing Agreement between the two companies and Rs. 1 crore paid towards annulment/termination or causing the annulment/termination of the other Joint Venture Agreements and all other agreements is an amount negotiated between the two parties.”

10.6 The assessee was once again given an opportunity vide note sheet entry dated 7.3.2000 to furnish the details on the basis of which amount of compensation of Rs.11.264 crores was determined and circumstances and reasons which resulted into termination of Joint Venture. The assessee was also asked to explain how it was commercially expedient to terminate the agreement and to make the payment to Godrej Soaps Ltd.

10.7 In response to the above, the assessee vide its letter dated 13^th March, 2000 submitted as under :

“This refers to the information submitted by us on January, 25, 2000 and January 31, 2000 and the subsequent hearing wherein your good self has requested us to explain specifically as to the allowbility of the deductions claimed by us in respect of the following payments :

i) a sum of Rs. 11.264 crores to Godrej Soaps Ltd (GSL) for a premature termination of the Manufacturing Agreement, and

ii) a sum of Rs. 1 crores to GSL for termination of all other Joint Venture Agreements.

As requested, we explain in respect of the above as follows :

Re: termination of Manufacturing Agreement :

The assessee company had entered into Joint Venture Agreement (JVA) in January 1993 by which the assessee company agreed to purchase 80,000 metric tones of toilet soaps per annum from April, 1993 from GSL on a principal basis. By this  JVA GSL also agreed to terminate its manufacturing agreements with third parties for manufacture of toilet  soaps. This Manufacturing Agreement was for a period of 10 years.

However, with the termination of the JVA in July, 1996 as well as changes in the market conditions in the toilet soaps market, the said Manufacturing Agreement was also terminated. Consequently GSL was put to a loss of sales and profits and was also unable to use such manufacturing capacity for others on account of the product and quality specifications imposed by the assessee company as well as the termination of the third party manufacturing agreements by GSL as a part of the JVA.

We submit that the payment of such compensation for early termination of the Manufacturing Agreement being a business expenditure is fully deductible as revenue expenditure. In this respect reliance is placed on the following decisions in this regard :

1. Karamchand Thapar & Bros. Pvt.Ltd. V/s CIT (80 ITR 167)

2. CIT V/s Oberoi Hotels (India) Pvt. Ltd (209 ITR 732 (Cal))

3. CIT V/s Ashok Leland Ltd. (86 ITR 549 –SC)

4. G. Scammel and Nephew Ltd V/s Rowles (HM Inspector of taxes 8 ITR Suppl.41-CA)

It has been held in the decision in Ashok Leyland’s case (86 ITR 549) by the Apex Court that the compensation paid to the managing agents for the termination of the managing agency in view of the change in the business activity of the aseseee was clearly of a revenue nature and therefore an allowable deduction under section 37(1) of the  Income tax Act.

Similarly, in G Scammel’s case, the expenditure incurred for termination of disadvantageous trading relationship and the related litigation expenses have been held to be of a revenue nature and therefore allowable as deductions.

In the case of the assessee company , as is evident from the copy of the Termination of JV Agreement which is enclosed and marked as Annexure I, the compensation was paid to GSL for its loss of sales and profits which had resulted from the termination of the said Manufacturing Agreement as a result of the termination of a disadvantageous trading relationship, which in turn had arisen due to the changes in the toilet soaps market in India. Due to the early termination of the Manufacturing capacity for any other customer also. As such, you will appreciate that the payment of Rs. 11.264 crores to GSL was a business expenditure of revenue nature and is accordingly allowable fully as deduction as claimed.

Re : termination of other agreements of JVA:

This amount was paid to GSL to compensate for the loss on account of premature termination of all other agreements which formed a part of JVA. We submit that payment of compensation for early termination of the other agreement of JVA being a business expenditure is fully deductible as  revenue expenditure.      In this respect we place reliance on the submissions made above regarding the  payment for termination of Manufacturing Agreement “

However, the AO did not accept the assessee’s explanation. He observed that the assessee has not furnished any basis on which odd figure of Rs. 11.264 crores has been worked out for termination of Manufacturing agreement and Rs. 1 crore to be paid towards termination of other Joint Venture Agreements. The AO after considering the certain clause of the agreement including Clause 19 of the Agreement which reads as under :

“INDEMNIFICATION

19. In the event of the expiration or termination of this Agreement, none of the parties shall be liable to the other parties for any loss of anticipated sales or prospective profits or because of expenditures related to the performance of this Agreement.”

distinguished the decisions relied on by the assessee and interalia observed as under :

“10.14 The assessee has claimed deduction of Rs. 12.264 crores paid as compensation for termination of Joint Venture Agreement. But inspite of so many opportunities given, the assessee company has not furnished any details regarding the method or basis on which an odd figure of Rs. 11.264 crores was worked out as compensation for so called termination of  manufacturing agreement and Rs. 1 crore towards  termination of other agreements entered under Joint Venture. The assessee has also not furnished any details as to now it was commercially expedient for the assessee to terminate the Joint Venture. Even, during  the course of assessment proceeding of earlier AY 1996-97, the assessee did not furnish any correspondence or minutes of meetings held before the termination of the Joint Venture as to why the Joint  Venture was terminated and how the amounts payable were determined. It is not known for whom it was commercially expedient to terminate the Joint Venture. Whether it was terminated at the instance of Godrej  Family or at the instance of P&G Group………… ”

The AO after considering the sales, position of shareholdings of the company before and after termination of the Joint Venture Agreement and other relevant material has finally held that the payments for termination of agreements was capital expenditure vide finding recorded as under (Page 23 of AO):

It is pertinent to note that agreement at Sr. No. 2,3,5,6,9 and 10 are the agreements which were not entered exclusively between the assessee company (PGG) and GSL. It is not understandable as to how it was the liability of the assessee company to compensate the GSL for termination of these agreements wherein the assessee company was not a party. This itself shows that the payment was not made for commercial expediency of the assessee company. It may also be mentioned here that as per Clause 3.3 (a) of Joint Venture Agreement quoted above, equity shares were allotted to PGFE of Rs.100/- each at a premium of Rs.457.50 per share at the time of entering into Joint Venture. But at the time of termination of agreement, the family members of Godrej Group transferred the shares to the companies of P&G Group @ 230/- per share only. It is also pertinent to note that GSL has been showing huge losses carry forward in its Income Tax return and even after receiving payments from the assessee company, GSL was not liable to pay any income tax. Thus, it leads to irresistible conclusion that payments were made for termination of Joint Venture between two groups and on convenient understanding, the payments were shown to be made to GSL which will not be liable to pay any income tax. Thus, it was only camouflaging that the payment has been shown to be made for termination of manufacturing agreement of Rs. 11.264 crores and only Rs. One crore for all the agreements entered under Joint Venture Agreement.Thus, the payment was related to the change of ownership and management of the company exclusively to P&G Group. Thus, it cannot be said that the payment has been made for any termination of trading agreement but it was made for restructuring of the company and hence, was capital expenditure.”

20. On appeal, the learned Commissioner of Income Tax (A) while agreeing with the views of the AO held that the entire payment of Rs.12,26,40,000/- was not incurred by the appellant wholly and exclusively for the purposes of its business as required by the provisions of section 37 (1) of the Act and accordingly he confirmed the disallowance made by the AO.

21. At the time of hearing, the learned counsel for the assessee very fairly submits that the identical issue has been decided by the Tribunal against the assessee in the case of M/s.Procter & Gamble Home Products Ltd. V/s JCIT (2011- TIOL-1 6-ITAT-MUM). He further submits that now the assessee has filed extract of Board Resolution dated July 23,1996, Extract of Article published  in Business India Magazine for the period July,15 to 28, 1996, extract from the book “Global CEO” published in the year 2001   by A.V. Vedpuriswar, Management Author and Manufacturing Agreement for Toilet Soaps dated 22 Jan. 1993 between PGG and GSL appearing at pages 1 to 20 of the additional paper book along with the copy of the application for admission of the additional evidence on the ground that the said additional document are required to be brought on record to the notice of the Bench to render assistance to the Tribunal in deciding the issue raised in the said grounds, the  same being essential to decide the issue in just  and fair manner, therefore, it may be admitted. He further submits that the compensation of Rs.12,26,40,000/- paid to the GSL for termination of manufacturing agreement is allowable in view of the following reasons :

“1. Manufacturing Arrangement was disadvantageous.

Submitted Extracts from “Business India” Edition of July 1997, stating that

i) P&G had no control over costs under the agreement as it was Cost + fixed margin contract. There were no Cost caps or incentives for Cost efficiencies in the JV Agreement.

ii) Costs were increasing and market shares was reducing.

iii) Sales were falling behind targets resulting in Idle capacity resulting in higher overheads.

iv) Pursuant to JV, GSL had enhanced its manufacturing facilities resulting in burden of high Interest and Depreciation since 50% of capacity remained un utilised.

v) Godrej’s processing costs were well above the market rates by as much as Rs. 10,000 per tone.

vi) The JV was ‘adversely affecting the brands of GSL.

Summary chart based on financials showing that after termination of JV, Operating costs as a % to sales reduced to 57% in FY 1996-97 as against 89% in FY 1995-96 and in FY 1994-95 is as under :

Proctor and Gamble Distribution Company Limited Previous year 1996-97   Assessment year 1997- 98

(Rs. in crore)

Particulars	Financial Year
	1996- 97	1995- 96	1994- 95
a. Sales	175.08	364.55	351.49
b. Purchase cost	100.12	316.43	315.05
c. Purchase Cost as % of Sales	57.18%	86.80%	89.62%
d. Profit before tax	22.85	(34.05)	15.4

(Year under appeal)

Quantity purchased was lower in Year 1994 (46,000 tonnes) and Year 1995 (38,000 tonnes), as against Annual Commitments of 80,000 tones.

2. Whether termination affected Profit making apparatus of the Company

i) Appellant continued selling its major soap brand ‘Camay’ even after termination of JV, therefore the Profit making apparatus was not affected.

3. Compensation was given for loss of sales and profits and idle capacity of GSL resulting from terminationi) Although original agreement did not envisage such  compensation, an agreement can always be modified by consent of both parties. Hence, to the extent the confined agreement was not acted upon, it was overridden by new termination agreement.

ii) In any case, Clause 19 of JV agreement applied and in cases of termination mentioned in paragraph 14 of the JV Agreement and this is not such a termination.

iii) Merely since the Assessee is not contractually bound, compensation cannot be disallowed. Voluntary payments without legal claim are allowable if commercial expediency is established.

Motor Industries Company Ltd. (223 ITR 112) (KAR) Glaxo Laboratories (I) P.Ltd. (114 ITR 110) (Bom)…”

22. Further the learned counsel for the assessee while referring to the same decisions which were relied on in the case of M/s PGHPL (supra) and the extract of the Articles published in the magazine also relied on the decision of the Honourable Supreme Court  in Senairam Doongarmall V/sCommissioner of Income Tax (1961) 42 ITR 392 (SC) for the proposition that the quality of the payment that is decisive of the character of the payment and not the method of the payment of its measure, and makes it fall within capital or revenue. He, therefore, submits that the payments on termination of the Manufacturing Agreement pursuant  to the termination of the Joint Venture Agreement be allowed to the assessee.

23. On the other hand, the learned D.R. while strongly opposing to the admission of additional evidence submits that the additional evidence was filed by the assessee in view of the observations of the Tribunal in the case of M/s PGHPL (supra), therefore, the same should not be admitted. The learned D.R. further submits that in view of the findings recorded by the AO, the learned Commissioner of Income Tax (A) and the Tribunal in the case of M/s PGHPL (supra), the learned Commissioner of Income Tax (A) was fully justified in rejecting the claim of the assessee and therefore the dis allowance made by the AO be upheld.

24. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that there was an “indemnification” clause in the said Agreement which reads as under :

“INDEMNIFICATION

19.  In the event of the expiration or termination of this Agreement, none of the parties shall be liable to the other parties for any loss of anticipated sales or prospective profits or because of expenditures related to the performance of this Agreement.”

25. As regards the admission of additional evidence, we find that there is no dispute that the extract of Board Resolution and Articles published in the magazines are for the relevant assessment year but the same were not filed before the AO as observed by the AO in paragraph 10.14 of the assessment order. Now the assessee is filing the same as an additional evidence, in view of the observations of the Tribunal in the case of M/s PGHPL (supra), wherein it has been held in Paragraph 2.5.5 that “There is also no material produced to show that there were any difficulties between the two parties regarding the working of the manufacturing agreement”. However, keeping in view that the above additional evidence is for the relevant assessment year which according to the learned counsel for the assessee goes to the very root of the matter, we admit the same.

26. We further find that on the similar facts and circumstances of the case, the Tribunal in the case of M/s PGHPL (supra), has considered the above issue in detail and after considering all the decisions relied on by the learned counsel for the assessee has held vide paragraphs 2.5.4 to 2.5.13  as under :

“2.5.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding the nature of expenditure incurred by the assessee by way of payment of Rs.7 crores to GSL towards termination of manufacturing agreement for manufacture of detergent bar. The said manufacturing agreement had been originally entered into between PGI & GSL under the provisions of clause 9.3 of the joint venture agreement (JVA) between P&G group and the Godrej group. In terms of the said agreement PGI had purchased the laundry and cleaning powder business from GSL and had entered into manufacturing agreement for manufacturing and designing of detergent bar. The said business was later transferred by PGI to the assessee w.e.f. 1 .11.93. As per the agreement the assessee had agreed to buy from GSL 1800 tons bar of detergent per month at the agreed price. The agreement was in force till 31.3.97. The JV Agreement between the two groups was however terminated on 23.7.96. Under the provisions of clause 14.6 of the JVA, in case of termination of JVA, all agreements emanating from the JVA were to automatically cease. The case of the assessee however is that the manufacturing agreement was prematurely terminated on 30.7.96 to remove commercial constraints and the payment of Rs.7 crores had been made to GSL to compensate for loss of sale and profit and loss of capacity utilization. It has also been submitted that the agreement terminated was for manufacture of Trilo brand and it was one of many such agreements by the assessee for manufacture of different products. The termination did not therefore have any impact on the profit earning apparatus and the advantage derived from the assessee was only in the revenue field. It has been pointed out that after the termination, sales and profit both had improved. Accordingly it has been urged that the expenditure should be allowed as revenue expenditure.

2.5.5 In our view for deciding the nature of expenditure, it is first necessarily to ascertain the real purpose of payment. It is clear from the reading of the clause 14.6 of JVA that in case of termination of the JVA, all other agreements entered into under the provisions of JVA would automatically cease to exist. There is no dispute that the manufacturing agreement had been entered into under the provisions of the clause 9.3 of the JVA. There is also no dispute that the JVA had been terminated by both the parties on 23.7.96 and therefore on the said date the manufacturing agreement had ceased to exist. There was thus no need to enter into a separate termination agreement. The termination agreement dated 30.07.96 was only a formality. There is also no material produced to show that there were any difficulties between the two parties regarding the working of the manufacturing agreement. Merely because the GP rate in the subsequent period had improved, it cannot be the basis to conclude that the manufacturing agreement had been terminated because of any commercial constraints when no such material has been placed on record. It has been submitted that sale and profit had improved after the termination. But we find from the details given at page 37 of the paper book that sales of soap and detergent had fallen down to Rs. 284 crore in F.Y. 1996 -97 compared to Rs. 299 crore in F.Y. 1995- 96. GP rate in respect of soap and detergent is not given. No such plea was raised before lower authorities and therefore cannot be entertained at this stage as it will require going into fresh facts.  Moreover the manufacturing agreement was not terminated because of any constraints in the working of the manufacturing agreement but because of the termination of the JVA as on the termination of J.V. the manufacturing agreement automatically ceased to exist. Therefore in our view the payment made by the assessee was for termination of the JVA. The argument of the assessee that payment was made for loss of sale or profit by GSL cannot be accepted as clause 19 of J.V.A clearly provided that in case of termination of J.V.A., no liability would be cast on any party towards the other party for loss of anticipated sale or prospective profits.

2.5.6 Having concluded that the payment had been made for termination of JVA, the other issue to be addressed is whether the payment can be considered as revenue expenditure in case of the assessee. A careful perusal of the JVA shows that it was not a mere trading agreement. It provided for creation of joint venture company between P&G group and Godrej group namely PGG in which the PG group was to hold 51% equity. PGG had been formed for manufacture of synthetic detergent bar and to market, sale and distribute toilet soap. The JVA also provided for different manufacturing agreements between GSL and different entities of P & G group for manufacture of different products. Further the JVA was for an unlimited period and could be terminated only in case of insolvency and bankruptcy and liquidation of either of the party and for breach of any terms and conditions of the JVA. Admittedly none of the terms and conditions of the JVA had been violated by either of the parties. Thus the JVA provided for a long term business framework and profit earning apparatus of the P & G group. With the termination of the JVA, the JV company as well as other manufacturing agreements automatically ceased to exist. The termination of JVA was thus obviously a part of restructuring and reorganisation of the profit earning apparatus of the P&G group. Therefore the termination had impact on the profit earning apparatus of the group and the payment was therefore in relation to change in profit earning apparatus of the P&G group and not for   termination of manufacturing agreement which had already ceased to exist.

2.5.7 We have now to consider the nature of the said expenditure. It is a settled legal position that in case an expenditure is incurred for better working of the existing profit earning apparatus, it will be revenue in nature but in case the expenditure relates to any change in the profit earning apparatus the expenditure would be capital in nature. The said view is supported by the judgement of Honourable Supreme Court in case of Empire Jute Co. (124 ITR 1). We have already held that the payment in this case was in relation to restructuring and reorganization of business frame work and profit earning apparatus of the P & G group. The payment was not wholly and exclusively for termination of manufacturing agreement between the assessee and the GSL. Therefore in our view the expenditure has to be treated as capital in nature. The Learned AR for the assessee has argued that the manufacturing agreement was like one of several agencies taken during the course of business and therefore expenditure on termination of one agency has to be treated as revenue in nature. We are unable to accept the argument. Firstly this is not a case of termination of one of several agencies. The JVA as we have discussed earlier provided for long term business framework and profit earning apparatus of the P & G group. Secondly, payment made for cancellation of an agency can be considered as revenue expenditure only when it does not affect the trading or profit earning structure of the business. In the present case we have already held that the termination of JVA had an impact on the profit earning apparatus as JVA was a pivot to the business structure. We therefore hold that the expenditure was capital in nature.

2.5.8 The Learned AR for the assessee has placed reliance on several judgements in support of the case that the expenditure was revenue in nature. We have gone through the said judgements and in our view all the judgements are distinguishable and not applicable to the facts of the present case. In case of CIT Vs Ashok Leyland Ltd. (86 ITR 549) on which reliance has been placed, the assessee was originally importing and assembling motor cars, parts etc. manufactured by Austin of England. The assessee had appointed CB Ltd. as managing agent for Austin cars. With government allowing setting up of automobile industry in India, the assessee in 1954 took up manufacturing of Leyland commercial vehicle and stopped manufacturing of Austin cars. In 1955 the assessee terminated the managing agency on payment of Rs. 2.5 lacs. The issue was nature of expenditure on account of the said payment and it was held as revenue expenditure. It is obvious that the termination of managing agency did not have anything to do with the stoppage of manufacturing of Austin car which had already been stopped nor did it have anything to do with the manufacture of Leyland commercial vehicle. After the assessee stopped manufacturing Austin cars, the managing agency had become redundant. Thus the termination of managing agencies did not relate to the profit earning apparatus of the assessee and by termination the assessee could only gain advantage in the revenue field by way of saving of unnecessary expenditure. The case of the assessee is different as in this case payment was for termination of JVA which had impact on the profit earning apparatus.

2.5.9 In case of Western India Oil Distributing Co. India Vs CIT (77 ITR 140) the assessee had an agreement for 10 years for obtaining aggregate loan of Rs.10 lacs. The assessee had agreed to pay interest @ 6% per annum on Rs. 10 lacs whether or not the finance was taken. The assessee was also required to pay commission on import of goods, whether finance was taken or not, even after expiry of agreement. Subsequently the assessee revoked the agreement in a consent decree on payment of Rs. 3 lacs in five equal instalments. The issue was the nature of expenditure incurred. Obviously, the agreement was only in connections with obtaining finance required for the purpose of business and any payment in connection with the finance, for the working of business is a revenue expenditure. The termination of agreement did not have any impact on the profit earning apparatus. The Honourable High Court held that payment had been made only to remove difficulty in the smooth running of business. The case is obviously distinguishable as the payment did not relate to the profit earning apparatus.

2.5.10 In case of CIT Vs Motor Industries Co. Ltd. (223 ITR 112), the assessee was manufacture and distributor of automobile parts. The assessee had an agreement with the sole distributor which expired on 9.2.72. The assessee entered into a fresh agreement with the sole distributor on 18.3.72 as per which the distributorship was restricted to certain areas. The agreement was limited to five years till 9.2.77 without any right of renewal to the distributor. Instead of renewing the agreement in 1977, the assessee decided to take on the remaining territory from the distributor on payment of Rs. 99 lacs over a period of three years and the issue was whether the expenditure could be allowed as revenue expenditure. The Hon’ble High Court observed that strictly speaking the distributor did not have any legal claim as the agreement had expired and there was no provision for renewal. The payment had been made for smooth transition from marketing through a distributor to marketing by the company itself. The payment did not relate to any assets or any augmentation of any profit making apparatus. It was only to get rid of a commercially disadvantageous business agreement and thus held as revenue expenditure. The case is obviously distinguishable. In the present case the JVA as pointed out earlier was a long term asset and constituted the profit earning apparatus in case of the assessee.

2.5.11 In case of CIT Vs Pecio Electronic & Electrical Ltd. (107 CTR 240), the assessee had contract for manufacture of goods with M/s. Vulcan Industries since November 1971. In 1975 the assessee stopped lifting goods from that party and paid compensation of Rs. 4,03,000/- for breach of contract. The High Court held that the payment had been made for premature termination of a trade agreement which was creating an onerous burden on the assessee. The termination only avoid future commercial inconvenience and therefore the expenditure was held allowable as revenue expenditure. In the present case as we have pointed out earlier the payment had been made for termination of JVA which was not a mere trade agreement. It provided for long term business framework and profit earning apparatus for the P & G group and therefore the termination did affect the profit earning apparatus.

2.5.12 In case of CIT Vs Glaxo Laboratories (India) Pvt. Ltd. (114 ITR 110), the assessee had an agreement for the purpose of distribution of products. The agreement could be terminated by either party at one month’s notice. The agreement obviously did not have anything to do with the profit earning apparatus as it only related to the sale and distribution of the products and it could be terminated any time after one month’s notice. The expenditure for termination was held to be allowable as revenue expenditure. The case is obviously distinguishable from the present case in our view of the discussion made earlier.

2.5.13 In view of the foregoing discussion and for the reasons given earlier we see no infirmity in the orders of the authorities below holding the expenditure as capital expenditure. The order of CIT (A) is accordingly upheld.”

29. Ground No.IV (1 and 2) are against the dis allowance of write back of provisions for excise duty by the AO.

30. At the time of hearing, the learned counsel for the assessee very fairly submits that the learned Commissioner of Income Tax (A) has granted relief to the assessee. However, the ground was taken out of abundant caution as at the time of filing of the appeal to the Tribunal, the appeal for the earlier years were pending before the Tribunal. Since the Tribunal has allowed the claim of the assessee in favour of the assessee for the relevant assessment years, therefore, he does not want to press above grounds which were not objected to by the learned D.R.

31. That being so, we are of the view that since due relief has been granted by the Tribunal in the relevant assessment years, the grounds raised by the assessee are therefore rejected being not pressed and accordingly same are decided against the assessee.

ITA No. 3661/Mum/2003 (by Revenue)

35. On the other hand, the learned counsel for the assessee submits that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the assessment years 1995-96 and 1996-97 (supra), wherein the assessee has allowed the similar claim to the assessee.

36. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that the Tribunal in assessee’s own case (supra) following the decision of the Honourable Apex Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428 has allowed the claim of the assessee vide paragraph 22 of the order. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the same uphold the order of the learned Commissioner of  Income Tax (A) in allowing the claim of the assessee. The ground No.1 taken by the Revenue is, therefore, rejected.

37. Ground No. 2 is against the deletion of   Obsolete Material Written Off of Rs. 73,42,784/-

38. Brief facts of the above issue are that from the details of miscellaneous expenses, the AO noted that the amount of Rs. 73,42,784/- has been debited on account of Obsolete Material Written Off. In response to show cause notice as to why the same should not be added to the income of the assessee, the assessee furnished the reply interalia stating that the expenditure incurred under the head Obsolete Material Written Off consists of raw material and packing material which has become obsolete and hence cannot be used after that date. However, the AO was of the view that in the absence of any details of such expenses, the assessee has not discharged its onus and hence he rejected the claim of the assessee.

39. On appeal, the learned Commissioner of Income Tax (A) following the appellate order for the earlier years deleted the dis allowance made by the AO.

40. At the time of the hearing, the learned D.R. supports the order of the AO.

41. On the other hand, the learned counsel for the assessee submits that this issue is also covered in favour of the assessee by the decision of the Tribunal in the assessee’s own case (supra), wherein similar dis allowance has been deleted by the Tribunal. The reliance was also placed on the decision of the Tribunal in DCIT V/s Bardma of India Ltd. in ITA No. 3428/Mum/2003 (AY-1997-98).

42. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the  learned counsel for the assessee that the Tribunal in assessee’s own case vide paragraph 26 of the order (supra) has accepted the claim of the assessee following the decision of the Tribunal in Bardma of India Ltd.(supra), wherein it has been held that “the old models of machines become outdated due to latest technology development and fast changing environment in the field of electronic products and, therefore, not saleable and the spare parts relating to such obsolete machines do not have any market value and there is no market equipment.” Respectfully following the same and keeping in view the rule of consistency, we uphold the order of the learned Commissioner of Income Tax (A) in deleting the dis allowance made by the AO. The Ground No.2 taken by the revenue is, therefore, rejected.

43. Ground No.3 is against the deletion of addition of Rs. 2,50,000/- made by the AO under section 37(2A) of the Act.

44. Brief facts of the above issue are that the AO observed that the assessee has claimed welfare expenses of Rs. 57,14,811/-. The AO was of the view that all the expenses cannot be allowed. The AO in view of the finding recorded in the earlier year i.e. for the assessment year 1996- 97 estimated Rs. 5,00,000/- as expenditure incurred in the nature of entertainment. The AO after giving statutory deduction of Rs. 2,50,000/- made the dis allowance of Rs. 2,50,000/- and added the same to the income of the assessee. On appeal, the learned Commissioner of Income Tax (A) following the appellate orders for the assessment years 1994- 95 to 1996- 97, wherein he has deleted the similar dis allowance, deleted the dis allowance made by the AO.

45. At the time of hearing, the learned D.R. supports the order of the AO.

46. On the other hand, the learned counsel of the assessee while relying on the order of the learned Commissioner of Income Tax (A) submits that this issue is also covered in favour of the assessee by the order of the Tribunal for the assessment year 1996-97 in ITA No. 861/Mum/2003 order dated 09.05.2008 (supra). He, therefore, submits that following the same the order passed by the learned Commissioner of Income Tax (A) in deleting the dis allowance be upheld.

47. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that the Tribunal on the similar facts and circumstance of the case has upheld the order of the learned Commissioner of the Income Tax (A) deleting the dis allowance made by the AO vide paragraph 28 of the order (supra). Following the same and keeping in view the rule of consistency, we decline to interfere with the order of the learned Commissioner of Income Tax (A). The Ground No. 3 taken by the Revenue is therefore rejected.

48. Ground No.4 is against the deletion of dis allowance of write back of provision of Rs. 18,14,08,561/-.

49. Brief facts of the above issue are that it was noted by the AO that the assessee company has written back the provision of contractual liability of Rs. 18,14,08,561/- for the assessment years 1994-95 (Rs. 5,24,83,620/-), 1995- 96 (Rs. 6,40,35,941/-) and 1996- 97 (Rs. 6,48,89,000/-) and offered the amount as income. The assessee had claimed these amounts as deduction on account of contractual liability in the earlier assessment years. The claim of the assessee was not accepted by the department and these amounts were disallowed and added back to the income of the assessee as there was no existing liability. The assessee has contested this in appeals before the learned Commissioner of Income Tax (A) which are pending. Therefore, the AO did not disturb the assessee’s claim and added the same on protective basis with this observations that in case, the dis allowance/ additions made in earlier assessment years are upheld, this amount will be allowed as deduction by rectifying this order. On appeal, the learned Commissioner of Income Tax (A) while observing that the said amount was subjected to the dis allowance in the said relevant assessment years, directed the AO to reduce the amount of Rs. 18,14,08,561/- from the income of the assessee.

50. At the time of hearing, the learned D.R.supports the order of the AO.

51. On the other hand, the learned counsel for the assessee submits that since the provisions has been allowed in the relevant assessment years, therefore, in view of the assessee’s own case for the assessment year 1996- 97, the order passed by the learned Commissioner of Income Tax (A) be upheld.

52. Having carefully heard the submissions of the rival parties and perusing the material available on record we are of the view that the learned Commissioner of Income Tax (A) has allowed the claim of the assesseee on the ground that the said amount has been subjected to dis allowance in the relevant assessment years and taxing the same in the year under consideration will be subjected to double addition. In the absence of any contrary material against the finding of learned Commissioner of Income Tax (A), we are inclined to uphold the order of the learned Commissioner of Income Tax (A) in accepting the claim of the assessee and accordingly the ground No.4 taken by the Revenue is rejected.