M/S. MITSU PRIVATE LIMITED,,VAPI vs. THE ACIT, VAPI CIRCLE,, VAPI

आदेश /ORDER PER BENCH: 1. The above captioned appeals by the Assessee and Revenue are directed against the separate orders of learned Commissioner of Income

tax (Appeals)-Valsad(in short “the CIT (A)”) dated 31.03.2006 for the

assessment year 2002-03 and Cross Objection by the assessee , order dated

15.05.2006 for the assessment year 2003-04 , and order dated 30.08.2006

for the assessment year 2002-03 and order 09.03.2016 for the assessment

year 2000-01 are against the appeal of assessment order passed under

section 143 (3)/ 143(3)/263 of Income Tax Act,1961 (in short ‘the Act’) by

the Assistant Commissioner of Income Tax-Vapi Circle, Vapi (referred as

the AO). These appeal were by the assessee as well as Revenue for the

and Cross Objection by the assessee for assessment year 2002-03 and A.Y. 2003-04 and A.Y. 2000-01 involving common issues were head together and

Page 3 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 being disposed-of by this consolidated order for the sake of brevity and convenience. 2. I.T.A.No. 1671/Ahd/2006/ A.Y. 2002-03: By the assessee: 3. Ground No. 1 & 2: are general in nature; hence, does not require our adjudication. 4. Ground No. 3 states that the ld. CIT (A) has erred in confirming disallowance of Rs. 29,242 being staff welfare expenses. 5. We have heard the rival submissions and perused the relevant material on record. We find that the assessee has incurred this expenditure under staff welfare expense on account of purchase of washing machine for director and umbrellas given to selected staff. Hence, this expenditure is in the name of gifts, which cannot be allowed as business expenses. We further observe that the Tribunal also confirmed such disallowance in I.T.A.No. 2470/A/2004 for the assessment year 2001-02 in the case of the assessee. In view of these facts, this ground of appeal is dismissed. 6. Ground No. 4 states that Ld. CIT (A) has erred in confirming disallowance of sale promotion expenses of Rs. 45,215. 7. We have heard the rival submissions and perused the relevant material on record. We find that the AO observed that the assessee has debited sale promotion expenses of Rs.2,26,078 which inter-alia included

Page 4 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 expenditure on gift to foreign clients, organizer diary etc. claimed to have

been incurred to develop the relationship with them. Accordingly, the AO disallowed 1/5th of the same at Rs.45, 215. The CIT (A) also upheld the

same. Before us, the learned counsel for the assessee submitted that such

expenditure has been incurred for the purpose of business hence, same is

allowable as deduction. Further, the issue is covered in favour of the

assessee by order of Tribunal [I.T.A.No. 2453/Ahd/2004/A.Y. 01-02] vide

Para 23.1 at Page No. 22. We find that the AO has disallowed the same on estimate basis without any justification. Hence, same are directed to be

allowed. This ground of appeal is therefore, allowed. 8. Ground No. 5 & 6 : states that Ld. CIT (A) has erred in confirming

the action of the AO in not considering the claim of the assessee that

the entire receipt to the tune of Rs.23,06,12,200 by way of transfer of

technical know-how and for undertaking non-compete obligation as

capital receipts and the Ld. CIT (A) erred in confirming action of the AO on account of claim of the appellant on part transfer as non-compete

fees to the tune of Rs. 14,55,41,760 not exigible to tax. The action of the AO is contrary to the facts. 9. Brief facts are that the assessee is engaged in the business of

manufacturing and selling of various kinds of pesticides. During the year

Page 5 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 under consideration, the assessee company has imparted the

process/technology of production of chloropyridine products developed by

it to M/s. Dow Agro Science B. V., (in short DAS) company registered in

Netherlands. The total consideration received by the assessee was

Rs.18,19,27,200. Out of this, the assessee has treated 20% of the receipt

amounting to Rs.3,63 85,440 as royalty for use of process/technology

(hereinafter referred to as technical know-how) and 80% of the above

receipts amounting to Rs.14,55,41,760 were treated as consideration for

loss of source of income and hence, as capital receipt. The assessee has

claimed this receipt as non-compete fees of Rs.14,55,41,760 as capital

receipt and claimed it as exempt from tax. However, the AO, while going

through the assessment records, noticed that during the assessment year

2000-01, the assessee has entered into a non-compete agreement with

another party Hoechest AgroEnvo and has received Rs.10 crores as a

consideration for noncompeting into that particular line of business. Since

the nature of transaction of this year is similar, the assessee was therefore

asked to explain as to why this receipt should not be treated as a revenue

instead of capital receipt and tax as business income under section 28 of

the Income Tax Act, 1961. It was explained by the assessee that the

assessee has entered into a non-compete covenant with the purchaser of

Page 6 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 technical know-how and by doing so, it had undertaken an obligation that

it will not carry out any kind of research related to chloropyridine product

for the period of 10 years and will not sell such technical know-how

information and intellectual property of manufacturing to any third party.

Thus, the assessee company lost its source of income as a result of non-

compete agreement. The assessee company cannot use and share technical

know-how to others and if the assessee is uses technical know-how

information for itself, it will have to pay heavy penalties to the buyer.

However, the AO reproduced the clause 2.4 of the Technology Purchases

Agreement with DAS BV as under:

“To protect the value of Mitsu of know-how to DAS, Mitsu and its Affiliates shall not continue research related to the production of chloropyridine products based upon Mitsu know-how for the period of ten (10) years from the Effective date of this Agreement, except as otherwise provided in the Supply and License Agreement for Chorpyrifos and Chorpyrisfos Methyl of and even date between the parties. For a like period, Mitsu shall use its best efforts to prevent disclosure to third parties for use of MITSU of know-how by its employees, subsequent to the effective date of this paragraph 2.4 MITSU acknowledges and confirms that the covenants which has provided under this agreement are reasonable on it. In view of the consideration, it has received under this agreement.” 10. The AO observed that the perusal of the above clause of technology

purchase agreement makes it clear that the assessee was restrained from

doing any kind of activity related to Chloropyridine Products for a period

Page 7 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 of 10 years and as a result, it lost its source of income from the particular

activity. However, it is hard to believe that the receipt is not a business

receipt. If the assessee were not engaged into the business of

manufacturing and selling various kinds of pesticides, it would have not

earned this income. The assessee company earned this income only

because of this knowledge and expertise in that business. Had the assessee

company not been in the business of manufacturing and selling of

pesticides and it would have not acquired knowledge and expertise related

to the development of Chloropyridine Products. It is true that the assessee

has lost its source of income, but from the perusal of the technology

transfer agreement and other facts and circumstances of the case, it is also

evident that receipt of non-compete fees is nothing but a receipt resulting

in the benefit of the company which arose out of carrying on business. The

AO further placed reliance in the case of CIT V. R L Bhargava (86 of 1981)

of Hon`ble Delhi High Court wherein it was held that the consideration

received for imparting technical know-how, without the value of any

capital asset, should be treated as a business receipt. The AO further

observed that the assessee company has itself treated 20% of total receipt

as a revenue receipt chargeable to tax as business income. If 20% of the

total receipt is business income, which the assessee itself admits, then how

Page 8 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 80% of the same total receipt can be treated as capital receipts? Total

receipts comes from one single source i.e. from one single transaction (sale

of technology/of know-how), then how two treatment can be given to it.

Therefore, the assessee company was asked to give the basis of the

allocation of total receipts as 20% revenue receipt and 80% capital receipt.

However, the assessee company could not provide the basis of allocation

and has made the allocation arbitrarily. The AO further observed that there

is no transfer of any capital asset. Therefore, in the circumstances, it was

held that the entire amount has been received as royalty against transfer

of technical know-how along with the future profits of the assessee

company. The AO further noted that it appears that the assessee company

is a major competitor of the purchaser of the know-how. The agreement is

much more than an agreement of transfer of know-how. The assessee

company has agreed to keep off from the market and has similarly offered

all its intangible business resources like product registration, customer

information and market contacts, which we will enable the purchaser to

earn revenue profit year after year. The assessee company, on the other

hand, has received the profit it would have earned for a period through a

single act i.e. by transferring the technical know-how and keeping off the

competition.

Page 9 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 11. Being aggrieved, the assessee filed an appeal before the ld. CIT (A).

It was contended before the CIT (A) that the legislator has sought to bring

into tax receipts for an undertaking non-compete covenants from the

assessment 2003-04 only. The assessee company has sold the technical

know-how along with undertaking non-compete covenants. The Hon`ble

Bombay High Court in the case of CIT v. Rawllwolf Limited [1983] 143 ITR

720 (Bombay) held that such receipts are capital in nature not liable to

tax. The case laws of CIT v. R L Bhargava (86 of 1981) is distinguishable as

in that case the assessee has transferred only technical know-how with no

commercial obligation which is not the case of the assessee. However, the

ld. CIT (A) has echoed the findings of the AO on the ground that the

assessee company was manufacture and exporter of the products in India

and abroad. The appellant company has sold its line of business and

technical know-how to a foreign company who will naturally insist that such

technology not be shared with a third party. It is true that the sale of know-

how and undertaking of non-compete obligations is resulting in loss of

source of income of the appellant company. The AO has relied in the case

of CIT v. R L Bhargava (supra) wherein sale of technical know-how has been

held to be the business receipt. Therefore, after perusal of the various

factual aspect of the case, the Ld. CIT(A) has agreed that the appellant

Page 10 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 company has earned the receipt to the tune of Rs.14,55,41,760/- for

transfer of know-how and the same constitutes an income taxable under

the provisions of the Act. 12. Being, aggrieved the assessee filed this appeal before the Tribunal.

The Ld. Counsel for the assessee once again strongly relied upon the

provisions of Sec. 28(1) and reiterated the stand of the assessee that it is

a primary condition that the assessee must carry on the business during the

previous year only then the profits and gains will be taxable under the head

'profits and gains of business'. The Ld. Counsel further argued that Section

28(va)(a) has been inserted by the Finance Act, 2002 w. e. f 1.4.2003 and

reference is only to any sum whether received or receivable in cash or kind

under an agreement for not carrying out any activity in relation to any

business. Therefore, such sum is chargeable under section 28(va) with

effect from 01.04.2003 i.e. A.Y. 2003-04 and not for the assessment year

under appeal. The Ld. Counsel also contended that the main provision of

Sec. 28 and Sec. 28(va) refers to carrying on of business and as the assessee

has not carried out any business, therefore there is no question on the

taxability of non-compete fees under the head profits and gains of

business. On the contrary, it is a capital receipt and has been rightly

returned under the head capital gains by the assessee in his return of

Page 11 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 income. The Ld. Counsel filed a Paper book relying upon the decision of

ITAT in the case of Mrs. Hami Aspi Balsara (supra), ACIT v. Savita

Mandhana in ITA No. 3900/Mum/2010, Dr. B.V. Raju (supra), Guffic Chem

(P.) Ltd. v. CIT [2011] 332 ITR 602/198 Taxman 78 (SC) and John D'Souza.

The learned counsel for the assessee further submitted that similar ant

held to be capital receipt in the case of the assessee by the Hon’ble Gujarat

High Court in Tax Appeal No.1151 and 1188 of 2008 and 800 of 2013 dated

04.07.2016[ PB-61 to 68] wherein after considering the decision of Hon`ble

Supreme Court In the circumstances Guffic Chem (P.) Ltd. v. CIT [2011]

332 ITR 602 (SC)/ [2011] 198 Taxman 78 (SC) which held that non-compete

fees received for from refraining from carrying on business was capital

receipt and non-compete fees received prior to 01.04.2003 was not taxable

under section 28(va) of the Act and CIT v. Sapthagiri Distilleries Ltd. [2015]

53 taxmann.com 218 (SC) it was held that compensation amount received

towards loss of source of income and non-competition fees would only be

treated as capital receipt and was not liable to tax, held in favour of the

assessee. The learned counsel for the assessee further relied in the case of

CIT v. Mrs. TARA SINHA [I.T.A.No. 154/2005 dated 11.08.2017 of Hon`ble

Delhi High Court] in support of his contentions. 13. Per contra, Ld. D.R. supported the order of lower authorities.

Page 12 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 14. We have heard the rival submissions and perused the relevant material on record. We find that the issue is covered by decision of Hon’ble Gujarat High Court in the case of the assessee wherein it was held “Against the order of the Commissioner of (Appeals), the assessee preferred the appeal before the Tribunal. The Tribunal by its order dated 4.1.2008 allowed the appeal by holding that section 28(iv) of the Act was not applicable in the case of the assessee. Hence the revenue is before us. 7. Learned counsel for the appellant-revenue Mr. Sudhir Mehta has contended that the Tribunal has committed an error in allowing the appeal of the assessee whereby holding that that section 28(iv) of the Act was not applicable in the case of the assessee. He has further contended that the issue squarely falls within the scope of section 28(iv) of the Act. 8. Learned counsel for the respondent Mr. Patel has contended that the issue is covered by the decision of the Apex Court in the case of Guffic Chem (P.) Ltd. v. CIT [2011] 332 ITR 602/198 Taxman 78/10 taxmann.com 105 (SC) where in paragraph No. 7 it is held as follows: "Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgement. The High Court has misinterpreted the judgement of this court in Gillanders Arbuthnot & Co. Ltd.'s case [(1964) 53 ITR 283 (SC)]. In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a

Page 13 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable (see: Section 28(va)). The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from 1.4.2003. Hence, the said section 28(va) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji (1959) 35 ITR 148 it was held by this court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT(A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of Rs. 50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped into specifically tax such receipts under non- competition agreement with effect from 1.4.2003. " 9. The learned counsel for the respondent has further relied on the decision of the Apex Court in the case of CIT v. Sapthagiri Distilleries Ltd. [2015] 53 taxmann.com 218/229 Taxman 487 (SC) where it was held that compensation amount received towards loss of source of income and non-competition fee could only be treated as capital receipt and was not liable to tax. 10. We have heard learned counsel for the parties. We have gone through the order of the Tribunal and the judgement cited by the learned counsel for the respondent. In our view, the issue is now squarely covered by the aforesaid decisions of the Apex Court. In that view of the matter, we dismiss the appeals preferred by the revenue. Accordingly, we answer the questions in favour of the assessee and against the revenue.

Page 14 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 15. In the light of judgement of Hon’ble Gujarat High Court a cited above

in the case of the assessee, We find that the issue is now squarely covered

in favour of the assessee by the judgement of Hon`ble Jurisdictional High

Court of Gujarat in the assessee`s own case wherein after considering

the decision of Hon`ble Supreme Court in the case of Guffic Chem (P.) Ltd.

v. CIT [2011] 332 ITR 602 (SC)/ [2011] 198 Taxman 78 (SC) which held that

non-compete fees received for from refraining from carrying on business

was capital receipt and non-compete fees received prior to 01.04.2003 was

not taxable under section 28(va) of the Act and CIT v. Sapthagiri Distilleries

Ltd. [2015] 53 taxmann.com 218 (SC) it was held that compensation

amount received towards loss of source of income and non-competition

fees would only be treated as capital receipt and was not liable to tax,

held in favour of the assessee. The learned counsel for the assessee further

relied in the case of CIT v. Mrs. TARA SINHA [I.T.A.No. 154/2005 dated

11.08.2017 of Hon`ble Delhi High Court] wherein also following the

decision of Guffic Chem (P.) Ltd. v. CIT [2011] 332 ITR 602 (SC)/ [2011] 198

Taxman 78 (SC) and Rohitasava Chand v. CIT 306 ITR 242 (Delhi) the issue

was allowed in favour of the assessee. Since the facts of the present case,

are identical as the assessee has received non-compete fees for non-

compete obligation resulting in loss of source of income and further more

Page 15 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 non-compete fees is chargeable under section 28(va) from assessment year

2003-04 and not for assessment year under appeal, therefore, the non-

compete fees in question amounts to receipt of cap in nature, not

chargeable to tax for assessment year under consideration. Therefore,

respectfully following the above judgements of Hon’ble Gujarat High Court

and Hon`ble Supreme Court as cited above, we allow Ground No. 5 & 6 of

appeal in favour of the assessee. 16. Ground No. 7: is alternative ground which says the ld. CIT (A) has erred in upholding in not granting deduction under section 80HHC on

receipts by way of non-compete fees to the tune of Rs.14,55,41,760

and assessed the income from business. The action of the Assessing Officer is contrary to the facts and law and deserve to be deleted. 17. Succinct facts are that during the course of assessment proceedings the assessee has claimed an alternate claim that since the non-compete

fees are treated as revenue receipt and income from business and

profession hence, same are includible under the head business income

eligible for deduction under section 80HHC. However, the AO was of the

view that deduction under section 80HHC is allowed in respect of export

out of India of any goods or merchandise to which that section applies. The

Jurisdictional assessee company has not received this income from

Page 16 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 exporting any goods and merchandise. Therefore, the claim of the assessee has no force hence, same was rejected. 18. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). The CIT (A) observed that with regard to claim of deduction under section 80HHC(4C), the main thrust of the assessee is that exclusion mentioned in sub-clause (baa) of section 80HHC. A careful analysis of said clause clearly brings out the intentions of the legislature that profit earned outside India has been excluded as also brokerage, commission, interest, rent and similar receipts. Hence, the CIT (A) did not find any infirmity in the computation for deduction under section 80HHC made by the AO by excluding such income by way of non-compete fees. Accordingly, this ground of appeal was dismissed. 19. Being, aggrieved the assessee filed this appeal before the Tribunal. 20. We have heard the rival submissions and perused the relevant material on record. Since, we have allowed the appeal of the assessee in respect of Ground No. 5 & 6 of non-compete fees. As capital receipt as per judgement of Hon`ble High Court. Therefore, the claim of deduction under section 80HHC becomes academic in nature and infructuous, hence, same is not being adjudicated hence, it is treated as dismissed.

Page 17 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 21. Ground No. 8 states that the ld. CIT (A) has erred in upholding the action of the AO in not granting deduction under section 80HHC on the receipts on transfer of technical know-how treated as royalty to the tune of Rs. 8,50,70,440 and assessed as business income . The action of the Assessing Officer is contrary to the facts and law and deserve to be deleted. 22. The AO observed that the assessee has made an alternate claim that deduction under section 80HHC should be granted on the above income, if the non-compete fees is to be treated as revenue receipt. However, the AO observed that deduction under section 80HHC is allowable only in respect of export out of India of any goods or merchandise to which this section applies. The assessee company has not received this income from exporting any goods or merchandise. Therefore, the claim of the assessee company to grant deduction under section 80HHC has got no force and was therefore rejected. 23. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). Who has dismissed the ground of appeal. 24. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that if amount of non- compete fees receipts is treated as income for technical know-how as

Page 18 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 business income then deduction under section 80HHC be allowed on said income. 25. Per contra, the Ld. CIT (DR) relied on lower authorities. 26. We have heard the rival submissions and perused the relevant material on record. Since, we have allowed the appeal of the assessee in respect of Ground No. 5 & 6 of non-compete fees. As capital receipt as per judgement of Hon`ble High Court. Therefore, the claim of deduction under section 80HHC becomes academic in nature and infructuous, hence, same is not being adjudicated hence, it is treated as dismissed. 27. Ground No. 9 states that the ld. CIT (A) has erred in upholding the action of the AO in not granting deduction under section 80-O on receipts treated as non-compete fees to the tune of Rs. 14,55,41,760 and assessed as business income purely on technical ground stating that revised certificate in Form No. 10HA is not filed. The action of the AO is contrary to the facts and law and deserve to be deleted. 28. The assessee has made an alternate claim for deduction under section 80-O in respect of receipts from transfer of technical know-how. However, the AO observed that section 80-O allows a deduction of 30% from the amount received by any assessee company, if its gross total income includes any income from the government of foreign State or

Page 19 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 foreign enterprise in consideration for use outside India of any patent,

invention, design, process, registered trademark etc. and such income is

received in convertible foreign exchange in India. A perusal of the claim

put forward by the assessee company reveals that the assessee company

has claimed deduction in respect of receipts from the following two foreign

companies 1). Syngenta Crop Protection AG Rs. 48,68,50,00 and 2). Dow

Agro Science Rs.3,63,85,440 totaling to Rs. 8,50,70,440. The 80% of the

amount received by the assessee company from the Dow Agro Science was

considered as receipts for undertaking non-compete obligation not eligible

to tax has been considered as business receipts arising from manufacturing

pesticides and as royalty income. Certificate in Form No. 10HA has also

been filed by the assessee company along with its return of income. The

AO observed that conditions as per provisions of section 80-O and CBDT

circular number 71 dated 20-12-1995 has been met with the above

transaction. The assessee company did receive income from a foreign

enterprise as royalty for sale of technological process developed by it. It

received full consideration for it in convertible foreign exchange and such

income was received in India within 6 months from the end of the previous

year as per the certificate filed by the assessee company along with the

return of income. However, the assessee company Form 10HA filed along

Page 20 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 with his return of income has filed for deduction under this section only for Rs.08, 50, 70, 440/-. Therefore, deduction under section 80-O is allowed on the amount claimed by the assessee company in Form 10HA. 29. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). The CIT (A) observed the AO has not granted deduction under section 80-O on receipts to the tune of Rs.14,55,41,760 which were claimed by the assessee company as non-compete fees but same were assessed as royalty income. The appellant company has claimed the receipt as being attributable to the undertaking of non-compete obligations. The AO has treated the same as being derived from business. The appellant company itself has claimed in its return of income only 20% of the income from the transaction can be attributed to sale of know-how. Hence, the CIT (A) observed that he did not find any infirmity in the observation of the AO denying deduction under section 80-O, the appellant company. This ground was accordingly, dismissed. 30. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned Counsel for the assessee submitted that that this is alternate ground if the amount of non-compete fees is treated as business income then the deduction under section 80-O is required to be allowed. 31. Per contra, the Ld. DR relied upon the orders of the lower authorities.

Page 21 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 32. We have heard the rival submissions and perused the relevant material on record. Since, we have allowed the appeal of the assessee in respect of Ground No. 5 & 6 of non-compete fees. As capital receipt as per judgement of Hon`ble High Court. Therefore, the claim of deduction under section 80HHC becomes academic in nature and infructuous, hence, same is not being adjudicated hence, it is treated as dismissed. 33. Ground No. 10 states that the ld. CIT (A) has erred in confirming the action of the AO in not considering interest income to the tune of Rs.1,88,07,480 as income from business for computing deduction under section 80HHC. The action of the AO is contrary to the facts and law and deserve to be deleted. 34. The AO has observed that the amount of interest of Rs.1,88,07,480 has been earned by the assessee out of surplus fund kept with bank, which has got no connection with manufacturing activity of the assessee company. The AO further observed that such income does not have any direct nexus and therefore, it was excluded from the profits derived for manufacturing activity eligible for deduction under section 80HHC of the Act. The AO also supported his view by placing reliance in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) : 129 Taxman 539 (SC).

Page 22 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 35. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). However, the ld. CIT (A) relying on the decision in the case of CIT Nagpur Engineering Co Ltd. [2000] 245 ITR 806 (Bombay) and Lalson Enterprise v. DCIT 89 ITD 25 (Delhi) directed the AO to exclude only net interest income of Rs. 44,15,400 as earned by the assessee after payment of interest and earning of interest. Thus, this ground of appeal was partly allowed. 36. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned Counsel for the assessee submitted that that CIT (A) has allowed netting of interest income of Rs.44,15,400 for deduction under section 80HHC of the Act, which is supported by the decision of Shri Ram Honda 289 ITR 475 (Delhi). 37. The ld. D. R. relied on the order of the AO/CIT (A). 38. We have heard the rival submissions and perused the relevant material on record. We find that the issue under consideration is squarely covered by the decision of full bench of Hon`ble Rajasthan High Court in the case of Reliance Trading Corporation v. ITO [2015] 376 ITR 53 (Raj.) wherein it was held as under: “26. Mr. R.B. Mathur, learned counsel appearing for the IT Department, has referred to the cases relating to the deductions on export profits under s.80HHC and has relied on direct and proximate test, in submitting that where the interest has no direct or proximate nexus with the business of export, such interest will not

Page 23 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 be excluded under sub-s. (3) of s.80HHC of the Act. He has relied on Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); CIT v. Swani Spice Mills (P.) Ltd. [2011] 332 ITR 288/201 Taxman 81 (Mag.)/12 taxmann.com 432 (Bom).; Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC); Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC); and Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). 27. In Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Supreme Court held, while discussing the classification of income under ss. 4, 14, 56 and 57 of the Act, that interest income is always of revenue nature unless received by way of damages or compensation. Where interest is earned by assessee on investment of share capital, it can be assessed separately under the head "income from other sources". The income attracts tax as soon as it accrues. 28. In Swani Spice Mills (P.) Ltd. (supra), the Bombay High Court, after discussing several judgments, held in para 20, that the income of an assessee which is chargeable to tax under s. 4, is required for the purposes of computation to be classified under various heads of income specified in s. 14. Sec. 56, which deals with income from other sources is attracted where the income does not belong to a category which is specified in any of the other heads elucidated in s. 14. The income earned by an assessee, which utilizes its surplus funds in order to earn interest cannot be classified under the head of business income, but will fall for classification as income from other sources. 29. In CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475/158 Taxman 474 (Delhi) it was held that the interest income kept by the assessee for availing of credit facilities from bank, does not qualify the business income, and, therefore, will go to reduce the deductible amount for the purposes of s.*) S. 80HHC. Reliance was placed on the judgments in K. Ravindranathan Nair (supra) Punit Commercial Ltd. (supra) and the judgments of the Kerala High Court in Abad Enterprises v. CIT [2002] 253 ITR 319/120 Taxman 503, CIT v. Jose Thomas [2002] 253 ITR 553/121 Taxman 210 (Ker.) and CIT v. Abad Fisheries [2002] 258 ITR 641/125 Taxman 616

Page 24 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 (Ker.) as well as Urban Stanislaus Co. v. CIT [2003] 263 ITR 10/130 Taxman 244 (Ker.). 30. In Liberty India (supra), the Supreme Court, dealing with the deduction on Duty Entitlement Passbook Scheme (DEPB), held that there is a distinction between profit linked tax incentives and investment linked tax incentives. Sections 80-I, 80-IA and 80-IB have a common scheme. The incentives in the form of deductions are linked to profits and not to investment. DEPB is an incentive. Source of duty drawback receipt lies in s. 75 of the Customs Act and s. 37 of the Central Excise Act. The remission of duty is on account of the statutory/policy provisions of these Acts. The profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking". The trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. The duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly. 31. In Cambay Electric Supply Industrial Co. Ltd. (supra), it was held that s. 80E provides for deduction in respect of profits and gains from specified industries in the case of certain companies, providing for certain special deduction to be made in computing the total income in the case of specified industries, over and above the other general deductions contemplated by the Act. Such deductions must be attributable to the profits and gains of the business. In para 8, the Supreme Court held as follows : "8. As regards the aspect emerging from the expression 'attributable to occurring in the phrase 'profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the Legislature has deliberately used the expression 'attributable to' and not the expression 'derived from'. It cannot be disputed that the expression 'attributable to' is certainly wider in import than the expression 'derived from'. Had the expression 'derived from' been used it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business or generation and distribution of electricity.

Page 25 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 In this connection it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General it has used the expression 'derived from', as for instance in section 80J. In our view since the expression of wider import, namely, 'attributable to' has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." 32. Mr. Anuroop Singhi, learned counsel appearing for the Department, submits, relying on CIT v. Rajasthan Land Development Corpn. [1995] 211 ITR 597 (Raj.), Murli Investment Co. (suprs), CIT v. Avon Apparels [D.B. IT Appeal No. 41 of 1999, dated 11-7-2002], Shri Ram Honda Power Equip (supra), CIT v. Meea & Ceiko Pumps (P.) Ltd. [ITAT No. 298 of 2003, dated 27-11-2014], CIT v. Greatways (P.) Ltd. [2008] 171 Taxman 316 (Punj. & Har.), that where surplus funds 'are parked with the . bank and interest is earned thereon, it can be only categorized as income from other sources. This receipt merits separate treatment under s. 56 of the Act, which is outside the ring of profits and gains from business and profession. Such income which could only be earned under s. 56. goes entirely out of the reckoning for the purposes of s.80HHC. 33. We have considered the submissions at the Bar, and find that in Shri Ram Honda Power Equip. (supra), the question Nos. 1 and 3 were addressed and answered in favour of the Revenue. The discussion in this judgment, is close to the question raised, and has received careful consideration, with reference to the object and purpose of providing deductions under s. 80HHC, prior to amendment w.e.f. 1st April, 1992. The deductions under s. 80HHC was admissible in respect of business incomes, which did not have an element of turnover. The CBDT Circular No. 564, dt. 5th July, 1990 [(1990) 85 CTR (St) 53],was issued to clear the doubts that cl. (baa) of the Explanation to s. 80HHC of the Act, was introduced w.e.f. 1st April, 1992. The rationale for this change was explained in CBDTs Circular No. 621, dt. 19th Dec, 1991 [(1992) 101 CTR (St) 1].The profit earned by the assessee during the relevant assessment period from the commission was also treated to be profit, derived from export since it would not have come to the assessee had he not been engaged in the export business. The decision was approved in P.R Prabhakar (supra).

Page 26 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 34. There is distinction between the words "attributable to" and "derived from". In sub-s. (3) of s.80HHC of the Act, the words used in cl. (a), are profits derived from such export shall be the amount which bears to the profits of the business". 35. In Cambay Electric Supply Industrial Co. Ltd. (supra), it was held as follows; "In our view, since the expression of wider import, namely 'attributable to', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity". 36. The Supreme Court in Vellore Electric Corpn. Ltd. v. CIT [1997] 227 ITR 557/93 Taxman 401, held in the context of s. 80-I, which uses the words "profits and gains attributable to any priority industry", answering the question in affirmative, that the income earned by way of interest on the investment in securities of the amounts appropriated to the contingencies reserve, which was mandatorily required to be maintained by it in terms of the Electricity (Supply) Act, 1948. It was held that the condition statutorily incorporated is incidental to the carrying on of the business of generation and distribution of electricity by the assessee. 37. In sub-s. (3) of s. 80HHC of the Act, the words used are, "derived from". In our view, the words "derived from", are of restricted meaning. and are not as wide as are "attributable to". The 'stand alone' provision of s.80HHC of the Act has to be construed on its own wordings. A distinction sought to be made in respect of the definition of 'profits of the business" under sub-s. (baa) of the Explanation, to mean the profits of the business as computed under the head "Profits and gains of business or, profession", which incorporates the entire procedure for computing the business income under s. 28 to 44 of the Act. De hor s. 80HHC of the Act. the consistent approach is that where the statutory provision talks of "income derived from" the business activity in question, the nexus theory should be applied in order to determine whether a particular item of income is business income or not. 38. In Punit Commercial Ltd. (supra), the assessee was a 100 per cent exporter. The AO had proceeded on the footing that the interest income was business income, and that it was not income from exports, and in these circumstances, the High Court held that since the entire

Page 27 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 business activity of the assessee is only of exports, the entire business income is deemed to be profit derived from export of goods. Both the judgments of the Kerala High Court in K. Ravindranathan Nair (supra), and Southern Cashew Exporters v. Dy. CIT [2003] 130 Taxman 203 (Ker.), were affirmed by the Supreme Court, confirming the findings of the Kerala High Court, that interest earned on fixed deposits for the purposes of availing of credit facilities from the bank does not have an immediate nexus with the export business, and therefore, has to necessarily be treated as income from other sources and not as business income. 39. It is the settled proposition in interpretation of the statutes, that while ascertaining the true scope of a provision in a statute, attention must necessarily be paid not only to the text, but also the context. In Reserve Bank of India v.. Peerless General Finance & Investment Co. Ltd. [1987] 61 Comp. Cas. 663 (SC) it was observed that interpretation must depend on the text and the context. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result, which could not have been intended, the Court must avoid such interpretations. 40. In Shri Ram Honda Power Equip. (supra), the Delhi High Court held that the word " interest" in cl. (baa) of the Explanation to s.80HHC of the Act, is indicative of net interest i.e. gross interest as reduced by expenditure incurred by the assessee in earning such interest. 41. While applying the direct and proximate nexus test, we are of the view that where the interest earned does not have direct and proximate nexus, with the income from the business of export, the interest cannot be deducted as income from export under s. 80HHC(3)(a) of the Act, and has to be given the same treatment for tax, as "income from other sources" under s. 56 of the Act. 42. The question No. 1 is, thus, answered in favour of the Revenue, and against the assessee. 43. So far as question No. 2 is concerned, on the aforesaid discussion, we are also of the view that the amendment in s. 80HHC, by way of insertion of sub-s. (4B), excluding interest income for the purposes of deduction under' s. 80HHC of the Act, will also affect the deduction of interest income under s. 80HHC of the Act. for the period prior to the amendment, inasmuch as the applicability of the principle of

Page 28 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 direct and proximate nexus to the business income, will apply both, to the provisions of the Act prior to, and after the amendment, which came into effect by the Finance Act, 1992, w.e.f. 1st April, 1992. The question No. 2, is thus decided in favour of the Revenue and against the assessee. 44. On the question No. 3, we hold that the earning of the income convertible from foreign exchange by way of interest, is not necessary so long as the interest is derived from business of export, and has direct and proximate nexus, with the income earned out of the profits retained for the export business. The earning of the income convertible from foreign exchange, is not a test for determining, as to whether deduction is allowable in respect of the income derived from the profits retained for export business. The question No. 3, is also decided in favour of the Revenue and against the assessee. 45. The reference is answered in the aforesaid terms.” 39. In view of respectfully following the ratio laid down by the Hon`ble Rajasthan High Court in above decision, This grounds of appeal of the assessee is accordingly, dismissed. 40. Ground No. 11 states that the ld. CIT (A) has erred in confirming the action of the AO in not considering insurance claim received to the tune of Rs.2,33,106 and miscellaneous income to the tune of Rs. 54,316 as income from business for the purpose of computing deduction under section 80HHC. The action of the AO is contrary to the facts and law. 41. The Ld.AO relying on the Hon`ble Supreme Court decision in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC) has disallowed the claim of insurance for the purpose of deduction under section 80HHC of the Act.

Page 29 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 42. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). It was contended that insurance claim received is directly derived from the business. It was pleaded that insurance claim is against some business loss, hence, such receipts increases the manufacturing profit. However, CIT (A) observed that the claim of the appellant that it increases manufacturing profit is not accepted as the insurance claim is received on account of claim for loss as per Insurance Policy. However, the CIT (A) has accepted the alternate claim that exclusion is restricted to the receipts by way of insurance claim as reduced by corresponding losses and expenses. 43. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that netting off expenses has been granted by the CIT (A). The amount of Rs.54,316 was received for damage of raw material. This issue is covered in favour of the assessee by decision of tribunal in A.Y. 2001-02 in I.T.A.No. 2435/Ahd/2004 (Page 33 para 32). 44. Per contra, learned CIT(D.R.) relied on CIT (A). 45. We have heard the rival submissions and perused the relevant material on record. We find that the insurance claim and misc. income have been received against business loss, hence, such receipt is not income derived from export business. However, an amount of Rs. 54,316 was

Page 30 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 received against damage, which is covered in favour of the assessee by the decision of Co-ordinate Bench of Tribunal in the case of the assessee in I.T.A.No. 2435/Ahd/2004. Hence, same is allowed. Thus, this ground of appeal is therefore, partly allowed. 46. Ground No.12 to14 are general in nature; and not pressed before us, hence, does not require our adjudication. 47. In the result, the appeal of the assessee is partly allowed. 48. I.T.A.No. 1371/AHD/2006/A.Y. 2002-03: By the Revenue: 49. Additional Ground: During the course of appellate proceedings, the AO has filed an additional ground stating that the ld. CIT (A) has erred in directing not to exclude the amount of DEPB Credit of Rs.3, 31, 22,811 from the profits eligible for deduction under section 80HHC, though the same has no direct nexus with the export activity of the assessee.

Page 31 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 that the additional ground of appeal can be admitted where the issue

involved is pure question of law not involving any investigation of facts.

of expert benefit of DEPB of Rs.4,51,34,659 while calculating the deduction

under section 80HHC of the Act. Therefore, the assessee was asked to show

cause as to why the above amount should not be excluded while working

out the profits eligible under section 80HHC of the Act. It was explained

that DEPB represent Duty Entitlement Pass Book and as per government

rule the assessee company can import certain goods free of custom duty to

the extent of amounts shown in DEPB. It was contended that the exporter

does not receive any income by virtue of DEPB hence, such item disclose

duty entitlement should not be considered as other income. However, the

AO was of the view that DEPB is not income derived for expert of goods

nor is attributable to Industrial undertaking, hence, not required to be

included while computing deduction under section 80HHC of the Act. The

AO also supported his view by placing reliance in the case of CIT v. Sterling

Foods 237 ITR 579 (SC) and same was excluded from working of profit

eligible for deduction under section 80HHC of the Act.

Page 32 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 52. Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). However, Ld. CIT (A) observed that the Taxation Laws (Second amendment) Act, 2005 has now clearly closed the whole issue by lying down specifically that profit on sale of DEPB and DFRC benefits are eligible for deduction under section 80HHC subject to certain conditions. Further, decision of CIT v. Sterling Foods [1999] 237 ITR 579 (SC) relied by the AO excluded only profits from sales of import entitlements and licenses being not derived from Industrial Undertaking. The mere receipt of an expert benefit to reimburse the duty elements cannot be treated as one degree away from the activity of Industrial Undertaking. In view of this matter, the CIT (A) directed the AO to grant deduction under section 80HHC without excluding Rs.3,31,22,811 by way of DEPB credits from eligible profits. 53. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The Ld. CIT (D.R.) relied on the order the findings of the Ld. AO. 54. Per contra, the learned counsel for the assessee submitted that the issue covered by amendment by Finance Act, 2005 and decision of Hon`ble Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC). 55. We have heard the rival submissions and perused the relevant material on record. We find that the Hon`ble Supreme Court in the case of

Page 33 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC) the

Hon`ble Supreme Court observed as “This is an appeal against the

judgment and order dated 06.08.2010 of the Bombay High Court in ITA(L)

No. 1276 of 2010 deciding two issues against the assessee. On the first

issue, the High Court has held, relying on its judgment in CIT v. Kalpataru

Colours & Chemicals [2010] 192 Taxman 435 (Bom.), that the entire

amount received by an assessee on sale of the Duty Entitlement Pass Book

(for short 'the DEPB') represents profit on transfer of DEPB under Section

28(iiid) of the Income Tax Act, 1961 (for short 'the Act'). We have already

decided this issue in favour of the assessee in a separate judgment

in Topman Exports v. CIT [2012] 18 taxmann.com 120 (SC), and we have

held that not the entire amount received by the assessee on sale of DEPB,

but the sale value less the face value of the DEPB will represent profit on

transfer of DEPB by the assessee. The first issue is, therefore, decided

accordingly.” Therefore, respectfully following same we do not find any

infirmity in the order of CIT (A), accordingly, same is upheld. Accordingly,

this additional ground of appeal of the Revenue is therefore, dismissed. 56. Ground No.1 states that Ld. CIT (A) has erred in deleting foreign

travelling expenses of Rs.4,48,986 without appreciating the facts that

Page 34 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 the assessee has failed to substantiate the claim that it wholly and exclusively incurred for business purpose. 57. The assessee has debited a sum of Rs.22,44,932 as foreign travel expenses. The AO has observed that though the assessee has given the names of person who have visited along with names of the place and number of days of stay. The assessee has submitted that it has export turnover of Rs. 80.90 crores and various executives are required to visit abroad to explore market condition and new market. However, The AO observed that the assessee could not justify the purpose of visit and give proper explanation. Hence, the AO disallowed 1/5th of expenditure which worked out to Rs. 4,48,986. 58. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). It was contended that the appellant is a leading manufacture of non- synthetic pyrethorid products and undertakes exports as well and for the purpose of its employees and whole time directors visited various countries frequently. The assessee has also filed details of travelling expenditure incurred along with explanation. The assessee also relied in the case of M/s. Vikshara Trading & Investment Ltd. [I.T.A.No. 5122/Ahd/1996 dated 30.03.1998) of Ahmedabad tribunal wherein it was held that whether the assessee was benefitted by foreign travel or not was subsequent event and

Page 35 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 was not relevant. Hence, foreign travel undertaken by directors for business purpose and there no justification for disallowing 50% on pure estimate. The Ld. AR for the assessee also relied the decision of Hon’ble Gujarat High Court in case of Sayaji Iron & Engineering Co. v. CIT [2002] 253 ITR 749 [2002] 121 Taxman 43 (Guj). In view of these facts and circumstances, the ld. CIT (A) observed that the AO has not brought on record any material/ evidence that 1/5th expenditure was not incurred for business purpose. The AO has not analyzed each and every visit and particular trip of director that he has over stayed. Therefore, considering aforesaid judicial pronouncements the CIT (A) held that action of the AO is not sustainable in the eyes of law, as same is without any merit and concrete findings. Therefore, 1/5th disallowance made by the AO were deleted. 59. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The Ld. CIT (DR) vehemently supported the findings of the AO recorded in assessment order and submitted that the assessee has could not justify the stay of foreign visit. Therefore, Ld. CIT (A) was not justified in deleting that disallowance of expenditure. 60. Au contraire, the learned counsel for the assessee supported that order of Ld. CIT (A) and argued that the export turnover of the assessee is

Page 36 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 more than 80.90 crores and requires to undertake frequent foreign visit

by the directors and employees to explore new market for their products.

Hence, considering the turnover and judicial decision relied by the assessee

before CIT (A). The CIT (A) was justified in deleting the ad-hoc estimated

disallowance. 61. We have heard the rival submissions and perused the relevant material on record. We find that the disallowance @1/5th of total foreign

travel expenses have been made on presumption basis without bringing any

material or evidence on record that these were not incurred for the

purpose of business. The assessee has filed every details of foreign trips

undertaken with name, place of visit and number of days. Therefore,

relying on the decision of Co-ordinate Bench in the case of M/s. Vikshara

Trading & Investment Ltd. [I.T.A.No. 5122/Ahd/1996 dated 30.03.1998) of

Ahmedabad tribunal wherein it was held that whether the assessee was

benefitted by foreign travel or not was subsequent event and was not

relevant. Hence, foreign travel undertaken by directors for business

purpose and there no justification for disallowing 50% on pure estimate.

and also on the judgement of Hon’ble Gujarat High Court in case of Sayaji

Iron & Engineering Co. v. CIT [2002] 253 ITR 749 [2002] 121 Taxman 43

(Guj), we are of the considered opinion the ld. CIT (A) was justified in

Page 37 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 deleting the 1/5th estimated disallowance of foreign travelling expenses. Accordingly, this grounds of appeal of Revenue is therefore, dismissed. 62. Ground No. 2 states the ld. CIT (A) has erred in deleting addition of Rs.23,226 on account of petrol and diesel expenses without appreciating facts. 63. The AO noticed that the assessee has debited Rs. 3,66,130 under the head Oil and Petrol expenses. The assessee company has admitted that log book of vehicles is not maintained. Therefore, the AO disallowed 1/5th of expenses which worked out to Rs.73,226 as against which, the assessee has voluntary disallowed Rs. 50,000 hence, balance of Rs. 23,226 were disallowed. 64. In appeal, the ld. CIT (A) has deleted the said disallowance by relying on the ratio laid down by the Hon’ble Gujarat High Court in the case of Sayaji Iron & Engineering Co. v. CIT [2002] 253 ITR 749 [2002] 121 Taxman 43 (Guj) wherein it was held that public limited company is an inanimate person and there cannot be anything personal about such an entity. 65. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The Ld. CIT (DR) relied on the AO and submitted that the assessee company itself admitted that log-book is not maintained and disallowed Rs. 50,000 on this account.

Page 38 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 66. Per contra, the learned counsel for the assessee relied on the order of Ld. CIT (A). 67. We have heard the rival submissions and perused the relevant material on record. We find that there cannot be any “personal use” of vehicles in the case of limited company. Therefore, relying on the ratio laid down by the Hon’ble Gujarat High Court in the case of Sayaji Iron & Engineering Co. v. CIT [2002] 253 ITR 749 [2002] 121 Taxman 43 (Guj), we find no fault in the findings of Ld. CIT (A). Accordingly, same is upheld. Consequently, this ground is dismissed. 68. Ground No. 3 states that Ld. CIT (A) has erred in holding that expenditure incurred of Rs.1,43,200 on registration of trademark and reviewing the draft technology agreement was revenue in nature though the same was giving enduring benefit. 69. The assessee has incurred trademark expenses of Rs. 1,54,200 and Rs. 40,400 for consultancy charges aggregating to Rs. 1,94,600. The AO has observed that the expenditure incurred for trademark registration will give enduring benefit hence, same are capital in nature. However, without prejudice, the A.R. of the assessee submitted that expenses should be apportioned over a period of 3 years. Considering these facts, the AO disallowed 1/3rd of the expenses of Rs. 1,54,200, which worked out to Rs.

Page 39 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 1,02,800. The expenditure of Rs.40,000 incurred for reviewing the draft of

technology purchase agreement receipt of which are treated as capital

receipt. Hence, said expenditure was disallowed being capital

expenditure. 70. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). Wherein it was contended that expenditure was incurred in connection

with registration of trademark and itself cannot be treated as capital

expenditure. The CIT (A) therefore, held that the assessee company has

not incurred the expenditure for purchase of trademark. The expenses

were incurred for registration of trademark and relatable expenditure.

Hence, expenditure is allowable as deduction under section 37(1) of the Act. The disallowance made of 2/3rd of expenses was therefore, deleted.

With regard to expenses of Rs. 40,400 incurred towards reviewing draft

technology purchase agreement, the CIT (A) observed that the assessee has

submitted that receipt of technology transfer was treated as revenue income by the AO. Further, if it is treated as royalty even than the

expenditure is wholly and exclusively incurred for the purpose of business.

In view of this matter, the CIT (A) has allowed the appeal on this count. 71. Being aggrieved, the Revenue has filed this appeal before the

Tribunal. The learned D.R. supported the order of the AO whereas the

Page 40 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 learned counsel for the assessee supported the order of Ld. CIT (A) and submitted that expenditure are for registration and purchase of legal document. 72. We have heard the rival submissions and perused the relevant material on record. We find that the expenditure of Rs.1,54,200 has been incurred for registration of trademark and not for the purchase of trademark. Hence, the CIT (A) rightly treated it as revenue expenditure, allowable as deduction under section 37(1) of the Act. Similarly, expenditure of Rs.40,400 has been incurred towards drafting legal agreement and part receipts from technology transfer are treated as revenue receipts and treated as business income. Therefore, the action of the AO is merely based on presumption basis. Hence, we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. This ground of appeal is therefore, dismissed. 73. Ground No. 4 states that the ld. CIT (A) has erred in holding that the payments of PF and ESIC amounting to Rs.1,28,209 made before filing of return of income are eligible for deduction without considering the fact that the due date in the respective Acts for said payment is 15th and 21st of every months.

Page 41 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 74. The assessee company filed month-wise details of payment of PF and ESIC with return of income. The payment made beyond grace period was suo-moto disallowed by the assessee at Rs.1,36,534. However, the payment of Rs.1,28,209 is made beyond due date under the PF and ESIC Rules was not disallowed. The AO therefore, relying on the decision of Hon`ble Madras High Court in the case of CIT v. Madras Radiators Ltd. disallowed the same under section 43B of the Act. 75. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). The ld. CIT (A) has deleted the disallowance by following the decision of Hon’ble Gujarat High Court in the case of Alembic Glass Industries Ltd. [2005] 149 Taxman 15 (Gujarat) wherein Hon`ble High Court held that PF & ESIC deducted during the year and paid before due date of filing of return of income is allowable as a deduction under section 43B of the Act. 76. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The learned D.R. submitted the payment of PF and ESIC has not been paid within due date prescribed under the respective statutes i.e. PF Act and ESIC Rules. Therefore, in the light of decision of Hon’ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation [2014] 366 ITR 170 (Guj) : 223 Taxman 398 : [2014] 41

Page 42 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 taxmann.com 100 (2014) (1) TML 502 -Guj-HC is not allowable as deduction under section 43B of the Act. 77. Per contra, the learned counsel for the assessee supported the order of Ld. CIT (A). 78. We have heard the rival submissions and perused the relevant material on record. We find that the issue is covered against the assessee by decision of Hon’ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation [2014] 366 ITR 170 (Guj) : 223 Taxman 398 : [2014] 41 taxmann.com 100 (2014) (1) TML 502 -Guj-HC. Hence, the finding recorded by the Ld. CIT (A) are reversed. This grounds of appeal of Revenue is allow in favour of the Revenue. 79. Ground No. 5 states that the ld. CIT (A) has erred in deleting the disallowance of Rs.1,250 made out of telephone expenses, without considering the fact the assessee himself disallowed Rs.50,000 on this account. 80. Brief facts are that the AO has disallowed 1/5th of telephone expenses of Rs.51,250 which worked out to Rs. 1,250 by observing that it is hard to believe that from telephone installed at the residence of director there absolutely no personal call made by the directors. The assessee has suo- moto disallowed Rs.50,000 for “personal use” out of telephone expenses.

Page 43 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 81. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). However, CIT (A) keeping in view that the assessee has already disallowed Rs.50,000 for “personal use” hence, further disallowance made without any merit and concrete finding, hence, same were disallowed. 82. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The learned D.R. vehemently supported the order of the AO whereas the learned counsel for the assessee supported the order of the CIT (A). 83. We have heard the rival submissions and perused the relevant material on record. We find that the assessee company has already disallowed Rs. 50,000 for “personal use” hence; further disallowance made by the AO was rightly deleted by the Ld. CIT (A). Therefore, same is upheld. This ground of appeal is dismissed. 84. Ground No. 6 states that the ld. CIT (A) has erred in directing not to exclude the following amounts from the profits eligible for deduction under section 80HHC, though same have no direct or immediate nexus with export activity of the assessee a) Restricted exclusion interest income of Rs.44,15,400 as against Rs.1,88,07,480 b) Exchange rate difference of Rs.1,55,25,673 c) Sale of scrap of Rs.44,621. The CIT (A) has granted relief on the issue of exchange rate difference without

Page 44 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 appreciating the fact that the assessee enter in to forward contract on

account of which there might be an income or loss and hence, it is

nothing but a speculation profit and not related to business of the assessee. 85. Briefly, stated the facts of the case are that the assessee has received interest of Rs.1,88,07,480 out of surplus fund which were kept with bank.

Hence, the AO relying on CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and

Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) : 129 Taxman 539

(SC) has excluded the same from the computation of deduction under

section 80HHC of the Act. Similarly, the AO observed that the exclusion of

the amount of exchange rate difference for the purpose of deduction under

section 80HHC the assessee has claimed that same as accounted separately

as per Accounting Standard 11 as prescribed. Therefore, applying the ratio

laid down in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC), the

AO excluded the amount of exchange rate difference. The AO has also excluded sale of scrap of as it was realized for sale of raw material and

packing material. 86. Being aggrieved, the assessee filed an appeal before the ld. CIT (A).

It was claimed that fluctuation in foreign exchange rates income is related

to the realization of export proceeds and basically exchange rate

Page 45 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 fluctuation difference is nothing but a part of sales. The assessee has also

placed reliance on various tribunal decision as referred by the CIT (A) in

his order. After considering the facts and judicial findings, the CIT (A)

observed that the exchange rate difference bears the character of income

which is treated as derived from export sales and it is part and parcel of

the export profits only. Thus, the CIT (A) has allowed the contention of the

assessee and held that amount on account of exchange rate difference of

Rs.1,55,25,673 would not be excluded while computing deduction under section 80HHC. The CIT (A) observed that the scrap is natural outcome of

the manufacturing process. It is generated during the manufacturing

process and is thus, directly related to source of business income. Reliance

was also placed in the case of Rolla Taineras Ltd. v. DCIT [200] 69 TTJ (Del)

and Madras High Court in the case of Fenner (India) Limited v. CIT [200]

241 ITR 803 ((Mad). 87. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The learned D.R. supported the order of the AO. 88. Per contra, Learned Counsel submitted the issue is covered in favour of the assessee by various decisions. It was submitted that netting of

interest has been allowed by the Hon`ble Supreme Court in the case of

ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC) and Hon’ble

Page 46 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 Gujarat High Court in the case of DCIT v. Narmada Valley Fertilizer [2015]

57 taxmann.com 250 (Gujarat) and also covered by the decision of ITAT

in I.T.A.No. 1672/& 2245/Ahd/.20027 for A.Y. 2004-05 in assessee`s own

case. Further exchange rate difference is also covered in favour of the

assessee by ITAT in I.T.A.No. 1672/Ahd/2007 (Page No. 53 to 55 ) Further.

Tax appeal filed by the Revenue has been dismissed by the Hon’ble Gujarat

High Court in Tax Appeal No. 658 of 2009 for A.Y. 2004-05. Further, the

scrap is generated during manufacturing process and same is covered by

decision of Gujarat High Court in the case of Nirma Limited 55

taxmann.com 125 (Gujarat) and Harjivandas J. Javeri 258 ITR 758 (Gujarat)

and also covered by decision of the ITAT in I.T.A.No. 1672/&

2245/Ahd/.20027 for A.Y. 2004-05 in assessee`s own case. 89. We have heard the rival submissions and perused the relevant

material on record. We find that netting of interest has been allowed by

the Hon`ble Supreme Court in the case of ACG Associated Capsules Pvt.

Ltd. v. CIT [2012] 343 ITR 89 (SC) and Hon’ble Gujarat High Court in the

case of Narmada Valley Fertilizer [2015] 57 taxmann.com 250 (Gujarat) and

is also covered by the ITAT in I.T.A.No. 1672/ & 2245/ Ahd/2007 for A.Y.

2004-05 in assessee`s own case. Further, exchange rate difference is

covered in favour of the assessee by ITAT in I.T.A.No. 1672/Ahd/2007 (Page

Page 47 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 No. 53 to 55 ) Further the Tax appeal filed by the Revenue has been dismissed by the Hon’ble Gujarat High Court in Tax Appeal No. 658 of 2009 for A.Y. 2004-05. Further, scrap is generated during manufacturing process and same is covered by decision of Gujarat High Court in the case of Nirma Limited[2015] 55 taxmann.com 125 (Gujarat) and Harjivandas J. Javeri 258 ITR 758 (Gujarat) and is also covered by the ITAT in I.T.A.No. 1672/& 2245/Ahd/2007 for A.Y. 2004-05 in assessee`s own case. In the light of above findings, this ground of appeal is therefore dismissed. 90. Ground No. 7 is general in nature hence, does not require any adjudication. 91. In the result, the appeal of the Revenue is partly allowed. 92. CO No. 184/AHD/2006: A.Y. 2002-03: By the assessee: 93. Ground No.1: is general in nature; hence, does not require our adjudication. 94. Ground No. 2 states that Ld. CIT (A) has rightly deleted the addition made by the AO being foreign travelling expenses of Rs.4,48,986 without appreciating the facts that the assessee has failed to substantiate the claim that it wholly and exclusively incurred for business purpose.

Page 48 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 95. We have heard the rival submissions and perused the relevant material on record. As we have dismissed this grounds of appeal of revenue in their appeal, hence, this ground taken in CO by the assessee has becomes infructuous. Therefore, it is treated dismissed. 96. Ground No. 3 states the ld. CIT (A) has rightly deleted addition of Rs.23,226 on account of petrol and diesel expenses without appreciating facts. 97. As we have dismissed this ground of Revenue hence, this ground of the assessee becomes infructuous, hence, treated as dismissed. 98. Ground No. 4 states that Ld. CIT (A) has rightly held that expenditure incurred of Rs.1,43,200 on registration of trademark and reviewing the draft technology agreement was revenue in nature though the same was giving enduring benefit. 99. We have heard the rival submissions and perused the relevant material on record. As we have dismissed this grounds of appeal of Revenue, therefore, this ground of the assessee is accordingly, dismissed. 100. Ground No. 5 states that the ld. CIT (A) has rightly held that payments of PF and ESIC amounting to Rs.1,28,209 made before filing of return of income are eligible for deduction without considering the

Page 49 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 fact that the due date in the respective Acts for said payment is 15th and 21st of every months. 101. We have heard the rival submissions and perused the relevant material on record. Our finding as given in respect of Revenue appeal would apply to this ground hence, this grounds of appeal is therefore, dismissed. 102. Ground No. 6 states that the ld. CIT (A) has rightly deleted the disallowance of Rs.1,250 made out of telephone expenses. 103. We have dismissed this ground of revenue hence, this ground becomes infructuous. 104. Ground No.7 : states that the ld. CIT (A) has rightly directed not to exclude the following amounts from the profits eligible for deduction under section 80HHC, though same have no direct or immediate nexus with export activity of the assessee a) Restricted exclusion interest income of Rs.44,15,400 as against Rs. 1,88,07,480 b) Exchange rate difference of Rs.1,55,25,673 c) Sale of scrap of Rs. 44,621. The CIT (A) has rightly granted relief on the issue of exchange rate difference without appreciating the fact that the assessee enter in to forward contract on account of which there might be an income or loss and hence, it is nothing but a speculation profit and not related to business of the assessee.

Page 50 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 105. We have heard the rival submissions and perused the relevant material on record. We find that we have allowed this ground in revenue appeal therefore, our finding thereon would apply accordingly, following the same this grounds of appeal of the assessee is therefore, dismissed. 106. In the result, Cross Objection filed by the assessee is dismissed. 107. I.T.A.No.1672/AHD/2006/A.Y.2003-04:By assessee: 108. Ground No. 1 & 2: are general in nature; hence, does not require our adjudication. 109. Ground No.3 states that Ld. CIT (A) has erred in confirming disallowance of sale promotion expenses of Rs. 2,62,627 which is contrary to the facts and law. 110. We have heard the rival submissions and perused the relevant material on record. We find that the AO observed that the assessee has debited sale promotion expenses of Rs.2,26,078 which included expenditure on gift to foreign clients, organizer diary etc. claimed to have incurred to development relation with them. Accordingly, the AO disallowed 1/5th the same at Rs. 45,215. The CIT (A) also upheld the same. Before us, the learned counsel for the assessee submitted that such expenditure is incurred for the purpose of business hence, same is allowable as deduction. Further, the issue is covered in favour of the

Page 51 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 assessee by Tribunal order in I.T.A.No. 2453/Ahd/ 2004/ A.Y. 01-02 Para 23.1 at Page No. 22. We find that the AO has disallowed the same on estimate basis without any justification. Hence, same are directed to be allowed. This ground is therefore, allowed. 111. Ground No. 4 states that Ld. CIT (A) has erred in confirming disallowance of Rs.3,23,600 treating same as deferred revenue expenditure. 112. The perusal of details submitted by the assessee showed that Rs. 4,85,400 has been incurred from registration of imidacloprid product, which will give enduring benefit to the assessee as it is renewable in three years. Therefore, same was treated as capital expenditure. However, the AO has accepted alternate plea that the product is deferred revenue expenditure to be written off in three years. Hence, 1/3rd was allowed and balance 2/3rd of Rs. 3,23,600 was disallowed. 113. In appeal, CIT (A) observed that expenditure has been incurred for new product registration without which the assessee cannot sell its product in market. The benefit of this registration would be available to the assessee at least three years for which the AO has accepted the alternate plea. Hence, this ground was dismissed.

Page 52 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 114. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee repeated same argument as taken before lower authorities. 115. Per contra, the learned D.R. supported the order of authorities below. 116. We have heard the rival submissions and perused the relevant material on record. We find that the expenditure has been incurred for registration of new product which will give benefit to the assessee for at least three years. Hence, 2/3rd of the same has been rightly capitalized to be allowed in next three years. In view of this matter, we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. This grounds of appeal is therefore, dismissed. 117. Ground No. 5 states that Ld. CIT (A) erred in confirming the action of the AO in making addition out of loss incurred by the appellant company on traded items to the tune of Rs.1,87,694 . The action of the AO is contrary to the facts and law. 118. The AO has observed that the reply of the assessee is not convincing. It is hard to believe that the assessee company which is having a turnover of more than Rs. 40 crores and has undertaken small activity of trading of Rs.4.6 crores and has incurred losses in the activity. This, further gets

Page 53 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 strengthened that must of sales are made to related parties. In view of above facts, it is held that losses incurred by the assessee company are not genuine hence, these loss are added to total income. 119. Being dissatisfied, the assessee preferred an appeal before the CIT (A). It was contended that the raw material which is not required for use were disposed-off as a matter of commercial expediency to its related parties. However, Ld. CIT (A) observed that the transaction is not in ordinary course of business and has also resulted in loss of Rs. 1,87,694. The Ld. AR of the appellant has not brought forth the circumstances leading to disposal at a price lower than its purchase cost. Accordingly, this ground was dismissed. 120. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that purchase and sale are during normal course of business and fully supported by the proper bills. The purchaser companies are also being assessed at maximum marginal rate. The addition has been made only on the basis of presumption hence, deserve to be deleted. 121. Au contraire, the learned D.R. supported the order of CIT (A). 122. We have heard the rival submissions and perused the relevant material on record. We find that the purchase and sale are duly supported

Page 54 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 by the proper bills. There is only one company in which sales are made at

lower price. The purchaser companies are also assessed at maximum

marginal rate. We find that the AO had made addition only on presumption

basis without bringing on record any cogent material to establish that sales

were made with a view to decrease profit. The assessee company which is

having a turnover of more than Rs.40 crores would undertake such step

total income suppress the profit. Since the addition is made for

presumption basis. Therefore, same is directed to be deleted. This ground of appeal of the assessee is allowed. 123. Ground No. 6 states the ld. CIT (A) has erred in in not considering

that interest income to the tune of Rs.92,15,954 as income from

business for the purpose of computing deduction under section 80HHC.

The action of the AO is contrary to the facts and law and deserve to be

deleted. 124. We have heard the rival submissions and perused the relevant material on record. We find that this ground is covered by our findings as

given in the case of the assessee for the assessment year 2002-03 in Ground

No. 10 as discussed in earlier part of this order. Therefore, following our

finding as given therein this grounds of appeal of the assessee is

accordingly, dismissed.

Page 55 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 125. Ground No. 7 states that Ld. CIT (A) has erred in not considering insurance claim received to the tune of Rs.1,11,006 as income from business for the purpose of computing deduction under section 80HHC. The action of the AO is contrary to the facts and law and deserve to be deleted. 126. We have heard the rival submissions and perused the relevant material on record. We find that this ground is covered by the findings of ITAT in I.T.A.No. 2453/Ahd/2004 for A.Y. 2001-02. Hence, following the same this ground of appeal is therefore, allowed. 127. Ground No. 8 states that Ld. CIT (A) has erred in directing the AO to exclude profit on sale of DEPB to the tune of Rs.5,91,000 from the profit eligible business for deduction under section 80HHC. The action of the AO is contrary to the facts and law and deserve to be deleted. 128. The learned counsel for the assessee submitted that the issue under consideration is covered by the decision of Hon`ble Supreme Court in the case of Avani Export [2015] 58 taxmann.com 100 (SC) which held the amendment of Taxation law (Second Amendment) 2005 would not operate retrospectively. 129. We have heard the rival submissions and perused the relevant material on record. We find that the Hon`ble Supreme Court in the case of

Page 56 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC) the

Hon`ble Supreme Court observed as “This is an appeal against the

judgment and order dated 06.08.2010 of the Bombay High Court in ITA(L)

No. 1276 of 2010 deciding two issues against the assessee. On the first

issue, the High Court has held, relying on its judgment in CIT v. Kalpataru

Colours & Chemicals [2010] 192 Taxman 435 (Bom.), that the entire

amount received by an assessee on sale of the Duty Entitlement Pass Book

(for short 'the DEPB') represents profit on transfer of DEPB under Section

28(iiid) of the Income Tax Act, 1961 (for short 'the Act'). We have already

decided this issue in favour of the assessee in a separate judgment

in Topman Exports v. CIT [2012] 18 taxmann.com 120 (SC), and we have

held that not the entire amount received by the assessee on sale of DEPB,

but the sale value less the face value of the DEPB will represent profit on

transfer of DEPB by the assessee. The first issue is, therefore, decided

accordingly.” Therefore, respectfully following same we do not find any

infirmity in the order of CIT (A), accordingly, same is upheld. Hence,

following the same this ground of appeal is therefore, allowed. 130. Ground No. 9 states that Ld. CIT (A) has erred in confirming the

action of the AO in excluding claim received by the assessee company

amounting Rs.2,70,00,000 for loss of profit the profit eligible for

Page 57 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 deduction under section 80HHC. The action of the AO is contrary to the facts and law and deserve to be deleted. 131. The learned counsel for the assessee submitted that similar claim has been allowed by the Tribunal in own case of the assessee for A.Y. 2004- 05 in I.T.A.No. 1672/Ahd/2007 (Page No. 42 para 26). 132. Per contra, the Ld. DR relied upon the orders of the lower authorities 133. We have heard the rival submissions and perused the relevant material on record. We find that similar claim has been allowed by the Tribunal in own case of the assessee for A.Y. 2004-05 in I.T.A.No. 1672/Ahd/2007 (Page No. 42 para 26). Therefore, respectfully following the same this ground is allowed. 134. Ground No. 10 & 11 are general in nature hence, does not require any adjudication. 135. In the result, the appeal of the assessee is partly allowed. 136. I.T.A.No.1764/AHD/2006/A.Y.2003-04:By Revenue: 137. Ground no. 1 states that Ld. CIT (A) has erred in deleting staff welfare expenses of Rs. 42,358 without appreciating the facts that the assessee has failed to explain that the expenditure wholly and exclusively incurred for business purposes.

Page 58 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 138. We have heard the rival submissions and perused the relevant material on record. We find that the assessee has incurred expenditure of Rs.1,65,202 for labour welfare and Rs. 46,590 for staff welfare, which are mainly in the nature of entertainment and pertained to tea coffee etc. of which genuineness is also doubtful. Hence, the AO had disallowance 20 % of such expenses at Rs. 42,358. However, the CIT (A) has deleted the same. We find that such type of disallowance deleted n A.Y. 2001-02 in I.T.A.No. 2470/A/2004 were confirmed by the tribunal, in the case of the assessee. In view of these facts, this ground of appeal is therefore, dismissed. 139. Ground No. 2 states that Ld. CIT (A) has erred in deleting disallowance of Rs.27,771 made out of audit expenses without considering the facts that the assessee has failed to prove exigency of incurring such expenditure for business purpose. 140. The assessee has claimed the above expenses in-group in misc. expenses on account of expenditure incurred for entertainment of auditor of the assessee company. Therefore, the AO disallowed the same. However, CIT (A) deleted the same by holding that no concrete finding has been given by the AO. In view of this matter, we are of the considered opinion the CIT (A) was justified, in deleting the disallowance so made.

Page 59 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 Hence, we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. This grounds of appeal of revenue is therefore, dismissed. 141. Ground No. 3 states that Ld. CIT (A) has erred in deleting foreign travelling expenses of Rs. 1,54,650 without appreciating the facts that the assessee has failed to substantiate the claim that it wholly and exclusively incurred for business purposes. 142. We have heard the rival submissions and perused the relevant material on record. We find that this ground of appeal was also come before us in A.Y. 2002-03 in the case of the assessee, wherein we have dismissed the Revenue appeal, on this ground. Therefore, following same, this ground of appeal is dismissed. 143. Ground No. 4 states the ld. CIT (A) has erred in deleting addition of Rs.13,596 on account of petrol and diesel expenses without appreciating facts. 144. We have heard the rival submissions and perused the relevant material on record. We find that this ground of appeal was also come before us in A.Y. 2002-03 in the case of the assessee, wherein we have dismissed the Revenue appeal, on this ground. Therefore, following same, this ground of appeal is dismissed.

Page 60 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 145. Ground No. 5: states that the ld. CIT (A) has erred in holding that payments of PF and ESIC amounting to Rs. 2,330 made before filing of return of income are eligible for deduction without considering the fact that the due date in the respective Acts for said payment is 15th and 21st of every months. 146. We have heard the rival submissions and perused the relevant material on record. We find that this ground of appeal was also come before us in A.Y. 2002-03 in the case of the assessee, wherein we have allowed the Revenue appeal, by following decision of Hon’ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation [2014] 366 ITR 170 (Guj) : 223 Taxman 398 : [2014] 41 taxmann.com 100 (2014) (1) TML 502 -Guj-HC. Therefore, following same, this ground of appeal is allowed in favour of the Revenue. 147. Ground No. 6 states that the ld. CIT (A) has erred in deleting the disallowance of Rs.85,641 made out of telephone expenses, without considering the possibility of use of telephone by the directors and employees of the assessee company. 148. We have heard the rival submissions and perused the relevant material on record. We find that this ground of appeal was also come before us in A.Y. 2002-03 in the case of the assessee, wherein we have

Page 61 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 dismissed the Revenue appeal, on this ground. Therefore, following same, this ground of appeal is dismissed. 149. Ground No. 7 states that the ld. CIT (A) has erred in deleting the disallowance made under section 40A(2)(b) of Rs.5,912 without appreciating that payment made to related party for purchase of material was excessive as compared to other party. 150. We have heard the rival submissions and perused the relevant material on record. We find that the CIT (A) has deleted this ground by observing that the assessee has purchased the material for related parties at arm’s length price and no excessive payment has been made and considering the business exigency. The AO has not brought on record any such facts. In view of this, we do not find any infirmity in the order of CIT (A), accordingly, it is upheld. This ground of appeal is dismissed. 151. Ground No.8 states that the ld. CIT (A) has erred in directing not to exclude the following amounts from the profits eligible for deduction under section 80HHC, though same have no direct or immediate nexus with export activity of the assessee a) Restricted exclusion interest income of Rs.47,53,885 as against Rs. 92,15,954/- b) Exchange rate difference of Rs. 64,58,750/- c) Sale of scrap of Rs.3,00,311/-. The CIT (A) has granted relief on the issue of exchange rate difference without

Page 62 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 appreciating the fact that the assessee enter in to forward contract on

account of which there might be an income or loss and hence, it is

nothing but a speculation profit and not related to business of the

assessee . 152. The Ld. CIT (DR) relied on the AO. 153. On the other hand, the learned counsel for the assessee submitted

that netting of interest has been granted by the CIT (A), which is covered by the decision of Hon`ble Supreme Court in the case of ACG Associated

Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC) and DCIT v. Narmada Velley

Fertilizers Co Ltd. [2015] 57 taxmann.com 250 (Gujarat) wherein it was

held that where interest income was received on investments, while

interest paid on borrowings pertained to business expenditure, not 90

percent of gross interest , but 90 percent of net interest was to be reduced

for computing section 80HHC deduction. Further the issue of exchange

rate difference is covered in favour of the assessee by the decision of ITAT

in assessee`s own case in I.T.A.No. 1672 & 2245/Ahd/2007 for assessment

year 2004-05[ PB-53] and I.T.A.No. 1614/Ahd/2009 for A.Y. 2006-07 [ PB-

110 to 104]. Further, Tax Appeal of the Department has been dismissed by

the Hon’ble Gujarat High Court in CIT v. Mitsu Limited [Tax Appeal No. 658

of 2009 dated 19.03.2014] (PB-22 to 24) and sale of scrap is covered in

Page 63 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 favour of the assessee by the decision of Tribunal in I.T.A.No.1672 &

2245/Ahd/2007 for assessment year 2004-05 [PB-19-20]. 154. We have heard the rival submissions and perused the relevant

material on record. We find that this ground of appeal was also come before us in A.Y. 2002-03 in the case of the assessee, vide Ground No. 6 of

Department appeal, wherein we have dismissed the Revenue appeal, on

these issues in earlier part of this order. The Hon’ble Gujarat High Court

in the case of DCIT v. Narmada Velley Fertilizers Co Ltd. [2015] 57

taxmann.com 250 (Gujarat) wherein it was held that where interest

income was received on investments, while interest paid on borrowings

pertained to business expenditure, not 90 percent of gross interest , but

90 percent of net interest was to be reduced for computing section 80HHC

deduction. Similarly, the Hon`ble Supreme Court in the case of CIT v.

Punjab Stainless Steel Industries [2014] 46 taxmann.com 68 (SC) wherein

it was held that for the purpose of computation of deduction under section

80HHC of manufacture and exporter of steel utensils, proceeds generated

from sale of scrap would not be included in total ‘turnover’. These issues

are also covered in favour of the assessee by the decision of Tribunal in

the case of the assessee as mentioned by the learned counsel for the

Page 64 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 assessee in above para. Therefore, following same, this ground of appeal of Revenue is dismissed. 155. Ground No. 9 relates that Ld. CIT (A) erred in holding that excise duty and sales would not be included in the total turnover while calculating the deduction under section 80HHC of the Act without considering the facts that the issue in question is yet to be decided by the Highest Court of the Land. 156. The Ld. CIT (DR) relied on the AO. 157. On the other hand, the learned counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of Hon`ble Supreme Court in the case of CIT vs. Laxmi Machine Works[2007] 290 ITR 667 (SC), and also by the decision of Tribunal in assessee`s case for A.Y. 2001-02 in I.T.A.No. 2453/Ahd/2004 [PB56-57] and for A.Y. 2004- 05 I.T.A.No. 1672 & 2245/Ahd/2007 for assessment year 2004-05[ PB-53]. Further, Tax Appeal of the Department has been dismissed by the Hon’ble Gujarat High Court in I.T.A.No. 658 of 2009 (PB-22 to 24). 158. We have heard the rival submissions and perused the relevant material on record. We find that the issue is squarely covered in favour of the assessee by the decision of Hon`ble Supreme Court in the case of CIT vs. Laxmi Machine Works [2007] 290 ITR 667 (SC) and also by the decision

Page 65 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 of tribunal in assessee`s case for A.Y. 2001-02 in I.T.A.No. 2453/Ahd/2004 [PB56-57] and for A.Y. 2004-05 I.T.A.No. 1672 & 2245/Ahd/2007 for assessment year 2004-05[ PB-53]. Further, Tax Appeal of the Department has been dismissed by the Hon’ble Gujarat High Court in I.T.A.No. 658 of 2009 (PB-22 to 24). In view of these facts and circumstances, respectfully following the above cited judgements of Hon`ble Supreme Court and Hon`ble High Court and tribunal, this grounds of appeal of revenue is therefore, dismissed. 159. Ground No. 10 is general in nature hence, does not require any adjudication. 160. In the result, the appeal of the Revenue for A.Y. 2003-04 is partly allowed. 161. I.T.A.No.1000/AHD/2016/A.Y.2002-03:By the assessee: 162. Ground no. 1 to 4 are against the non allowing deduction under section 80-O of the Act by not considering the direction of ITAT used vide order dated 22.03.2013 and not adjudicating appeal in arbitrary manner without considering legal aspect. 163. Succinct facts are that original assessment was made under section 143 (3) on 21.03.2005 declaring total income of Rs. 45,86,66,943 which was later on revised to Rs. 41,82,55,337 under section 154 of the Act. This order

Page 66 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 was subsequently cancelled under section 263 of the Act vide order dated

22.12.2005 by the Commissioner of Income tax with a direction to make a

fresh assessment while examining the deduction under section 80HHC and

under section 80-O which were wrongly allowed. In consequence to above,

fresh assessment was made on 30.08.2006. Aggrieved, the assessee has

carried the matter before CIT (A). The CIT (A) vide order dated 30.11.2006,

has allowed the appeal of the assessee on deduction under section 80HHC

and under section 80-O of the Act. The assessee as well as Department

went into appeal before tribunal. The ITAT Ahmedabad vide order dated

22.03.2013 [I.T.A.No. 451/AHD/2006 and CO. No. 84/AHD/2007, I.T.A.No.

1074/ AHD/ 2007 by the assessee] and I.T.A.No.1074/AHD/2007 by the

Department. The ITAT vide para 4.2 and 4.3 of its order has set-aside the

issue of deduction under section 80-O to the file of CIT (A) by observing

that though the CIT (A) has allowed deduction under section 80-O of the

Act to the assessee by following CBDT Circular No. 731 dated 20.12.1995,

but no finding given by the CIT (A) that even after sale of technical know-

how , there was restriction on the buyer debarring him from using such

technical know-how in India. Under these facts, we feel that the order of

Ld. CIT (A) is not sustainable on this issue. However, we feel that in the

interest of justice, this matter should go back to the file of Ld. CIT (A) for

Page 67 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 deciding the issue afresh in order to enable the assessee to bring cogent

evidence on record to establish that there are restriction on the buyer

debarring him from using technical know-how in India at any point of time.

If the assessee is able to do so the assessee might have a case for allowing

deduction u/s. 80-O but the absence the assessee `s ability to establish

this, that there was restriction on the buyer debarring him from using

technical know-how in India at any point of time, in our considered

opinion, the assessee is not eligible for deduction u/s.80-O on account of

this receipt because in that situation, it cannot be said that the receipt in

question is a consideration for user of technical know-how outside India.

Hence, we set-aside the order of CIT (A) on this issue and restore the

matter back to his file for fresh decision. 164. In view of above, the CIT (A) has again given an opportunity of being

heard to the assessee. It was explained that the assessee company has

received a sum of Rs. 18,19,27,200 from M/s. Dow Agro Science BV for the

transfer of technical know-how of which 80% amount of Rs. 14,55,41,760

has been claimed as consideration received for loss of income and as such

treated the same as capital receipt. The balance 20% amount of Rs.

3,63,85,440 has been claimed as royalty received for the use of process

and technology. The assessee company had also received a sum of Rs.

Page 68 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 4,86,85,000 from Syngenta Crop Protection AG and the same has been

treated as royalty. The appellant company has claimed deduction under

section 80-O of the Act on royalty payments of Rs. 8,50,70,440 [ Rs. 3,63,85

440 + Rs. 4,86,85,000] and the balance amount of Rs.14,55,41,760 was

claimed as exempt being capital receipt. The appellant company also filed

the Chartered Accountant certificate in regard to the nature of receipt

and claim of deduction under section 80-O on which the AO originally

granted deduction under section 80-O vide order dated under section 143

(3) dated 21.03.2005 and CIT (A) has allowed the appeal. However, vide

order dated 30.08.2006 under section 143 (3) read with section 263 the AO

withdrew the deduction under section 80-O of the Act. However, the CIT

(A) observed that the assessee has filed copies of agreement entered in to

by the Appellant with above stated two parties for transfer of technical

know-how to them for consideration. The Ld. AR of the appellant also

submitted that an miscellaneous application has been filed by him before

the ITAT for rectification of mistake because while adjudicating the appeal

the due consideration to CBDT Circular No. 700 dated 23.03.1995 has not

been given which amounts to omission and requires to be rectified. Beside

this, no evidence has been adduced which shows that there was restriction

on the buyer of technical know-how to use the same in India at any point

Page 69 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 of time. Keeping in view the direction of the of Hon`ble Ahmedabad and

submissions of the appellant as well as reliance on the assessment order,

the CIT (A) held that the appellant has not been able to place on record

any evidence which shows that there was any restriction on the buyers of

technical know-how for using it in India at any point of time. Therefore, as

per direction of the ITAT, the appellant is not eligible for deduction under

section 80-O of the Act. 165. Being, dissatisfied the assessee has filed this appeal before the

Tribunal. The learned counsel for the assessee referred the “Section 8.01-

Termination” of the purchase agreement dated 12.09.2001(PB-38) with

Syngenta Crop Protection AG, Switzerland by which the said purchase

agreement can be terminated by Seller or Purchaser in the event of

transaction is being prohibited by the government becomes final or by

mutual written consent of both parties (PB-52) to contend that agreement

can be terminated by mutual written consent of the parties. Learned

Counsel further referred section 9.06- Assignment clause (PB-54) to

contend that the buyer cannot assign this agreement and hence, only a

right to use intellectual property is acquired. Learned Counsel also referred

clause 6.4 (PB-35) of Technology Purchase Agreement dated 01.01.2002

(PB-30) entered in to with Dow AgroSciences B.V., Netherland to contend

Page 70 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 that this agreement cannot be assigned to third party by the neither party,

without written consent of the other party. Thus, the buyer has only a

license to use the technical know-how and do not have a right to transfer

the same. Learned Counsel further drawn our attention that products sold

are insecticides, pesticides and/or its intermediates. Such products cannot

be manufactured in India without obtaining a license in the form of

registration from the concerned government Department in India. The

purchaser of technical know-how has never approached the appellant

company for such permission to use the technical know-how in India and to

the best of their knowledge and belief of the appellant company, the

aforesaid purchasers have not used the process of know-how of

manufacturing products in India. 166. Learned Counsel further supported his view by placing reliance in the

case of LI & Fung India (P) Ltd. v. CIT [2008] 305 ITR 105 (Delhi) wherein

considering the CBDT Circular No. 700 dated 23.03.1995 it was observed

that where the technical and professional services are rendered from India

and are received by a foreign Government or enterprise outside India,

deduction under section 80-O would be available to the person rendering

the service even if the foreign recipient of the services utilizes the benefit

Page 71 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 of such services in India. Similar findings were given in the case of CIT v.

Inchcape India P. Ltd.[2005] 273 ITR 92 (Delhi) “5. Again our attention was drawn to the circular issued by the CBDT being Circular No.700 dated specifically referring to section 80-o of the Act. It is stated specifically as under: “The matter has been considered by the Board. It is clarified that as long as the technical and professional services are rendered from India and are received by a foreign Government or enterprise outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India”. 6.Thus, it is not open for the Revenue to argue against the provision of law and the circular by which public at large is informed as to what is the provisions of law. Therefore, we would like to answer the question in favour of the assessee and against the Revenue. Ordered accordingly. The appeal stands disposed off.

the assessee also placed reliance on CBDT Circular No. 731 dated

20.12.1995 in which it was clarified that deduction under section 80-O

would be available to reinsurance agent in India for the gross premium

before remittance to his foreign principal.(PB-29). 168. Per contra, the learned D.R. relied on the order of lower authorities. He further submitted that the assessee has sold the technical know-how

hence, deduction under section 80-O is not allowable.

Page 72 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 169. We have heard the rival submissions and perused the relevant

material on record. We find that the Chartered Accountant certificate in

regard to the nature of receipt and claim of deduction under section 80-O

on which the AO originally granted deduction under section 80-O vide order

dated under section 143 (3) dated 21.03.2005 and CIT (A) has allowed the

appeal. However, vide order dated 30.08.2006 under section 143 (3) read

with section 263 the AO withdrew the deduction under section 80-O of the

Act. However, the CIT (A) observed that the assessee has filed copies of

agreement entered in to by the Appellant with above stated two parties

for transfer of technical know-how to them for consideration. The Ld. AR

of the appellant also submitted that an miscellaneous application has been

filed by him before the ITAT for rectification of mistake because while

adjudicating the appeal the due consideration to CBDT Circular No. 700

dated 23.03.1995 has not been given which amounts to omission and

requires to be rectified. Beside this, no evidence has been adduced which

shows that there was restriction on the buyer of technical know-how to use

the same in India at any point of time. Keeping in view the direction of the

of Hon`ble Ahmedabad and submissions of the appellant as well as reliance

on the assessment order, the CIT (A) held that the appellant has not been

able to place on record any evidence which shows that there was any

Page 73 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 restriction on the buyers of technical know-how for using it in India at any

point of time. Therefore, as per direction of the ITAT, the appellant is not

eligible for deduction under section 80-O of the Act. Learned Counsel also

referred clause 6.4 (PB-35) of Technology Purchase Agreement dated

01.01.2002 (PB-30) entered in to with Dow AgroSciences B.V., Netherland

to contend that this agreement cannot be assigned to third party by the

neither party, without written consent of the other party. Thus, the buyer

has only a license to use the technical know-how and do not have a right

to transfer the same. Learned Counsel further drawn our attention that

products sold are insecticides, pesticides and/or its intermediates. Such

products cannot be manufactured in India without obtaining a license in

the form of registration from the concerned government Department in

India. The purchaser of technical know-how has never approached the

appellant company for such permission to use the technical know-how in

India and to the best of their knowledge and belief of the appellant

company the aforesaid purchasers have not used the process of know-how

of manufacturing products in India. 170. We observe that the Hon`ble Delhi High Court in the case of CIT v.

Inchcape India P. Ltd.[2005] 273 ITR 92 (Delhi) held as under:

Page 74 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 “5. Again our attention was drawn to the circular issued by the CBDT being Circular No.700 dated specifically referring to section 80-o of the Act. It is stated specifically as under: “The matter has been considered by the Board. It is clarified that as long as the technical and professional services are rendered from India and are received by a foreign Government or enterprise outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India”. 6.Thus, it is not open for the Revenue to argue against the provision of law and the circular by which public at large is informed as to what is the provisions of law. Therefore, we would like to answer the question in favour of the assessee and against the Revenue. Ordered accordingly. The appeal stands disposed off.

Madras High Court in the case of CIT v. Chakiat Agencies Pvt. Ltd. [2009]

314 ITR 200 (Mad) wherein it was held that

“14. The basic purpose of section 80-O is the spread by an Indian assessee of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill of the assessee for use outside India and in that process to receive income to augment the foreign exchange resources of the country. The assessee can also make available to the foreign enterprise, technical and professional services, expertise of which it possesses for earning foreign exchange for the country. 15. The Central Board of Direct Taxes circular in Circular No. 700 dated March 23, 1995 ([1995] 213 ITR (St.) 78), clarified section 80- O by stating that as long as the technical and professional services arc rendered from India and are received by the foreign Government or enterprise outside India, deduction under section 80-O of the Act would be available to the person rendering the service, even if the foreign recipient of the service utilises the benefit of such services in India.

Page 75 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03

Page 76 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 (i) On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in allowing the appeal of the assessee and quashed the re-opening proceedings. (ii) It is therefore, prayed that the order of the CIT (A), may be set- aside and that the order of the Assessing Officer may be restored.

manufacturing of intermediates like Chloral ICAC and other products. The

assessee has filed return of income on 28.11.2000 declaring total income

of Rs. 13,00,450 under normal provisions of Income Tax Act,1961 (of the

Act) and book profit of Rs. 80,10,690 under section 115JB. The original

assessment was completed under section 143 (3) on 28.11.2002 declaring

total income of Rs. 11,95,88,016 in which additions were made by

reworking of deduction under section 80HHC by reducing 90% of total other

income including non-compete fees of Rs.10,00,00,000 for the purpose of

arriving at the figure of eligible profit of the business. The CIT (A) has

passed order on 23.04.2003 against which the assessee as well as

Department has filed appeal before Income Tax Appellate Tribunal

(Tribunal). During the pendency of appeal before Tribunal, The assessment

was reopened u/s.147 of the Act on the reason that the assessee has

reduced 90% of non-compete fees while arriving at the figure of eligible

business profit for the purpose of deduction under section 80HHC instead

Page 77 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 of reducing total amount of non-compete fees as the said receipt is not

derived from the eligible business activity. Other reason, for reopening of

assessment was that the assessee has claimed deduction under section

80HHC and under section 80IB simultaneously on the gross total income and

as per provisions of section 80IA(9) r.w.s. 80IB(13), the assessee cannot

claim deduction under two different sections in respect of same business.

The AO has worked out the deduction under section 80HHC at

Rs.8,21,84,014 as against the deduction of Rs. 10.03.50,355 computed in

the original assessment. The AO excluded the entire amount of non-

compete fees of Rs.10 crores and also excluded deduction of

Rs.1,83,58,427 under section 80IA while calculating the eligible profit for

the purpose of deduction under section 80HHC. Being, aggrieved, the

assessee has assailed the order passed by the AO under section 143 (3) read

with section 147 before the Ld. CIT (A). The assessee has challenged the

reopening of assessment on the ground that the reopening is based on

change of opinion and is also on the issue of section 80HHC which is subject

matter of appeal before ITAT and therefore, the AO has no jurisdiction to

reopen the said assessment. The ld. CIT (A) vide order dated 12.02.2007

held that the appeal is adjudicated on merit hence, issue of reopening of

assessment becomes consequential in nature and accordingly, he refrained

Page 78 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 from adjudicating this issue of validity of assessment. However, with

regard to receipt of non-compete fees arose out of the carrying of the

business of the assessee and therefore, eligible for deduction under section

80HHC. On the allowability of both the deduction under section 80IB and

under section 80HHC, the ld. CIT (A) relying on various judicial

pronouncements held that the assessee can claim both the deduction

subject to condition that total deduction cannot exceed the eligible profit

in the gross total income. 177. The Department preferred appeal before Tribunal, wherein it was

brought to notice of the Tribunal that the decision of CIT (A) in refusing to

adjudicate the issue of validity of re-opening on the ground that it is

consequential in nature is bad-in-law and requested to adjudicate this

ground. Accordingly, the Tribunal held that the CIT (A) was duty bound to

adjudicate the issue of re-opening and accordingly, restored the issue to

the file of the CIT (A). In view of these facts, the CIT (A) considered the

appeal and decided the issue of re-opening of assessment. The CIT (A)

observed that in the original assessment the AO treated that amount

received on account of non-compete fees of Rs.10 crores as revenue

receipt by treating it benefit to the company out of carrying out of the

business and the AO has also considered the same in the computation of

Page 79 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 income as well as calculation of deduction under section 80HHC and

therefore, the view taken by the AO amounts to change of opinion because

on the similar facts available on record the AO has arrived at different

conclusion. The CIT (A) further observed that notice under section 148 of

the Act cannot be issued on the issue which the Assessing Officer has

already decided and subsequently also decided by the CIT (A) because the

assessment order is merged with the order of CIT (A) against which appeal

can be filed before Tribunal. The CIT (A) further observed that the Hon’ble

Gujarat High Court in Appeal No. 800 of 2013 vide order dated 16.07.2016

in appellant`s own case held that non-compete fees is a capital receipt,

therefore, allowing of deduction under section 80HHC of the Act becomes

matter of academic discussion. In view of this, the CIT (A) held that the AO

reopened assessment on same set of facts as available on record and on

account of principle of merger and moreover, in view of the judgement of

Hon’ble Gujarat High Court, this amounts to change of opinion, hence,

reopening of assessment u/s.147 is not as per law. As the re-opening

assessment has not been found as per law therefore, other grounds of

appeal the appellant were not adjudicated. 178. Being aggrieved, the Revenue has filed this appeal before the

Tribunal. The learned D.R. supported the order of the AO. It was

Page 80 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 contended that the CIT (A) has failed to consider the legal position brought

by the AO in his remand report based on various judgements. The AO in

original assessment treated the non-compete fees as revenue receipt but

he did not discuss in the assessment whether the non-compete fees

received be treated as income derived from business and can be treated

as income attributable to the carrying out of the business. 179. Per contra, the learned counsel for the assessee submitted that the

AO has duly considered the issue in the original assessment by treating the

amount received on account of non-compete fees of Rs. 10 crores as

revenue receipt being a benefit to the company out of carrying out of the

business, and the AO has also considered the same in the computation of

income as well as calculation of deduction under section 80HHC and

therefore, the view taken by the AO amounts to change of opinion because

on the similar set of facts as available on record, the AO has arrived at

different conclusion as arrived by the preceding AO. The learned counsel

for the assessee further submitted that notice under section 148 of the Act

cannot be issued on the issue which the AO has already decided and

subsequently also decided by the CIT (A) because the assessment order has

been merged with the order of CIT (A) against which appeal can be filed

before Tribunal. Further, the Hon’ble Gujarat High Court in Appeal No. 800

Page 81 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 of 2013 vide order dated 16.07.2016 in appellant`s own case held that non-

compete fees is a capital receipt, therefore, allowing of deduction under

section 80HHC of the Act becomes matter of academic discussion.

Therefore, relying on the decision of CIT (A) submitted that CIT (A) has

rightly decided the issue in favour of the assessee. 180. Per contra, learned CIT(D.R.) relied on the AO. 181. We have heard the rival submissions and perused the relevant material on record. We find that the original assessment was made by the

AO by treating the amount received on account of non-compete fees of

Rs.10 crores as revenue receipt being a benefit to the company out of

carrying out of the business and the AO has also considered the same in the

computation of income as well as calculation of deduction under section

80HHC and therefore, the view taken by the AO amounts to change of

opinion, because on the similar set facts were already available on record.

Thus, the AO has arrived at different conclusion as arrived at by the

preceding AO. Further, the notice under section 148 of the Act cannot be

issued on the issue, which the AO has already been decided, and the CIT

(A) subsequently decided said issue. Therefore, said assessment order has

been merged with the order of CIT (A). Our view, is further fortified by the

decision of ACIT v Rajesh Jhaveri Stock Brokers (P) Ltd. [2007] 291 ITR 500

Page 82 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 (SC) and also for the decision of Hon`ble Supreme Court in the case of CIT

vs. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312(SC) held

that where no new material come to notice of the AO after completion of

assessment and assessment has been reopened on the basis of same

material is not permissible. We also notice that the Hon’ble Gujarat High

Court in Appeal No. 800 of 2013 vide order dated 16.07.2016 in appellant`s

own case has treated the non-compete fees as capital receipt. Therefore,

the issue has been covered against the Revenue by the decision of Hon’ble Gujarat High Court. In view of this matter, we do not find any infirmity in

the order of CIT (A), accordingly, same is upheld. Therefore, all the

grounds of appeal of revenue ae dismissed. 182. In the result, the appeal of the Revenue is dismissed. 183. In the result, appeal of the assessee in I.T.A.No. 1671/Ahd/2006 and appeal of Revenue in I.T.A.No. 1371/Ahd/2006 for A.Y. 2002-03 are partly

allowed and Cross Objection No. 184/Ahd/2006 for A.Y. 2002-03 by the

assessee is dismissed. The Appeal of the assessee in I.T.A.No.

1672/Ahd/2006 and appeal of Revenue in I.T.A.No. 1764/Ahd/2006 for the

A.Y. 2003-04 are partly allowed. The Appeal of the assessee in I.T.A.No.

1000/Ahd/2016 for A.Y. 2002-03 is allowed and appeal of the Revenue in

I.T.A.No.3510/Ahd/2016 for A.Y. 2000-01 is dismissed.

Page 83 of 83 Mitsu Ltd. v. ACIT- Vapi/I.T.A. No.1671-1371,CO-184,1672-1764,1614 &1000/AHD/2006/A.Y.02-03,03-04,06-07.02-03 184. This order is pronounced by listing the case on the Notice Board of Tribunal under proviso to Rule 34(4) of Income Tax Appellate Tribunal Rules

1963.

Sd/- Sd/- (SANDEEP GOSAIN) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat: Dated: 4th May, 2020/opm Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/ Guard file of ITAT. By order // TRUE COPY // Assistant Registrar, Surat