DCIT, NEW DELHI vs. M/S. XEROX INDIA LTD., NEW DELHI

5. Before us Ld. Counsel for the assessee, Mr. Ajay Wadhwa after narrating the entire facts and background of the case, submitted that in the earlier year also this issue had come up where the assessee has itself has disallowed the bonus amounting to Rs. 35,93,232/- u/s 43B in its computation and in the scrutiny assessment proceedings AO has disallowed the bonus of Rs. 1,06,51,114/- which included the disallowance made by the assessee also. Ld. CIT(A) had sustained the disallowance amounting to Rs. 86,10,251/-, so additional disallowance of bonus after reducing the disallowance made by the assessee worked out to Rs. 50,17,019/-. In this year assessee has paid bonus of Rs. 53,27,950/-. Since the earlier disallowance offered by the assessee due to non-payment in the A.Y.1997-98 has been claimed by the assessee in this year as the same was paid in the A.Y. 1998-99, therefore, there cannot be any dispute that the payment of bonus of Rs.53,27,950/- has been made during the year. Here the disallowance has been made by the Ld. CIT(A) on the ground that it is 3 incentive bonus. He submitted that the bonus is covered u/s 43B(c) which covered u/s 36(1)(ii). From the plain reading of the same, it is clear that nowhere section 36(1)(ii) envisages that performance related bonus are to be excluded. He also referred to various decision wherein it has been held that such kind of bonus is allowable u/s 36(1)(ii) read with section 43B the list of such judgments relied upon by him are as under :- i. Hon’ble Bombay High Court in the case of Sesa Goa Ltd. (2009) 316 ITR 399; ii. Hon’ble Kerala High Court in the case of CIT v. P. Alikunju (1987) 166 ITR 611; iii. Hon’ble Madras High Court in the case of CIT vs. D. Mohamed Ismail (1997) 227 ITR 211 (Madras); iv. Hon’ble Kerala High Court in the case of CIT vs. Travancore Titanium Products Ltd. (1993) 203 ITR 714 (Kerala).

6. On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT(A).

7. After considering the rival submissions and on perusal of the relevant finding from the impugned order, we find that in the first round the subject matter of disallowance was, whether the assessee can make such a claim during the course of assessment proceedings or not and the matter was set aside by the Tribunal to the AO to examine the claim of the assessee on merits. AO has again disallowed the claim of payment of bonus u/s 43B precisely on the same ground that it was not claimed by the assessee in the return of income, which was in complete disregard to the direction of the Tribunal. There is no dispute that such a payment of bonus amounting to Rs. 53,27,950/- has been made during the year and the same has been claimed u/s 43B. Before the Ld. CIT(A) in the remand proceedings the AO has stated that assessee has not furnished any vouchers, bills, details of mode of payment, details of employees to whom such bonus was paid which was in the nature of “customers satisfaction management survey bonus”. But before the CIT(A) the assessee has complete details of payment including details of vouchers dates of payment in regard to the amount of bonus which was filed before the AO which runs into hundreds of documents. All these facts have been noted by the Ld. CIT(A) in para 3.2.8. However, he Ld. CIT(A) without disputing the nature of details filed, held that the bonus paid by the assessee is not bonus payable under the ‘Bonus Act 1965’ and since it is a performance related incentive payable as per HR policy, therefore, same is not covered u/s 43B. Such a reasoning given by the Ld. CIT(A) is incorrect, because section 43B(c) only mentions that, “any sum referred to any clause (ii) of sub section (1) of section 36”. The said provision of Section 36(1) (ii) reads as under: - “36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- ......... (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.”

8. Ergo, there is no condition that the sum paid as a bonus to the employee for services rendered cannot be performance related. The only limitation is that such sum was not payable to him as a profit or dividend, that is, payment of bonus should not be in the nature of profit or dividend of the company. If assessee has been paying bonus from last several years which is given to the employee in the form of customer satisfaction bonus or linked to any performance based, then also such a bonus is allowable as deduction u/s 36(1)(ii). This precise issue has been dealt with the Bombay High Court in the case of Sesa Goa Ltd.(supra). Nowhere it has been the case of the department that these were linked with the profit of the business. But it was a matter of certain customary practice adopted by the company to give performance-based bonus to the employees. Thus, the reason for making a disallowance of the Ld. CIT(A) cannot be sustained and same is directed to the deleted. In the result ground No. 3 to 3.2 is allowed.

9. In so far as disallowance of sales tax payment is concerned, the same has not been pressed as raised in ground No. 4 to 4.2, therefore, the same is dismissed as not pressed.

10. Coming to the issue of disallowance of foreign travelling expenses the Tribunal has set aside this issue to the file of the AO after disallowing and holding as under: - “14.3 We have considered the facts of the case and rival submissions. We have also considered the submissions of the Ld. Counsel that provision made in this year was reversed in the next year and only the actual expenditure was claimed, which is a practice followed by the assessee consistently over a period of time. However, we find that the Tribunal had restored the matter to the file of AO in the order for A.Y. 1997-98. Since, a view has been taken in the matter already by a coordinate Bench, it would be in order that the same is followed. Therefore, we restore the matter to the file of the AO for fresh adjudication in the light of the facts available on record.”

11. AO has made the disallowance of Rs. 3.25 crores for the reasons of non-furnishing of complete details relating to foreign and inland travel expenses. Before the Ld. CIT(A) assessee filed additional evidences stating that the AO has asked to furnish each and every detail and since the matter was more than 14-year-old, therefore, it is not possible for the company to locate records relating to travel undertaken by its employees. Apart from that, management of the company has also changed hands and even officers looking after this matter has been changed on at least three to four occasions. Thus, after lot of efforts each and every voucher relating to travel and contest expenses have been located and was filed before the Ld. CIT(A). These evidences were sent to the AO to submit his remand report. However, the AO held that despite various opportunities to the assessee these details were not furnished therefore additional evidences may not admitted. In response, the assessee has given a detailed reply which has been incorporated by the Ld. CIT(A) from pages 12 to 17. However, the Ld. CIT(A) too has not admitted the additional evidence and rejected the assessee’s entire submissions.

12. Before us Ld. Counsel for the assessee submitted that the assessee incurred expenditure of Rs. 11,44,47,444/- on foreign and in-land travels. The expenditure included provision of Rs. 12.08 lakh in respect of in-land travels and Rs. 2,67,63,000/- relating to foreign travels. As per the assessee company, it had evolved "Grand Slam" scheme as an incentive to the employees. The scheme was floated to motivate the employees to achieve their sale targets and the employees who fulfilled the targets were permitted to take their spouses with them therefore, the expenditure was incurred for the purpose of business. Regarding provision, the assessee was following the practice of making provision in respect of travelling expenses calculated on the basis of advances given to the employees. The provision was made in 7 respect of journeys which had already been performed but their bills and supporting evidence for travel were received in the subsequent assessment year. The provision is thus an expenditure which was entered in the Profit and Loss account for the year. This provision made was reversed in toto to the last rupee in the subsequent assessment year. Hence on reversal of the provision, the profit of the company was increased to the extent of the reversed amount. The net effect of this transaction is that the expense booked in the last year is taken as income in the subsequent year. The expenditure claim is therefore, allowable in the year in which the provision is made and the same provision becomes the income in the subsequent assessment year when it is reversed. Hence, between FY 1997-98 and FY 1998-99, the expense was reversed and taken as income. In this manner, there is tax neutrality. To reiterate, he submitted that the provision disallowed by the Id. Assessing Officer has been reversed and treated as income on 31.12.1998. Evidence in support has been enclosed in the paper book showing that a sum of Rs.2,67,63,000/- towards foreign travel provision was reversed by crediting GL Code G4120601vide voucher No. J-124403 dt.31/12/1998. Similarly, provision towards inland travel was also reversed by a sum of Rs. 12,02,000/- by crediting GL Code G4060401vide voucher No. J- 40927 dt.25/04/1998. After having reversed the provision in the subsequent year, the assessee accounted for foreign travel expenses for which the bills had been received and were finally approved by the management. In respect of A.Y. 1998-99, Ld. Counsel pointed out that the provision for foreign travel expenses made on 31.12.1997 which was Rs. 2,67,63,000/- and Rs. 12,02,000/- for inland travel made on 31.03.1998. Further this provision was reversed on 25.04.1998 for inland travel and on 31.12.1998 for foreign travel; and during the F.Y. 1998-99, expenses of Rs. 2,07,08,476/- for foreign travel and Rs.

12,30,609/- for inland travel were incurred and booked and claimed against the said provisions of Rs. 2,67,63,000/- for foreign travel and Rs. 12,02,000/- for inland travel. As a matter of accounting practice, this policy has been followed by the assessee company from the beginning, claim of which stood allowed in previous years also. Therefore, he submitted that the issue is purely legal in nature and relates to the assessee's method of consistency i.e. making a provision for travelling expenses which is reversed in subsequent assessment year which is completely tax neutral.

of Rs. 13407168/- and contest expenses was , (ii) Interest u/s restored) 2 3 4 B of Rs.7353688/- and (iii) Interest u/s 220(2) of 27-Sep- Demand raised in Order Demand of Rs. 2 , 2 1 , 6 1 , 9 2 6 / - 2011 u/s 251/143(3) dt.30-Nov- 4 , 3 0 , 7 8 , 7 7 / 6 09 was paid on various - was paid to the 1 , 8 4 , 1 7 , 6 9 4 / - 20-Feb- dates from various year's extent of 2012 refunds Rs.4,25,95,034/- 2 0 , 1 5 , 4 1 4 / - 20-Oct- From the above it is seen that the demand which has been finally sustained is much more than the demand which was sustained by the Tribunal in the first round which should have been much lower as substantial relief was granted. Therefore, there cannot be any issue of levy of interest u/s 220(2) from the original date of first assessment order. Accordingly, the AO is directed to compute the interest u/s 220(2) from the date of demand notice issued by him after the expiry of 30 days of 30th November, 2011; and after giving effect to this order considering the additions which have been deleted in the earlier paragraphs.

IT A No. 2895/Del/2013 (A.Y. 2006-07)

2.1 That the CIT(A) has erred in law and in facts in overlooking the fact that the royalty on sales paid by the appellant is towards (i) grant of license, (ii) furnishing of improvements, (Hi) provision of technical assistance; and not towards use of trademark. 2.2 The Ld CIT(A) has erred in law and on facts in not appreciating the fact that there is no royalty attributable to trademark at all. Hence the disallowance made is on a mistaken belief which is not sustainable in law. 2.3 The Ld. CIT(A) has erred in facts, in believing that assessee has himself claimed that royalty to the extent of 20% may be attributed towards use of trade mark.

either before or during the course of hearing.”

21. In assessment year 2006-07 cross appeal has been filed by the assessee as well as by the assessee also which is .

1. The order of the Ld. CIT (A) is not correct in law and facts.

2. On the facts and circumstances of the case as well as in law the Ld. CIT (A) has erred in deleting the addition of Rs.27,55,467/- made by AO on account of retrenchment of certain personnel/severances as the assessee was under no obligation to make any payment. 14

3. On the facts and circumstances of the case as well as in law the Ld. CIT (A) has erred in not appreciating that there was no admissibility of expenses to employees working under contractors either u/s 37 of IT Act, 1961 or under any other provision of the Act.

4. On the facts and circumstances of the case as well as in law the Ld. CIT (A) has erred in giving direction to treat the 80% of total expenditure on account of royalty as revenue expenditure despite had enduring benefit as long as business continued. 5. On the facts and circumstances of the case as well as in law the Ld. CIT(A) has erred in giving direction to allow depreciation on 20% of the royalty expenditure despite no asset was created even after payment of royalty. 6. On the facts and circumstances of the case as well as in law the Ld. C1T (A) has erred in giving direction to allow depreciation on the assets discarded despite the assessee failed to identify such assets. 7. The appellant craves leave to add, amend any / all of the grounds of appeal before or during the course of the hearing of the appeal”.

23. In so far as the ground No. 2 and 3 of revenue’s appeal is concerned, i.e., disallowance of compensation of employees, AO has disallowed the expenditure on the ground that assessee company was under no contractual obligation to make the payment of retrenchment to the employees who were not in an employment at the time of payment as they were the employees of the contractors and assessee company has no contract with its employees in respect of this payment. Lastly, such expenditure cannot be allowed u/s 37. Ld. CIT(A) has deleted the disallowance after considering the additional evidence in the form of bills/invoices raised by the contractors and assessee seeking payment of retrenchment compensation for the employees and such additional evidence was also confronted to the AO from which AO has also submitted the remand report. The AO’s contention in the remand report has been that there was no necessity that the assessee company was under legal obligation to make such payment, therefore, there is no necessity to peruse the bills / vouchers. The assessee has filed submissions before the Ld. CIT(A) the sums and substance of which reads as under: - i) The assessee had taken a number of persons on contractual basis from the contractors. Their salaries and social security dues were paid by the contractor who in turn used to raise monthly bills on the company for placing the service of manpower with the assessee. (ii) During the impugned assessment year, services of some such workers were discontinued. The contractors brought to the notice of the assessee that they have to incur cost towards full and final settlement of such employees along with severance cost such as retrenchment compensation, leave encashment, gratuity etc. (iii) According to the assessee, the payment had to be 'made to safeguard the interest of the company and to avoid any dispute with the employees. (iv) The assessee sought an advice from a senior Advocate of Hon'ble Supreme Court of India who opined as under: - "Considering the totality of facts and circumstances, it is not advisable to have "Off Roll" employees through OSP arrangement as is presently there it is also relevant to notice that these “Off Roll" .employees are at the premises of XMC for the full day and work shoulder to shoulder along with regular employees of XMC The working hours, leave, off day, Email ID, lunch arrangement etc. are same and similar for Off Roll persons as well as regular employees of XMC These "Off Roll" employees virtually get Instructions and are in the supervision and control of the executives of XMC In such circumstances, If the issue is tested before the Court, there is good possibility of the finding being that they are In fact the employ XMC. The terminology of "Off Roll" employee is wholly unwanted and unjustified. There is no concept of Off Roll employees In employment laws applicable in the country. In law these persons are contract labour and covered by the CL Act". (v) Hence, according to the assessee, the factum of manpower provided 'by the contract stood established; services were rendered by the said manpower; the services were terminated by the assessee; the workers raised invoices on the contractor clamming retrenchment compensation; the contractor in turn claimed the retrenchment compensation from the assessee by raising invoices; the assessee accepted the invoices raised by the contractor and paid the retrenchment compensation and, therefore, the payment was wholly and exclusively for the purpose of business.

(vi) The assessee further submitted that there is a direct nexus between the compensation paid to the contractor with the business of the "assessee since "the workers were wholly and exclusively working for the assessee.

(vii) The assessee also submitted that there is no necessity of making payment pursuant to written agreement as the invoice /bill duly accepted constitutes a legal valid agreement and the payment made thereto ought to be allowed.

i. That the assessee made the payment of royalty towards use of Trade mark and therefore, Ld. AO disallowed the expenditure. ii. As per Ld. AO, the assessee company was solely dependent on parent company for any technical inputs, manufacturing technology and supplies from parent company. iii. When there is a sale of products in any category, the parent company had a claim of its share in profits by way of royalty which was embedded in sales. iv. Decision of Hon'ble Supreme Court in the case of Southern Switchgear Ltd (supra) not in favour of the assessee. v. No asset was created after payment of royalty therefore no depreciation is allowable. vi. No TDS was deducted u/s 40(a) (ia).

Standard bought-out components shall mean uch components as are available in India and which are not specifically made for XMC manufactured Licensed Products, Parts and consumable.”

Thus, determination of amount of royalty was linked with the sale of licensed products and was directly linked with the amount of turnover.

expenditure. As a result, the orders of the authorities below were to be set aside.” b. Hon'ble Delhi High Court in the case of CIT v. Sharda Motor Industrial Ltd. wherein it was held that:- "7. Learned counsel for the Revenue submits that the Tribunal has not considered the effect of the judgment of the Supreme Court in Southern Switch Gear Ltd. v. CIT [199B} 232 ITR 359, inasmuch as in that case the payment or royalty was treated as capital expenditure. However, what is glossed over is that under the terms of the agreement in that case/ the assessee company therein had agreed to pay the foreign company lump sum of royalty and it was in these circumstances the same was treated as capital expenditure and the Tribunal had disallowed 25 per cent thereof. In the present case/ as pointed out above/royalty is to be paid on the quantity of the goods produced, calculating per piece of the said goods produced. Therefore/ the Tribunal rightly held that the aforesaid judgment is not applicable to the facts of the present case.” c. Hon'ble Delhi Court in the case of CIT v. G4S Securities System (India) P. Ltd. [2011] 338 ITR 46 (Delhi), wherein it was held that: - ''Held that the ownership rights of the trade mark and know-how throughout vested with 'G' and on the expiration or termination of the agreement, the assessee was to return all know-how obtained by it under the agreement. The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time/ the assessee was entitled to become the exclusive owner of the technical know-how and the trade mark. Hence the expenditure incurred by the assessee as royalty was revenue expenditure and was therefore deductible under section 37(1). d. Hon'ble Delhi ITAT in the case of [2014] 32 ITR (T) 31 (Delhi - Trib.) has followed the judgement of Climate Systems India Ltd. (supra) and held as under: "12. We have heard the rival submissions of both parties and have gone through the material available on record. We find that as per various clauses of the licence agreement the assessee was to pay at the time of entering into the agreement certain amounts to cover equipment and training and further it was required to pay a regular annual royalty on all domestic sales which was to be calculated on the basis of turnover. The learned Commissioner of Income-tax (Appeals) therefore has rightly held the payment to be of revenue nature and has rightly allowed the relief. The hon'ble Deihi High Court in the case law of Climate Systems India Ltd. (supra) under similar facts and circumstances has held as under: ''Held, allowing the appeal, that under the agreement payments were to be made by the assessee in two parts: a lump sum fee for transfer of technology (which the assessee had admitted as being of capital nature) and royalty payment in consideration of providing technology services. The payment of royalty depended on the quantum of domestic as well as export sales which would decrease or increase every year depending upon the decrease or increase in the sales. This payment was not because of 'transfer' of technology but for providing technical services. In such circumstances, the payment of royalty which was a continuous process, should have been treated as revenue expenditure. "

13. Therefore, relying upon the judgment of the hon'ble Delhi High Court and on the basis of facts and circumstances of the case we do not find any infirmity in the order of the learned Commissioner

of Income-tax (Appeals). Therefore, ground No. 1of appeal is dismissed. "