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PER PAWAN SINGH, JUDICIAL MEMBER: 1. These cross appeal under section 253 of the Income-tax Act (the Act) are directed against the order of ld. Commissioner of Income Tax (Appeals)-III [the CIT(A)], Mumbai dated 21.12.2006 for the Assessment Year 2002-03.
The Revenue in its appeal has raised the following grounds of appeal: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO not to treat the payment of Rs. 50 lacs paid to Mr. Arjun Sharma as non compete fees as capital expenditure but to allow the amount of Rs. 25 lack out of the same as a deduction in A.Y. 2002-03 as a revenue expenditure and the remaining amount of Rs. 25 lacs to be allowed in A.Y. 2003-04 and to withdraw the depreciation of Rs. 6,25,00/1- on the same". 2. "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow the deduction u/s 80HHD on the amount of Rs. 38,02,104/- being the income earned by the appellant from the training fees without appreciating the fact that words "derived from" should be a immediate source and not source of the source and since the above income is not derived from the services provided to the foreign tourist, assessee is not entitled for deduction u/s 80HHD in respect of these receipts". 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow deduction u/s 80HHD on retention money written back amounting to Rs. 10,74,050/- without appreciating the fact that that words "derived from" should be a immediate source and not source of source and since the above income
2. ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. are not derived from services provided to the foreign tourist, assessee is not entitled for deduction u/s 80HHD in respect of these receipts". 4. "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow the deduction u/s 80HHD in respect of gains from foreign exchange fluctuation amounting to Rs.1,85,88,507/- without appreciating the fact that foreign exchange fluctuation gain received by the assessee does not emanate from the services provided by the assessee to the foreign tourist". 5. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to re-compute the deduction allowable u/s 80HHD after excluding the receipts of Rs. 31,30,99,313/- passed on by the assessee to other hotels and travel agents from the total receipts in respect of which the assessee issued certificate in Form No. 10CCAE to the recipient to enable him to claim the deduction u/s 80HHD without appreciating the fact that to work out the proportionate amount correctly, both the numerator and denominator should be found out on a uniform basis and when the AO excluded the receipts passed on by the assessee to the hotels and travel agents from the numerator in formula given in section 80HHD(3). Therefore, these receipts are also required to be excluded from the denominator i.e. the total receipts of the business to work out proper deduction u/s 8OHHD." 6. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to exclude the receipts of Rs. 66,39,877/- from the total receipts of the business while computing the deduction allowable u/s 8OHHD without appreciating that these amounts realized after 31.09.2002 for not entering the numerator i.e. the receipts earned by the assessee from the rendering of the service to the foreign tourist. Therefore, these receipts would also not enter the denominator in the formula to work out deduction u/s 8OHHD properly".
& 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.
7. "The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored." 2. The assessee in its cross appeal has raised the following grounds of appeal: 1) Non-Compete fees - Rs. 1,00,00,000/-. (a) The Ld. CIT (A) erred in law and facts in upholding the non compete fees of Rs. 50,00,000/- paid to Ms. Anita Shirodkar as capital expenditure and disallowing the same as revenue expenses u/s 37 of the Act. The reasons given by him are contrary to the facts of the case and against provision of law. (b) The Ld. CIT (A) erred in law and facts in upholding the non- compete fees of Rs. 50,00,000/- paid to Mr. Arjun Sharma as expenditure for enduring benefit and allowing deduction in 2 years as tenure of agreement is two years. The reasons given by him are contrary to the facts of the case and against provision of law. (c) The Ld. CIT (A) failed to appreciate that the disallowance of Rs. 1,00,00,000/- paid to company's employee and employee of a brand acquired by the appellant being non compete fees paid to protect the business from competition and run the business smoothly and claimed by the assessee u/s 37(1) being incurred wholly and exclusively for the business of the appellant. (d) The Ld. CIT (A) ought to have allowed compensation of Rs. 1,00,00,000/- for not competing in the business as revenue expense. The expenditure did not result in the acquisition of any asset nor enduring benefit to the assessee as it is not for elimination of competition but non compete for a short period. 2) License Fees - Rs.1 ,05,00,000/-: (a) The Ld. CIT (A) erred in law and facts in upholding the disallowance of Rs Rs. 1,05,00,000/- being license fees paid for use of the brand name. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.
& 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.
(b) The Ld CIT (A) failed to appreciate that the income out of use of the brand name has been offered to tax. Hence the license fees paid to earn such income is allowable u/s. 37 (1) of the Act. (c) The Ld. CIT (A) ought to have allowed license fees paid for Rs. 1,05,00,000/- paid for the use of trade mark for a certain period of time. The Tour club brand has enabled it to enter new markets overseas (Middle East) and enhance its income and hence license fees are fully allowed u/s 37(1) of the Act. 3) Utilization of Reserve Rs. 88,37,9571-: (a) The Ld CIT (A) erred in law and facts in upholding the disallowance of utilization of Tourism Reserve Rs. 88,37,957/- utilized in accordance with the conditions laid down in Sec. 80HHD (4) (b) of the Act as per Sub Section (5) of the Section 80HHD. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. (b) The Ld CIT (A) failed to appreciate the fact that amount of Rs. 78,01,588/- incurred for acquisition of New Cars as promoted in Sub Sec. 4 (b) of 80HHD and Rs. 10,36,369/- incurred on RTO Taxes, paid for all cars/coaches acquired by the assessee which is part of acquisition cost and to bring asset to its intended use. (c) The Ld CIT (A) has not properly construed the provisions of law in rejecting utilization of Tourism Reserve u/s. 80HHD(4)(b) of the Act even though the conditions laid down in the said sections are fully satisfied by the appellant. (d) The Ld CIT (A) also erred in law & facts for upholding and not discussing to add the amount disallowed as above, under the head of 'Profit & Gains of Business' in calculating the deduction u/s 80HHD. This is contrary to the provisions of the Act since Section 80HHD(5), which provides that amount, not so utilized, shall be deemed to be the profits of the previous year in which not utilised. Hence, the amount of Rs. 88,37,957/- should be eligible to be included in 'Profits and Gains of Business' for calculation of deduction u/s 80HHD.
& 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.
4) Deduction u/s 80HHD : (i) The Ld CIT (A) erred in law and facts in upholding that the Interest Income of Rs. 3,61,62,504/- inextricably linked with the business of the assessee is not eligible for deduction u/s.80HHD. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. (ii) The Ld. CIT (A) failed to appreciate the fact that the interest income is part of business income and assessed accordingly by the Ld. A.O. and accepted by Id. CIT (A) during the year and was accepted as business income for allowing deduction u/s 80HHD of the Act by Hon. ITAT in earlier years in assessee's own case. (iii) The Ld. CIT (A) has erred in law and facts in not passing order on Ground No. 3(d) of the Appeal. The Id. CIT (A) ought to have added Rs. 88,37,957/- to the profit of the business for computation of deduction u/s 80HHD of the Act being uitlisation of Reserve not accepted 1 disallowed u/s 80HHD(5) of the Act and added to the profit & gains of business. 5) Disallowance u/s. 14 A : (i) The Ld CIT (A) erred in law and facts in upholding the disallowance of Rs.21,62,346/- being proportionate of Head Office Expenses Rs. 6,45,974/- and fees paid for Management consultancy Services Rs.15,16,372/, u/s 14A of the Act, on the estimated basis. The reasons given by him for doing so are wrong and contrary to the facts of the case and against the provisions of law. The disallowance is made without any basis, evidence of expenses being incurred for earning tax- free income. (ii) The Ld. CIT (A) failed to appreciate the fact that these expenses are not incurred in relating to income not forming part of the taxable income and disallowance u/s 14A cannot be made on estimated, adhoc and arbitrary basis. These expenses were incurred wholly and exclusively for the business of the appellant hence the disallowance required to be deleted. 6 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.
Brief facts of the case are that the assessee-company is engaged in the business of Tour Operator and Travel agent, filed its return of income for relevant AY on 28.12.2002 declaring total income of Rs. 12,13,39,305/-.
Subsequently, a revised return was filed on 30.03.2004 declaring total income of Rs. 11,75,79,781/-. In the revised return, the assessee claimed the deduction of Rs. 6,89,17,108/- under section 80HHD. The assessment was completed on 17.03.2005 under section 143(3) of the Act. The Assessing Officer (AO) while framing the assessment order made the addition of Rs.1,00,00,00/- by disallowing the amount of compensation to paid on account of non-compete fees (Rs. 50lacks each to Smt.Anita Sirodkar and Arjun Sharma), disallowed Rs. 1,05,00,000/- on account of license fees holding that expenditure not eligible for deduction. Disallowance u/s 14A of Rs.21,62,346/-, disallowed Rs. 88,37,957 on account of un-utilization of reserve u/s 80HHD and the deduction u/s 80HHD (i) interest income on deposit Rs.3,61,62,504/-,(ii) disallowed Rs. 38,02,104/- on account of training (iii) retention money written back of Rs. 10,74,050/-.
On appeal before the ld. CIT(A) the addition on account of non-compete fee of Rs. 50,00,000/- paid to Anita Sirodkar was sustained, however for payment to Anil Sharma it was allowed for 50% and withdrew the depreciation, sustained the additions of license fees of Rs. 1,05,00,000/- and disallowance of un-utilized reserve of Rs. 88,37,957/- of 80HHD, Interest Income of RS. 3,61,62,504/- (claimed u/s 80HHD) and disallowance u/s 14A. However, the & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. part of disallowance under section 80HHD of Rs.38,02,104/- on account of training and retention money written back of Rs. 10,74,050/- was deleted.
The ld CIT(A) also allowed gain on Foreign Exchange Fluctuation for Rs. 1,85,88,507/- which was not considered by AO for eligible receipt and further directed the AO for to re-computing the receipt of Rs. 31,30,99,313/- received from Hotels and operators and Rs.66,39,877/- Thus, further aggrieved by the order of ld. CIT(A), the assessee as well as Revenue has filed their cross appeal before us raising their grounds of appeal which we have referred above.
ITA No.2075/M/2007 by assessee 5. We have heard Sh. Percy J Pardiwala learned Sr Advocate for the assessee (ld AR) assisted by Ms. Jay Bhansali Advocate and the Ms Padmaja, ld. CIT- DR (‘ld DR’) assisted by Ms. Pooja Swaroop ld JCIT. First, we are taking the appeal filed by the assessee. Ground No. 1 relates to disallowance of payment of Non-Compete Fees. The ld. AR for the assessee argued that the assessee entered into agreement with Ms Anita Shirodkar and Arjun Sharma and paid Rs. 50 lakh each to both of them on account of non-compete fees. The assessee by way of agreement dated 30.06.201 has acquired the right to use the license name ‘Tour Club’ for a fixed period so that the assessee could exploit the Middle East market where the strength of brand lies. Smt. Anita was one of the Director of Tour Club Express Travel & Tour Pvt Ltd and the amount of Rs. 50 lacks was paid to her for not doing similar business for five & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. years. The assessee claimed the said expenditure allowable under section 37 of the Act. The assessing officer disallowed the entire payment made to Anita Sorodkar considered this as valuable business right which is tangible asset allowing the depreciation under section 32 of the Act. The learned Commissioner (Appeals) upheld the disallowance on the ground that it is enduring benefit to the assessee and therefore Capital in nature and cannot be allowed as deduction. The assessee also entered with the agreement with Arjun Sharma who was employee of Tour Club Express Travel & Tour Pvt. Ltd. and COO of its inbound division. This agreement put restriction on Anil Sharma for not carrying on the business in the area of Destination Management Services for two years and paid Rs. 50 lakh. The assessing officer disallowed holding that it is a capital expenditure and assessee would be entitled for depreciation. The AO further held that assessee entered into agreement with Arjun Sharma on 23rd of March 2002, appreciation is allowable only at the rate of 12.5%. However the Commissioner (Appeals) allowed it is non-capital in nature and allows deduction in two years i.e. Rs. 25 Lack for every year. The learned AR of the assessee argued that the fees were paid to both of them to restrain from business. The assessee has not acquired any asset by making such payment to both of them. In support his submission the learned AR of the assessee relied upon the decision of Hon’ble Delhi High Court in case of CIT versus Eicher Ltd. (302 ITR 249) (Delhi), CIT v/s Career Launcher India Ltd. (358 ITR 179 ) (Delhi ) and decision of ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. Tribunal in Hidelberg Cement India Ltd. v/s ACIT [2015] 55 taxmann.com 336(Mumbai Trib). It was further argued that learned Commissioner (Appeals) relied upon the decision of Bombay High Court in Taparia Tools Ltd Versus JCIT[2003] 260 ITR 102/126 Taxman 544 (Bombay) which has been reversed by Hon’ble Supreme Court vide [2015] 372 ITR 605(SC). On the other hand the ld. DR supported the order of Assessing Officer. It was argued that agreement entered by assessee with Anita Shirodkar provides benefits to the assessee, which is enduring in nature. However, for agreement with Arjun Sharma, it was argued that non-compete agreement with him is only in respect of destination management services and not for whole tour and travel business carried by Tour Club Express Travel and Tours Pvt. Ltd. The ld. CIT(A) wrongly allowed the expenditure as a revenue expenditure. The learned DR for the revenue relied upon the decision in Madras Industrial Investment Corporation Ltd v/s CIT [225 ITR 802(SC)] and decision of Bombay High Court in Taparia Tools Ltd. v/s JCIT(2003) 260 ITR 102(Bombay).
We have considered the rival submission of the parties and perused the material available on record. The AO treated the expenditure as capital expenditure holding that in the books of account, the assessee has shown the amount paid for non-compete fees for intangible asset. Right to restrain competitor is a valuable commercial asset. Further the amount spent on acquisition of intangible asset is to be treated as capital expenditure and & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. depreciation is allowable on such intangible asset, thus, the entire amount of Rs. 1,00,00,000/- was treated as Capital expenditure. Since agreement with Anita Shirodkar was executed on 30.06.2011, the depreciation was allowed @ 25%. However, the date of agreement with Arjun Sharma is 23.03.2002, hence, depreciation @ 12.5% was allowed. The ld. CIT(A) upheld the action of AO for payment of non-compete fee holding that it is giving enduring benefit to the assessee and therefore, capital in nature. For payment to Arjun Sharma, the ld. CIT(A) hold that non-competing fee was paid for two years and allowed deduction in two years i.e. 25,00,000/- every year. We have perused the non-compete agreement dated 30.06.2011 with Anita Shirodkar.
Smt. Anita Shirodkar is one of the Director of Tour Club Express Travel and Tours Pvt. Ltd. As per Article-3, Smt. Anita Shirodkar received an amount of Rs. 50,00,000/- on account of non-compete consideration. As per Article-2 of the Agreement, Smt. Anita Shirodkar Director of the Tour Club Express Travel and Tours Pvt. Ltd. agreed not to directly or indirectly shall not own, manage, establish, engaging, operate or cause to be operate, consult or be employed in a competitive business, engaged in marketing and distribution services or carry on the competitive business or solicit any customer or target to the customer. She also undertook not to undertake directly or indirectly undertake any competitive business through relatives. The payment of non- compete fees is not in dispute. The only dispute before us is if the said non- compete fee paid by assessee is capital or revenue expenditure. The Hon’ble & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. Delhi High Court in case of CIT vs. Eicher Ltd. (supra) while considering the issue of non-compete fee held that Whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is necessary to know whether the advantage derived by the payer is of an enduring nature, and for this, one of the considerations is the length of time for which the non-compete agreement would operate, although that is not decisive. While the length of time for which competition is eliminated may not strictly be decisive in all cases, yet, at the same time, it should not be so brief as to be virtually transitory. When the assessee did not acquire any capital asset by making the payment of non- compete fee. It merely eliminated competition in the two-wheeler business, for a while. From the record, it was not clear how long the restrictive covenant was to last, but it was neither permanent nor ephemeral. In that sense, the advantage was not of an enduring nature. There was also nothing to show that the amount of Rs. 4 crores was drawn out of the capital of the assessee. On a cumulative appreciation of the facts, it was clear that the Commissioner (Appeals) and the Tribunal did not err in concluding that the payment of non- compete fee by the assessee was a business expenditure and not a capital expenditure.
Further, the Hon’ble Delhi High Court in case of CIT Vs. Career Launcher India Ltd. (supra) while considering the substantial question of law whether Tribunal is correct in allowing non-compete fee of Rs. 5,40,000/- by assessee as a revenue expenditure solely on the basis of agreement period and mode of payment. The Hon’ble High Court passed the following order:
“It is necessary to keep the nature of the assessee's business in mind before judging the allowability by the payment. The assessee is engaged in the business of running learning centers for preparing/coaching students to face competitive examinations held by IIM, IIT, Institute of Information Technology, etc. In conducting the classes for the students, the assessee has to rely on faculty members of repute. 'V' and 'S' were such faculty, who were engaged by the assessee. It is also necessary for the assessee to ensure that the faculty members do not compete with its business because that would affect the business. It cannot be disputed that the popularity and success of the learning centers run by the assessee is in a large measure due to the efficiency, knowledge and reputation of the faculty members. If the faculty members leave the assessee and decide to set up their own learning centers, that is most certain to affect the assessee's business. It was, therefore, in the interest of the & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. assessee's business that it ensured that for some period of time, such faculty members do not compete with it in the same business. It is with this end in view that the assessee made the payment to 'V' and 'S'. The period for which these persons could not compete with the assessee has been found by the Tribunal to be a short period of 12 months. This is not an irrelevant consideration taken into account by the Tribunal. The fact that the payment was made in monthly instalments is not decisive of the question; even if it had been made in a lump sum, that would have made little difference to the conclusion, having regard to the short period of 12 months during which the above two persons were prohibited from competing with the assessee business. It cannot be disputed any more that payment to ward off competition for a limited period should be held to be revenue expenditure and not capital expenditure. If that is so, the fact that the payment was made in a lump sum or in instalments hardly matters. Therefore, in coming to the conclusion that the payment in questions was a revenue expenditure, the Tribunal has not ignored any relevant material or taken into account irrelevant material. The Tribunal was certainly entitled to take note of the entire conspectus of the facts of the case and in particular the period during which the faculty members were prohibited from competing with the assessee's business. Therefore, the Tribunal was justified in allowing the assessee's claim.
The Co-ordinate Bench of Tribunal in Hidelberg Cement India Ltd. vs. DCIT while considering the issue of non-compete fee paid to the Director whose services were terminated when management was taken over by company, restricting the Director from exercising competitive activities within specified territories for one year was allowed as revenue expenditure holding as under:
“We have heard the rival contentions and carefully perused the record. We notice that the learned Commissioner of Income-tax (Appeals) has upheld the addition on the following reasoning : (a) The prohibition imposed under article 5 covers territory of four countries., viz., India, Bangladesh, Pakistan and Afghanistan. By putting such a territorial restriction, the assessee has acquired business o countries which could have been carried on by Mr. Parasrampuria in these countries. (b) The non-compete fee of Rs. 80.88 lakhs was paid in lieu of article 8, which discusses about the confidential information.
& 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.
(c) As per clause 9, Mr. Parasrampuria is deprived of his entitlement to claim any rights over intellectual property, which constitute capital assets in terms of section 32 of the Act. However, a careful perusal of the "compromise settlement" would show that Mr. Parasrampuria was appointed as executive director of M/s. Indo-rama Cements Ltd. from April 1, 2001, onwards. His term of appointment was renewed from time to time and last renewal was to expire by March 31, 2009. Before the expiry of the time period cited above, he has been terminated from the service and hence, as per the employment contract, he was paid compensation of 400000 USD in lieu of notice. Further he was paid 100000 USD as bonus. Further, under clause 4, the company may utilise the services of Mr. Parasrampuria and for that purpose he shall be paid a compensation of 100000 USD on August 31, 2008, with the condition that the process of acquisition of shares of Indorama takes place smoothly. In addition to the above, Mr. Parasrampuria was paid 200000 USD as compensatory indemnity under article 5. The said article 5 reads as under: "In view of the international activities of the company, the executive director agrees that after termination of his employment with the company, he shall be prohibited, during the period and within the territory specified below, from exercising activities which could be in effective competition with the company during the prohibition period either by running a personal enterprise or by being hired by a competitor and having thus the opportunity to cause a prejudice to the company or its group by using for himself or for the profit of a competitor his knowledge of any practice specific to the company or its group which he has acquired during his employment with the company either directly or indirectly. The prohibition set forth above shall apply during a period of one (1) year as of the termination of his employment with the company and shall cover the following territory: India, Bangladesh, Pakistan and Afghanistan. As compensation for the enforcement of this clause, the executive director shall be granted a compensatory indemnity. The amount of this indemnity shall be equal to 200000 USD gross (two hundred thousand) corresponding to the period of effective enforcement of this non- competition clause. This sum will be in addition to the amounts payable under articles 2 and 3 above, and will be paid immediately upon signing this agreement." It can be noticed that it is clearly provided in the abovesaid clause that the compensation of 200000 USD is paid for enforcement of this clause. Hence, in our view, the conclusion reached by the tax authorities that the impugned compensation is also paid for enforcing clauses 8 and 9 does not appear to be correct. A careful reading of clause 8 would show that the said clause only provide that the payee should maintain all confidential information strictly confidential. As submitted by the learned authorised representative, this is an usual clause, which is normally incorporated in separation agreements. Even otherwise, it is expected from anybody that he should not divulge any confidential information, which was acquired or obtained during the course of employment.
& 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.
Under article 9, it is provided that all intellectual property in any work or material developed, discovered, invented, designed and/or authored by the executive director, either individually or in conjunction with any other employee/consultant of the company, during the course of his employment with the company, shall belong to and are the absolute property of the company. In our view, it may not be correct to presume that an employee working in a research organisation shall become owner of any intellectual property developed by the company by employing such a person. A careful reading of article 9 would show that the payee is precluded from making such a claim, for the reason that the said intellectual property is developed etc. during the course of his employment with the company. It is not the case that the payee himself has developed some intellectual property and the assessee-company has acquired the same. Hence, we are of the view that the learned Commissioner of Income-tax (Appeals) and the Assessing Officer were not right in taking the view that the assessee-company has paid the impugned compensation to acquire the intellectual property from the payee permanently. Such a view does not emanate from a careful reading of article 9. The territorial restriction prescribed in article 5, in our view, does not lead to a conclusion that Mr. Parasrampuria was carrying on any business in those area. On the contrary, he was only prohibited from exercising the activities prescribed in article 5 in those four countries. During the course of arguments, the learned authorised representative categorically submitted that the payee did not carry on business in those territories. Hence, in our view, the learned Commissioner of Income-tax (Appeals) has entertained the same only on surmises and presumptions. The foregoing discussions would show that all the three reasons cited by the learned Commissioner of Income-tax (Appeals) to confirm the addition has failed. We also notice that the period of prohibition/restriction is for a period of one year only. In our view, the period of one year cannot be considered as a long period which would give an enduring benefit to the assessee. Hence, we agree with the contentions of the learned authorised representative that the decision rendered by the hon'ble Delhi High Court in the case of Eicher Ltd. [2008] 302 ITR 249 (Delhi) shall be applicable to the instant case. Accordingly we hold that the assessee could not be said to have derived any enduring benefit out of the payment of non-compete fee as referred to above. Further, it is in the nature of restricting only one of the employees of the company that was taken over by the assessee-company.
Thus, considering the above legal position, when the payment was made for elimination of competition but for non-compete for short period and the assessee have not derived any enduring benefit and no new asset was added the payment of non-compete fee was in the nature of restricting Anita Shirodkar and Arjun Sharma in exercising their skill and experience in the similar field, cannot be treated as capital expenditure. The decision relied by & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. ld. DR for the Revenue in Taparia Tools Ltd. (supra) has been overruled by Hon’ble Supreme Court in Taparia Tools Ltd. vs. JCIT (372 ITR 605) and the decision of Madras Industrial Investment Corporation Ltd. v/s CIT [225 ITR 802(SC)] is not applicable on the facts of the present case as the said case relates to proportionate deduction spread over a period on discount of debenture. In the result, Ground No.1(a) to 1(d) of the appeal are allowed.
Ground No. 2 relates to disallowance of license fees of Rs. 1,05,00,000/-. The ld. AR of the assessee argued that assessee paid license fees to leverage its strength and to expand business activities in Middle East market for incoming customer to India. The assessee paid the license fee for expanding its existing business in regions outside India. The expenses incurred toward license fee for a limited period is a revenue in nature and allowable as business expenses under section 37. The sum of Rs. 1.00 Crore was paid for the use of “Tour Club Mark.” The copy of agreement is placed on record. The assessee has neither acquired any capital asset nor any enduring benefit. The license fee was paid for use of mark for getting new plants in the existing business. The AO disallowed holding as a valuable business right as intangible asset allowing depreciation. The ld. CIT(A) upheld the same without considering the relevant provision of law. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Bombay High Court in Alpha Laval India Ltd. vs. DCIT (266 ITR 418)and the decision of Hon’ble Apex Court in CIT vs. IAEC (Pumps) Ltd. (232 ITR 316). On the other hand, the ld. ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. DR for the Revenue supported the order of authorities below. The ld. DR argued that the assessee made the payment for use of brand for a period of 5½ years. The agreement for use of brand name stipulates that assessee can take over the brand at a price which was determined on the basis of profitability.
The payment for acquisition of brand is also an intangible asset. The ld. DR relied upon the decision of Hon’ble Supreme Court in Madras Industrial Investment Corpn. Ltd. vs. CIT(225 ITR 802).
We have considered the rival submission of the parties and have gone through the orders of authorities below. There is no dispute about the payment of Rs. 1,05,00,000/- paid to Tour Club Express Travel and Tours Pvt. Ltd. for use of their brand “Tour Club”. The lower authority treated the same as capital expenditure. The assessee entered into license agreement with Tour Club Express Travel and Tours Pvt. Ltd. on 30.06.2001. As per Article-9.7, the license was granted to use brand name for a period of 5 ½ years. The consideration of license is referred in Article-11 which was to be calculated in accordance with Schedule-6 (Page 115 & 116 of PB). The perusal of books of account reveals that the assessee has capitalized the aforesaid expenditure under the head “intangible asset” in the schedule of fixed asset (page 14 of PB). The assessee claimed entire expenditure under section 37 and no depreciation is claimed by assessee. The AO disallowed holding it that expenditure is incurred for intangible asset and therefore, constitute a capital expenditure, the assessee itself capitalized the expenditure as an intangible & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. asset in its books of account. Tour Club Express Travel &Tour Pvt. Ltd. had accounted as income proportionately over a period of 5 ½ years. The ld. CIT(A) confirmed the action of AO holding that the assessee has got absolute control over the brand name and only assessee has power to terminate the brand agreement. The consideration of payment of Rs. 1.05 crore made by assessee is not only for use of brand name but paid for acquiring absolute right on the brand name and that expenditure incurred on acquisition of brand name is capital in nature. The Hon’ble Apex Court in case of CIT vs. IAEC (Pumps) Ltd. (supra) held that license fee paid for use of patent and design was on revenue account. The fact of the said case was that under an agreement entered by assessee with a foreign company, the assessee was granted a license to use its patents and designs exclusively in India. The agreement was for duration of 10 years, with the parties having the option to extend or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by others. The Hon’ble Supreme Court in case of Devidas Vithaldas & Co. Vs. CIT (84 ITR 277) held that where expenditure is for acquisition of goodwill, expenditure is capital in nature, however, where expenditure is not for acquisition of goodwill but to use it, expenditure would be allowable as revenue expenditure. The decision relied by ld. DR in Madras Industrial Investment Corpn. Ltd. (supra) has been & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. considered by Hon’ble Supreme Court in case of Taparia Tools Ltd. vs. JCIT 9372 ITR 605). Wherein the Hon’ble Court has held that revenue expenditure incurred in a particular year is to be allowed in that year and the department cannot deny the same. It is only in case that assessee himself want to spread the expenditure over a period of ensuring year, it can be allowed to be spread over provided the principle of matching concept is satisfied. Thus, considering the above discussed factual and legal position, the expenditure incurred by assessee on a license fee is revenue expenditure. Hence, the ground no.2 raised by assessee is allowed.
Ground no.3 & part of ground no. 4(iii) (Rs. 88,37,957/-) relates to disallowance on account of Mis-utilization of Tourism Reserve with reference to section 80HHD(4) of the Act. The ld. AR of the assessee argued that the assessee has utilized the amount of reserve created in earlier year for the purpose of purchases of coaches and car. As per section 80HHD(4)(b), reserve can be utilized for purpose of purchase of new car and new coaches by Tour Operators. The AO disallowed holding that purchase of car and coaches are must be purchased for providing service to the Tourist and added Rs. 88,37,957/-. The ld. AR of the assessee fairly conceded that these issues are against the assessee in assessee’s own case for AY 2001-02 in ITA No. 5400- 5562/Mum/2005. The ld. DR not disputed the contention of the ld. AR of the assessee. Considering the submission of ld. AR of the assessee, the grounds of ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. appeal no.3 and part of ground no.4(iii) to the extent of Mis-utilization of Tourism Reserve is dismissed.
Ground no. 4(i) & 4(ii) relates to denial of deduction under section 80HHD of the Act in respect of interest income amounting to Rs. 3,61,62,504/-. The ld. AR of the assessee argued that similar ground of appeal
was raised by assessee for AY 2000-01 & 2001-02 and the Tribunal has restored back the similar ground to the file of AO. The ld. DR not disputed the contention of ld. AR of the assessee.
14. We have considered the submission of the parties and find that in assessee’s own case for AY 2000-01 & 2001-02 the single issue was restored to the file of AO to decide the claim in accordance with the order of special bench in case of Amway India Enterprises vs. DCIT (2008) 301 (AT) 1 (Del) (SB).
Thus, considering the decision of co-ordinate bench, both the part of this ground of appeal are restored back to the file of AO to decide the same in accordance with the decision of Tribunal inc assessee’s own case in 5400/M/2005 dated 23.02.2011. Thus, this ground of appeal is allowed for statistical purpose.
15. Ground no.5 relates to disallowance under section 14A of the Act of Rs. 21,62,346/-. The ld. AR of the assessee argued that during the year the assessee received dividend and interest on various investments. The investments were made out of own funds and not from borrowed fund. The AO accepted that assessee has sufficient fund. There was negligible allocation ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. in the nature of expenses incurred at Head Office level so far as time spent on earning such income. The AO disallowed Rs. 21,62,346/- under section 14A on estimated. Out of which Rs. 15,16,372/ relates to Management Consultancy Services and Rs. 6,45,974/- for Head Office Expenses . The ld. AR of the assessee argued that huge disallowance was liable to be deleted as the superior court and the Tribunal have taken a consistent view of restricting the disallowance under section 14A in such cases 1 to 2% of exempt income being a reasonable disallowance. On the other hand, the ld. DR for the Revenue supported the order of authorities below.
16. We have considered the submission of parties and have gone through the orders of authorities below. During the year, the assessee earned tax free interest of Rs. 14,70,365/- and dividend income of Rs. 1,70,61,528/-. Before the AO, the assessee contended that only direct expenses incurred for earning exempt income can be disallowed. The contention of assessee was not accepted by AO. The AO worked out the disallowance on the basis of apportionment in the ratio of exempt income to total receipt of assessee and from Head Office Expenses, the AO calculated disallowance of Rs. 21,62,346/-. The ld. CIT(A) confirmed the action of AO holding that disallowance is quite reasonable.
17. The Hon’ble Bombay High Court in Godrej & Boyee Mfg. Co. Ltd v. Dy.
CIT [2010] 194 Taxmann 203 (Bom) held that prior to assessment year 2008- 09, when rule 8D was not applicable, Assessing Officer had to enforce & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. provisions of sub-section (1) of section 14A and for that purpose, Assessing Officer was duty bound to determine expenditure which had been incurred in relation to income which did not form part of total income under Act by adopting a reasonable basis. Thus, considering the fact of the present case and the fact that prior to AY 2008-09 the Superior Courts and the Tribunal had taken a consistent view that prior to insertion of Rule 8D, a reasonable disallowance is sufficient to meet the requirement of section 14A. Hence, we direct the AO to restrict the disallowance @ 2% of the exempt income for disallowance under section 14A, for the year under consideration. Thus, this ground of appeal is partly allowed. by Revenue
18. Ground no.1 relates to partial deletion of disallowance of Non-Compete Fees paid to Arjun Sharma. We have noted that the assessee has also raised the similar ground of appeal in assessee’s appeal for partial sustaining the disallowance of Non-Compete Fees. We have already allowed the similar ground of appeal in favour of assessee granting full relief to the assessee holding that Non-Compete Fees paid to Arjun Sharma is revenue expenditure.
Hence, ground no.1 of appeal raised by revenue is dismissed. 19. Ground No.2 relates to deletion of addition in respect of training fees of Rs. 38,02,104/-.The ld. DR for the Revenue relied upon the order of AO. On the other hand, the ld. AR of the assessee argued that the training fees are derived in the course of business of Tour & Travels of the assessee and ought to be & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. considered for the purpose of deduction under section 80HHD of the Act.
Once, the AO treated the training fees as business income, it is not open for him to exclude the same while computing deduction under section 80HHD. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Bombay High Court in case of CIT vs. Alfa Lavel (India) Ltd. (266 ITR 418) and decision of Tribunal in ACIT vs. Eastern International Hotels Ltd. (100 ITD 154).
We have considered the rival submission of the parties and have gone through the order of authorities below. During the assessment proceeding, the AO observed that in the details of miscellaneous income the assessee has shown to have received Rs. 38,02,104/- as training fees for staff use in Tours. The AO disallowed holding that income is not derived from foreign tourist. The ld. CIT(A) held that training fees form part of business income and has been assessed by AO under the head “Profit & Gain from Business and Profession” and therefore, said income is eligible deduction under section 80HHD of the Act. We have further noted that the co-ordinate bench of Mumbai Tribunal in ACIT vs. Eastern International Hotels (supra) held that where interest income received by assessee had been assessed under the head “Profit & Gain from Business and Profession” same cannot be treated as non-business income for the purpose of deduction under section 80HHD of the Act. The co-ordinate bench relied upon the decision of Alfa Lavel India Ltd. (supra) on contest of interpretation of section 80HHC holding that where the AO had assessed & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. interest received by assessee as a part of business profit under the head “Profit & Gain from Business and Profession”, he cannot treat the said amount as “Income from Other Sources” so as to exclude it from the business profit.
Thus, in view of the above factual and legal discussion, we do not find any illegality and infirmity in the order passed by ld. CIT(A). In the result, Ground no.2 of the appeal is dismissed. 21. Ground No.3 relates to deleting the addition of retention money of Rs. 10,74,050/- as written back, claimed as deduction under section 80HHD of the Act. The ld. DR for the Revenue supported the order of AO and argued that the retention money is not derived from the business activity of the assessee.
On the other hand, the ld. AR of the assessee argued that assessee had given office premises taken on rent for furnishing to various contractors. Certain part of bills raised by contractor were written by assessee. Some of the contractor did not claimed the said amount for a period of three years, the said amount was written back by the assessee. The AO disallowed the said amount holding that the write back did not fall within the phrase “derived from various services provided to foreign tourist” and therefore, could not form part of profit eligible for deduction under section 80HHD. However, the AO assessed such write back under the head “Profit & Gain from Business and Profession”. The ld. CIT(A) after appreciating the fact allowed the said deduction. It was further argued that income on account of write back represent profit derived in the course of business of tour and travels. In & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. support of this submission, the ld. AR of the assessee relied upon the decision of Hon’ble Bombay High Court in case of CIT vs. Alfa Lavel (India) Ltd. (266 ITR 418) and decision of Tribunal in ACIT vs. Eastern International Hotels Ltd. (100 ITD 154).
We have considered the rival submission of the parties and have gone through the orders of authorities below. We have noted that the AO has assessed the said amount under the head “Profit & Gain from Business and Profession”.
We have further noted that the co-ordinate bench of Mumbai Tribunal in ACIT vs. Eastern International Hotels (supra) held that where interest income received by assessee had been assessed under the head “Profit & Gain from Business and Profession” same cannot be treated as non-business income for the purpose of deduction under section 80HHD of the Act. The co-ordinate bench relied upon the decision of Alfa Lavel India Ltd. (supra) on contest of interpretation of section 80HHC holding that where the AO had assessed interest received by assessee as a part of business profit under the head “Profit & Gain from Business and Profession”, he cannot treat the said amount as “Income from Other Sources” so as to exclude it from the business profit.
Thus, in view of the above factual and legal discussion, we do not find any illegality and infirmity in the order passed by ld. CIT(A). In the result, Ground no.3 of the appeal is dismissed.
Ground no.4 relates to deduction under section 80HHD in respect of foreign exchange fluctuation of Rs. 1,85,88,507/-. The ld. DR for the Revenue relied & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. upon the order of AO and argued that the foreign exchange fluctuation gain is not derived from the income earned in foreign exchange by providing services to foreign tourist. On the other hand, the ld. AR of the assessee argued that during the relevant FY, the assessee earned a sum of Rs. 1,85,88,507/- on account of foreign exchange gain. The assessee claimed deduction and calculated as percentage of profit derived from services provided to foreign tourist. The gain on account of foreign exchange fluctuation is a part of profit derived from services rendered to foreign tourist and cannot be excluded while computing deduction under section 80HHD of the Act. The ld. AR of the assessee relied upon the decision of CIT vs. Syntel Limited [ITA No.1974 of 2009 (Bom, HC)] dated 15.12.2009, CIT vs. Rachana Udhyog [230 CTR 72 (Bom) & CIT vs. United Riceland Ltd.[ITA No. 6997 of 2010 dated 31.12.2012].
We have considered the submission of the parties and perused the orders of authorities below. The AO disallowed the deduction on gain from foreign exchange fluctuation holding that it does not emanate from the services provided by the assessee to foreign tourist. The ld. CIT(A) allowed the deduction holding that foreign exchange gain forms part and partial of foreign exchange sale proceed and cannot be excluded while computing deduction under section 80HHD. The Hon’ble Bombay High Court in case of CIT vs. Syntel Limited held that when assessee received sale consideration in dollars, which were to receive on date of sale. But on account of fluctuation in ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. conversion rate, the assessee received more in term of Rupee. Thus, the same cannot be within the teeth of law laid down by Hon’ble Apex Court in Liberty India vs. CIT. In Rachana Udyog (supra), the Hon’ble Bombay High Court held that exchange rate difference is allowable deduction under section 80IB of the Act which is directly related to the transaction involving the export of goods of eligible industrial undertaking. Further, the Hon’ble High Court in CIT vs. United Riceland Ltd., while relying upon the Rachana Udhyog (supra) and Syntel Limited (supra) also allowed the currency exchange gain. Thus, in view of the above factual and legal discussion, we do not find any illegality or infirmity in the order passed by ld. CIT(A). In the result, Ground no.4 of the appeal is dismissed.
Ground No. 5 & 6 relates to exclusion of receipts of Rs. 31,30,99,313/- passed onto other hoteliers and receipts of Rs. 69,83,040/- being unrealized tour receipts for computing deduction under section 80HHD of the Act. The ld. DR for the Revenue relied upon the order of AO. The ld. AR of the assessee argued that under section 80HHD, the deduction is calculated as a percentage of profit derived from services provided to foreign tourist. “Profit derived from services provided to its foreign tourist” shall be the amount which bears to the profit of the business as computed under the head “Profit & Gain from Business and Profession”, the same proportion as foreign tourist bears to the total receipt of business carried by the assessee. The formula is:- profit derived from services provided to foreign tourist = business profit * foreign & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. tourist receipt/total receipt. The AO while computing total receipt (denominator) added a sum of Rs. 31,30,99,313/-, being the amount of certificate issued to other hotel and tour operator in Form 10CCAC and Rs. 69,83,040/-, the money not received till 30.09.2002. It was submitted that it is undisputed that the same should not be form part of tourist receipt (numerator). In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Delhi High Court in case of Lotus Trans P. Ltd. and decision of Tribunal in case of M/s Sita World Travel (India) Limited vs. DCIT in ITA No. 1524/Del/2004.
We have considered the rival submission of the parties and have gone through the orders of authorizes below. The AO included first receipt i.e. Rs. 30.31 (approx) crore in receipt of business holding that there is not express provision in section 80HHD for exclusion from the total receipt. Receipt no.2 of Rs. 66.39 lakhs was included by AO holding that assessee is following mercantile system of accounting and these receipt accrued to the assessee during the previous year relevant to AY 2001-02. The ld. CIT(A) after examining the fact and submission of the assessee concluded that the amount charged by assessee from foreign tourist includes payment for lodging, boarding and local transportation. The payment received from foreign tourist, the assessee makes payment to the hotels and travel agents for lodging and boarding and transportation. These payments are to be treated as receipt of concern hotel or travel agent for the purpose of claiming deduction under ITA No.1924 & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd. section 80HHD by virtue of provisions in Explanation-1 to sub-section (2) of section 80HHD of the Act. It was further concluded that as per sub-section (2A), the assessee had issued certificate in Form 10CCAC to recipient to enable them to claim deduction. From the formula given in subsection (3), the payments made to hotel, travel agent in respect of which certificate in Form 10CCAC has been issued are to be excluded from the receipt received from rendering of services to foreign tourist. The assessee excluded Rs.
31,30,99,313/- from its income received from rendering services to the tourist.
By following the decision of Lotus Trans Travels (supra) wherein it was held that for the amounts, the assessee has issued certificate in Form 10CCAC cannot be treated as a receipt for the purpose of total business and accordingly directed the AO to exclude the receipt of Rs. 31,30,99,313/- passed on by the assessee to other hotel and travel agent. For second/other receipt of Rs. 66,39,877/- it was held that the said amount of foreign currency realized after 30.09.2009 have not entered the numerator i.e. receipt earned by assessee from rendering service to foreign tourist which would not enter the denominator in the formula and directed the AO to exclude the same. We have noted that finding of ld. CIT(A) in accordance with Explanation 1 to sub-section (2), sub-section (2) and sub-section (3) of section 80HHD. No contrary material is brought to our notice to take any contrary view. Thus, we do not find any illegality or infirmity in the order passed by ld. CIT(A). In the result, Ground no.5 & 6 of the appeal are dismissed. & 2075/M/2007- Kuoni Travels (India) Pvt. Ltd.