BOSCH LIMITED,BANGALORE vs. ACIT, BANGALORE

PER BENCH

Out of this bunch of five appeals, four appeals are cross appeal of the

assessee and revenue for assessment years 2005-06 & 2006-07 and the

remaining one appeal is by the assessee for assessment year 2006-07 arising

out of order passed by the ld. CIT(A) u/s 154 of the IT Act, 1961.

way of this common order for the sake of convenience.

2 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

2005-06 in ITA No.671(B)/2011.

Ground no.1 to 5 are in respect of TP issues and these grounds are as

under;

“1. the ld. CIT (A), LTU, Bangalore erred in dismissing the appellant’s claim for excluding certain comparables on the ground that high profit or high loss making companies should not be taken into account as comparables. 2. The ld. CIT(A) erred in not accepting the appellant’s plea that it is insulated from all business and operational risks, particularly having regard to facts in appellants case and did not agree for any suitable adjustments for the differences in risk profile. 3. the learned CIT (A) LTU erred in directing the DCIT to look into the feasibility of selecting companies such as Alpha Geo Ltd., and Vimta Labs which are functionally different. 4. without prejudice, the ld. CIT (A) has erred in law and in facts, in confirming with the TPO/AO in not applying the provisions of proviso to section 92C(2) of the Act. 5. Without prejudice to grounds 1 to 4 above, the learned CIT(A) ought to have directed the TPO to apply the arm’s length price determined by the TPO during earlier AY: 2004-05 for the current AY: 2005-06 also, particularly having regard to the fact that the appellant had entered into a fixed price contract for 4 years beginning on 01-04-2003 (relevant to AY: 2004-05)

3 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

para-9 to 9.1 of the order of the ld. CIT(A) that the assessee has raised an

issue before the ld. CIT(A) regarding revised bench-marking result furnished

by the assessee during assessment proceedings vide letter dated 07-10-2008

and the ld. CIT(A) decided the issue in a very cryptic manner without giving

any reason for upholding the order of the TPO and hence, the matter should

be restored back to the file of the ld. CIT(A) for a fresh decision by way of

speaking and reasoned order. He further submitted that if the matter is

restored back to the file of the ld. CIT(A) for a fresh decision regarding TP

issues then no specific adjudication is called for on any T P issues at the

present stage.

reference, we reproduce para-9 & 9.1 of the ld. CIT(A)’s order of pages- 20-21

of his order.

“9. Ground no.7.7 which is in a similar vein, and raises

the issue relating to the revised bench-marking result

furnished by the appellant during assessment proceedings

vide its letter dated 18-09-2007 and reiterated vide letter

dated 07-10-2008 is reproduced below;

7.2 Without prejudice, the TPO/DCIT, ought to have accepted the appellant’s revised bench-marking result furnished during the assessment proceedings which also satisfied ALP. 9.1 During the course of assessment proceedings, the

appellant vide its letter dated 18-09-2007 & 07-10-2008

4 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

submitted that it was engaged in providing basic design and

application development services which was in the field of

Research &Development in the Automotive Manufacturing

Industry i.e. starter motors and alternators, which was its

main business. The appellant requested the AO to adopt

seven comparables selected by it based on the financials of

FY: 2004-05, which is reproduced below;

Table -7

Sl.No. Comparables Without adjustments Mark-up on Op. cost 1 California Software Co.,Ltd., 9% 2 Engineers India Ltd., 10% 3 Geometric Software Solutions 19% Co.Ltd., 4 Onward Technologies Ltd., 12% 5 Easun Engineering Company Ltd., -7% 6 Powersoft Global Solutions Ltd., 22% 7 Quintegra Solutions Ltd., 8% Arithmetic mean 10% However, vide para-11.1 of the order u/s 92CA dated 31-10- 2008 the TPO rejected California Software Co. Ltd.,& Onward Technologies Ltd., on the ground that they had RPTs in excess of 25% whereas Engineers India Ltd., & Easun Engg. Co.Ltd., failed the export earnings filter while Geometric Software Solutions Ltd., was rejected for the reason that it was a software development company. Hence, the remaining companies selected by the appellant itself namely, Powersoft Global Solutions Ltd., & Quintegra Solutions Ltd., are retained as suitable comparables”. From the above paras reproduced from the order of the d. CIT(A), it is

seen that there is no reason given by the ld. CIT(A) regarding rejection of

various comparables by the TPO and hence, we feel it proper to restore the

5 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

entire matter on TP issues to the file of the ld. CIT(A) for fresh decision by

way of speaking and reasoned order after providing adequate opportunity of

being heard to both sides. We order accordingly.

purposes.

Ground no.6 raised by the assessee is as under;

“6. The ld., CIT(A)LTU erred in upholding the action of the AO in not allowing a deduction for the provision made towards interest payable to Central Excise Dept. Sales tax etc., dept. amounting to Rs.2,96,24,753/- although the appellant has followed mercantile system of accounting”.

decided against the assessee by the Tribunal in assessee’s own case for the

assessment year 2004-05 in IT(TP)A No.670(B)/2011 dated 20-08-2015. He

submitted a copy of this Tribunal order and has drawn our attention to

para-4 on page-10 of the Tribunal order. For the sake of ready reference, we

reproduce para-4 of this Tribunal order as under;

“ As regards of appeal no.8 is concerned, against the order of the CIT(A) in upholding the order of the AO in not allowing deduction for provision made towards interest payable to Central Excise Department and Sates Tax Department at Rs.4,29,67,460/- the learned counsel for the assessee submitted that this issue is covered against the assessee by the decision of this Tribunal in assessee’s own case for assessment year 2000-01 and 2001-02 which is placed at pages 3 to 58 of the case laws paper book filed before us. The

6 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

Tribunal, at para-6 of its order, has observed that this issue stands covered by the decision of this Bench of the Tribunal in assessee’s own case for assessment years 1994-05 and 1999-00 wherein the action of the CIT(A) on disallowing interest payable to Central Excise Department has been upheld by the Tribunal. Respectfully following the same, his ground of appeal (No.8) of the assessee is rejected”. From the above Para, what is seen that this issue is covered against

the assessee by the tribunal order in assessee’s own case for the assessment

years 2000-01 & 2001-02 and hence, this ground of the assessee is rejected

by respectfully following this Tribunal order.

Ground no.7 raised by the assessee is as under;

“7.1 The ld. CIT(A), LTU erred in upholding the expenditure towards trademark as capital expenditure and granting depreciation as against the appellant’s claim of amortization over 36 months given the facts and circumstances in the appellant’s case. 7.2 The ld. CIT(A), LTU erred in upholding the action of the DCIT in changing the character of the expenditure from revenue to capital after two years of its incurrence”.

ld. CIT(A) in para-13.1.1. and 13.1.2 on pages-28& 29 of his order that as

per the assessee’s submissions in assessment year 2003-04 & 2004-05,

similar claim was allowed as revenue expenditure and therefore, as per the

Rule of Consistency, in the present year also, the claim should be allowed as

revenue expenditure. He submitted that the claim of the assessee was

7 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

rejected by the ld, CIT(A) on this basis that merely a mistake was committed

in the earlier year and it cannot be allowed to be committed in perpetuity.

copy of the assessment order for assessment year 2004-05 and page-18 of

the paper book is relevant where the issue was decided by the AO in that

year and the claim was disallowed in respect of depreciation claimed in that

year on trade mark license fee of Rs.16,55,938/-. He submitted that in that

year, the claim of amortization of Rs.25,23,333/- was allowed by the AO

being 1/3rd of Rs.75.70 lakhs paid towards exclusive and indivisible right to

use their trade mark. He submitted that having allowed the claim in earlier

two years, it is not proper to disallow the same claim in the present year. He

submitted a copy of agreement for purchase of business from M/s Philip

India Ltd., as available on pages-168 – 175 of the paper book and our

attention was drawn to page-175 of the paper book where it is stated that

sec.3.25 of trade mark license, assignment, agreement shall apply. He

further submitted that as per the same, the assessee is eligible to use the

trade mark for three years. Thereafter, he has drawn our attention to pages

176 -183 of the paper book and pointed out that value of trade mark user

was Rs.75.70 lakhs. At this juncture, the Bench wanted to see specific

clause of agreement or trade mark license assignment agreement as per

which the assessee was eligible to use the trade mark only for three years

but the same could not be made available. But it was submitted by the ld.

AR of the assessee that it is not disputed by any authority below that there

is limited user of agreement for 36 months. He placed reliance on the

judgment of the Hon’ble Gujarat High Court rendered in the case of DCIT Vs

8 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

Gujarat Narmada Valley Fertilizers Co. Ltd. as reported in 356 ITR 460(Guj.).

He also placed reliance on the judgment of the Hon’ble Bombay High Court

rendered in the case of CIT Vs M/s Adhikari Brothers Television Networks

Ltd., in ITA No.142 of 2013 dated 17-01-2013. He submitted a copy of this

judgment. He also placed reliance on the judgment of the Hon’ble Apex

Court rendered in the case of Devidas Vithaldas & Co., Vs CIT as reported

in 84 ITR 277(SC).

blow.

reproduce para-13, 13.1, 13.1.1 and 13.1.2 from the order of ld. CIT(A) on

pages-26 to 29 of his order. These paras are as under;

“13. Grounds 3.1. to 3.3 on the other hand, deal

with the issue regarding the AO’s treatment of

expenditure incurred towards trademark as capital

expenditure and allowing depreciation @25% on

‘intangible assets’ as against the appellant’s claim of

treating the same as revenue expenditure and

amortizing the same over a period of three years. The

same are reproduced as under;

“3.1 That the DCIT erred in treating the expenditure towards trademark as capital expenditure and granting depreciation as against the appellant’s claim of amortization over 36 months given the facts and circumstances of the case”.

9 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

3.2 That the DCIT ignored the fact that in the year in which the expenditure was incurred, it was accepted as revenue expense and amortization over 36 months was allowed. 3.3 That the DCIT erred in changing the character of the expenditure from revenue to capital after two years of its incurrence”. 13.1 It appears that the appellant had acquired a business from Philips India Ltd., for a consideration of Rs.75.7 lakhs towards ‘non-exclusive and indivisible right to apply the trademark to the products and the right to sell the product under the trademark” It was claimed that the right to use the trademark was limited to a period of 3 years and not in perpetuity and, accordingly, a deduction of Rs.25,23,333/- (being 1/3rd of Rs.75.7 lakhs) was claimed u/s 37 for a period of 3 years starting from AY: 2004-05. The AO disallowed the appellant’s claim on the following grounds:- � The deduction for acquisition of trademark was clearly covered u/s 32(1)(ii), specifically Explanation 3 to sec.32(1) wherein the expression ‘block f assets’ shall mean ‘intangible assets, being know how, patents, copyrights, trade marks….’. In other words, the deduction for acquisition of trademark was allowable only u/s 32 for which the depreciation @25% was allowable on ‘intangible assets”. � Furthermore, the provisions of sec.43(6) were quite clear that the WDV of an asset purchased in an earlier year was cost less depreciation actually allowed. In the instant case, the deduction was claimed and allowed, the opening WDV would be the balance remaining to be written off. i.e.

10 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

Rs.25,23,333/- on which depreciation @ 25% would work out toRs.6,30,834/-. � The AO rejected the appellant’s contention regarding the limited usage of the trade mark for 3 years on the ground that when an asset is acquired, it had to simply be added to the concerned block of assets irrespective of the life of the asset. � Moreover, when the IT Act, allows deduction under a particular section, then the claim should be under that section alone and not under any other provisions. Accordingly, the AO disallowed the appellant’s claim for amortization of trademarks amounting to Rs.25,23,333/- and allowed depreciation of Rs.6,30,834/- resulting in a net addition of the difference of Rs.18,92,500/-

13.1.1. Vide written submissions filed on 28-03-2011, the appellant merely stated that the AO ought to have accepted its claim and allowed the same as revenue expenditure as was done in AYs 2003-04 & 2004-05 based on the rule of consistency instead of treating the same as capital expenditure in AY: 2005-06. Incidentally, a perusal of the earlier year’s records clearly indicate that the appellant had claimed deduction of Rs.25.23,333/- as expenditure payable to Philips India Ltd., to use their trademark to sell their products as well as claimed depreciation of Rs.16,55,938/-. The AO merely concluded that since the appellant cannot claim the deduction of Rs.25,23,333/- as well as depreciation of Rs.16,55,938/- at least one of the claim has to be disallowed. Accordingly, the claim of the depreciation was disallowed.

11 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

13.1.2. I am inclined to disagree with the appellant’s stand reproduced inpara-13.1.1 above. Firstly, there is no clear cut finding given by the AO that the deduction claimed constituted capital or revenue expenditure as he merely disallowed one of the two claims made by the appellant on the ground that only one of the deductions was allowable. Secondly, merely because a mistake was committed in the earlier years does not mean that it should be committed in perpetuity. The AO is well within his right to go into these issues and allow the correct deduction in the earlier years in accordance with law. For the detailed reasons reproduced in Para 13.1 above, I am of the considered view that the AO has rightly disallowed the appellant’s claim for amortization of trademarks amounting to Rs.25,23,333/- and allowed depreciation of Rs.6,30,834/-. The net addition of the difference of Rs.18,92,500/- is therefore, upheld. Grounds 3.1 to 3.3 also fail”.

From the above paras reproduced from the order of the ld. CIT(A), we

find that as per Sec.32(1)(ii) and Explanation-3 to Sec. 32(1), expression

block of assets also includes intangible assets including trade mark and

depreciation of 25% is prescribed on such intangible assets.

trade mark only for three years, it is noted by the AO that when an asset is

purchased, it has to be added to the block of asset irrespective of life of

asset. We find force in this observation of the AO because, this is true that

12 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

every asset has got a life but the same is not relevant for the purpose of

deciding the character of expenditure as to whether it is capital or revenue

expenditure. An asset may have a life of three years and some asset may

have a life of 30 years and then it cannot be said that the asset having a life

of 30 years is capital asset and the other asset having a life of three years

only is not a capital asset simply because the life of asset is only three

years. If the life of a concerned asset is less than one year then there may

be a case that it is an item of stores consumption and therefore, it is

revenue expenditure but where such life of asset is more than one year then

the quantum of life of capital asset is not relevant. If we go by the life of

asset and we amortize the cost of asset on the basis of the life of the asset

as being claimed in the present case then there was no need to prescribe

rate of depreciation for an asset in the statute book and such treatment on

the basis of life of asset will make depreciation provision redundant.

Therefore, this cannot be a valid interpretation of law which will result into

making the provisions of the Act about depreciation redundant.

Consistency. In our considered opinion, if the view taken by the AO in

earlier year is a possible view as per law and in a subsequent year, the AO

is proposing to take another possible view then the Rule of Consistency will

come into play. If the view taken by the AO in the earlier year is not a

possible view as per law then it cannot be said that the mistake committed

by the AO in an earlier year should be allowed to be perpetuated. In the

present case, we find that the view taken by the AO in the earlier years is

13 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

not a possible view as per law and therefore, the Rule of Consistency will not

come to the aid of the assessee in the present case.

the ld.AR of the assessee. The first judgment cited by him is the judgment

of the Hon’ble Gujarat High Court rendered in the case of DCIT Vs Gujarat

Narmada Valley Fertilizers Co.Ltd., (Supra). In that case, the facts were

that the assessee claimed deduction of a sum spent towards restructuring

of term loan. The revenue in that case wanted to treat such expenditure as

a capital expenditure. But it was held by the Tribunal in that case that

such expenditure is revenue expenditure. The decision of the Tribunal in

that case was that the assessee has already obtained a loan and the same

could not be treated as an asset or as an advantage of enduring nature and

any expenditure incurred was to be allowed as revenue expenditure. The

Tribunal order was challenged by the revenue before the Hon’ble Gujarat

High Court but the Hon’ble Gujarat High Court approved the Tribunal order

in that case. In our considered opinion, the facts in the present case are

totally different and therefore, this judgment is not applicable in the present

case. In that case, the issue is dispute was regarding the expenses incurred

for borrowing money and the Tribunal had followed the judgment of the

Hon’ble Apex Court rendered in the case of India Cements Ltd., Vs CIT 60

ITR 52 wherein it was held by the Hon’ble Apex Court that the act of

borrowing money was incidental to carrying on of the business and the loan

obtained was not an asset or an advantage of enduring nature. In the

present case, the trade mark was acquired by the assessee which is an

14 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

asset being intangible asset as per the provisions of sec.32(1)(ii) of the Act,

1961 and therefore, this judgment of the Hon’ble Gujarat High Court is not

applicable in the present case.

judgment of the Hon’ble Bombay High Court rendered in the case of M/s

Adhikari Brothers Television Networks Ltd. (Supra). In that case, the issue

is dispute was not with regard to depreciation on intangible asset but the

issue in dispute was regarding amortization of expenditure u/s 35D of the

Act. This is an admitted position of law that share issue expenses can be

amortized u/s 35D of the Act if the conditions prescribed in that sec. are

existing but this is not a case that share issue expenses are eligible for

depreciation u/s 32 of the Act. Hence, this judgment of the Hon’ble

Bombay High Court is also not applicable in the present case.

Apex Court rendered in the case of Devidas Vithaldas & Co. Vs CIT (Supra).

In that case, one Padamsi Haridas carried on profession as a Chartered

Accountant in the name of Devidas Vithaldas & Co., and he took one

Amritlal Parikh as a partner, reserving however, to himself all the rights and

interests in the goodwill of that business. Subsequently, he retired from

the said partnership and as per the deed of retirement the goodwill was sold

to the said Shri Amratlal and it was agreed that Shri Amratlal shall pay to

the said Padamsi for and during the term of his entire life of 50% share in

the net profit or share in the profession if carried on by Shri Amratlal in the

name of Devidas Vithaldas & Co. The dispute in that case was regarding the

nature of such payment and it was held that disbursement to retiring

15 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

partner as per deed of retirement is in the nature of royalty and not related

to any allowance and purchase of trade mark and therefore, admissible as

revenue expenditure. In the present case, the payment in question cannot

be said to be a payment in the nature of royalty because, in the present

case, fixed lump sum was paid for purchase of trade mark and therefore,

this judgment of the Hon’ble Apex Court is not applicable in the present

case.

17.1 As per the above discussion, we have seen that none of the

judgments cited by the ld AR of the assessee is rendering any help to the

assessee in the present case and since the nature of asset acquired is a

capital asset eligible for depreciation u/s 32 of the Act, it cannot be allowed

as a revenue expenditure and therefore, this ground of the assessee is

rejected.

Ground no.8 is as under;

“8. The ld, CIT(A) LTU erred in upholding the action of the DCIT in not granting the deduction u/s 80JJAA in respect of the workmen who were employed y the appellant during the year but whose duration of working in that year was less than 300 days.

Hon’ble Apex Court rendered in the case of CIT Vs J.H.Gotla as reported in

156 ITR 323. He also placed reliance on a Circular No.772 as reported in

235 ITR9 (St.) 35 and submitted that para-45 of the said Circular is

relevant.

16 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

below.

was decided by the ld. CIT(A) as per para-15 of his order as available on

pages 31 to 34 of the order. These paras are reproduced for the sake of

ready reference;

“15. Ground 5 pertaining to non-granting of deduction u/s 80JJAA in respect of workmen employed by the appellant working for less than 300 days in the year is reproduced below: 5. That the DCIT erred in not granting the deduction u/s 80JJAA in respect of the workmen who were employed by the appellant during the year but whose duration of working in that year was less than 300 days. � 15.1 Out of the deduction claimed of Rs.12,37,509/- u/s 80JJAA, the AO allowed only Rs.4,68,078/- and disallowed the balance of Rs.4,68,078/- on the ground that as per the definition of ‘regular workmen’ in Explanation(ii) to Sec.80JJAA, ‘regular workmen’ did not include ‘any other workmen employed for a period of less than three hundred days during the previous year’. The appellant plea that this definition applied to only casual labourers and not permanent employees was rejected on the round that deduction u/s 80JJAA was restricted to additional wages paid to employees who have worked for more than 300 days during the relevant period irrespective of whether they were employed on a permanent basis or otherwise. The AO, accordingly, ascertained that additional wages paid to those who had worked for less than 300 days was Rs.25,64,771/- 30% of which worked out to Rs.7,69,431/-

17 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15 which was required to be disallowed. At the appellate stage, the appellant reiterated that in the case of permanent workmen, the question of whether they worked for 300 days or more did not arise.

15.1.1. In view of the facts of the case as discussed in the preceding paragraphs, the AO gave a categorical finding that the wages paid to employees who had worked for less than 300 days in this year cannot be considered for the purposes of deduction u/s 80JJAA. It is of relevance that sec.80JJAA specifically defines the term ‘regular workmen’ in clause (ii) of the Explanation to the section. It is a cardinal rule of interpretation that where the language used by the Legislature is clear and unambiguous, the plain and natural meaning of the words should be supplied to the language used and resort to any rule of interpretation to unfold the intention is permissible only where the language is ambiguous. There are a plethora of decisions of the Apex Court which support this proposition namely;

• Smt. Tarulata Shyam Vs CIT 108 ITR 345 (SC) • Keshavji Ravji Vs CIT (1990) 183 ITR 1 • Guru Devdata VKSSS Maryadit Vs State of Maharashtra AIR 2001 SC 1980. • CIT Vs Anjum M.H. Ghaswala (2001) 252 ITR 1 • Prakash Nath Khanna and Anr Vs CIT & Anr 266 ITR 1.

The above judgments make it clear beyond a shadow of doubt that Courts are not required to look into the object or intention of the Legislature by resorting to aids to interpretation where the language of the provision is clear

18 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

and unambiguous. Consequently, the meaning of each word used by the Legislature is to be given its plain and natural meaning and no word should be ignored while interpreting a provision of a statute. It is pertinent to note that the AO has also relied on several decisions which make it abundantly clear that when the wordings in a section are clear and specific, it has to be followed without imputing or assigning any other meaning or intention. i) Karnataka Forest Plantations Corpn.Ltd., Vs CIT 156 ITR 275 (Kar.) ii) Karnataka State Financial Corpn. Vs CIT 174 ITR 206(Kar.) iii)Ramachandra Mardaraja Deo Vs CIT 27 ITR 667(Ori) iv) R Gao Electrodes Ltd., Vs CIT 173 ITR 351 (Ker.) v) Haji Mohammad Usman & Sons Vs CIT 25 ITR 2252 (Nag.) It is quite apparent from the above analysis that the appellant’s eligibility for the said deduction from the standpoint of whether the appellant’s employees qualified as ‘workmen’ within the meaning of Sec.80JJAA or not should be examined from the point of view of tenure of work by the said employees within the meaning of the definition of the term ‘regular workmen’ contained in Explanation (ii)© whereby those who were employed for a period of less than 300 days during the previous year were excluded from the definition. I am of the firm view that the AO has rightly denied the deduction to the extent it has been claimed for employees who have worked for more than 300 days in the previous year in contravention of Explanation (ii)© to Sec.80JJAA. Consequently, ground 5 fails”.

19 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

allowability of deduction u/s 80JJAA and hence, we hereby reproduce the

provisions of sec.80JJAA of the Act for the sake of ready reference;

“Section 80JJAA…

][Deduction in respect of employment of new employees.

(1) Where the gross total income of an assessee to whom section 44AB applies, includes any profits and gains derived from business, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent, of additional employee cost incurred in the course of such business in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided. (2) No deduction under sub-section (1) shall be allowed,— (a) if the business is formed by splitting up, or the reconstruction, of an existing business: Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B; (b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation; (c) unless the assessee furnishes along with the return of income the report of the accountant, as defined in the

20 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

Explanation to section 288 giving such particulars in the report as may be prescribed. Explanation.—For the purposes of this section,— (i) "additional employee cost" means total emoluments paid or payable to additional employees employed during the previous year: Provided that in the case of an existing business, the additional employee cost shall be nil, if— (a) there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year; (b) emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account: Provided further that in the first year of a new business, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost; (ii) "additional employee" means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include,— (a) an employee whose total emoluments are more than twenty-five thousand rupees per month; or (b) an employee for whom the entire contribution is paid by the Government under the Employees' Pension Scheme notified in accordance with the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952); or

21 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

(c) an employee employed for a period of less than two hundred and forty days during the previous year; or (d) an employee who does not participate in the recognised provident fund; (iii) "emoluments" means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include— (a) any contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law for the time being in force; and (b) any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like. (3) The provisions of this section, as they stood immediately prior to their amendment by the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for any assessment year commencing on or before the 1st day of April, 2016.'.

[(1) Where the gross total income of an assessee, [being an Indian company,] includes any profits and gains derived from the manufacture of goods in a factory, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent. of additional wages paid to the new regular workmen employed by the assessee in such factory, in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided.]

22 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

(2) No deduction under sub-section (1) shall be allowed—

[(a) if the factory is acquired by the assessee by way of transfer from any other person or as a result of any business re-organisation;]

(b) unless the assessee furnishes along with the return of income the report of the accountant, as defined in the Explanation below sub-section (2) of section 288 giving such particulars in the report as may be prescribed.

Explanation.—For the purposes of this section, the expressions,—

(i) “additional wages” means the wages paid to the new regular workmen in excess of [one hundred workmen] employed during the previous year:

Provided that in the case of an existing [factory], the additional wages shall be nil if the increase in the number of regular workman employed during the year is less than ten per cent of existing number of workmen employed in such factory] as on the last day of the preceding year;

(ii) “regular workman”, does not include—

(a) a casual workman; or

(b) a workman employed through contract labour; or

(c) any other workman employed for a period of less than three hundred days during the previous year;

(iii) “workman” shall have the meaning assigned to it in clause (s) of section (2) of the Industrial Disputes Act, 1947 (14 of 1947).]

23 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

(iv) "factory" shall have the same meaning as assigned to it in clause (m) of section 2 of the Factories Act, 1948 (63 of 1948).]...”

additional wages paid to employees who have worked for more than 300

days during the relevant period irrespective of whether they were employed

on a permanent basis or otherwise. Accordingly, the AO ascertained the

additional wages paid to those workers who had worked for less than 300

days of Rs.25,64,771/- and 30% of which worked out to Rs.7,69,431/- was

disallowed by the AO. The claim of the assessee is this that if the worker is

employed on permanent basis then only because in the present year,

working days are less than 300 days because he was employed after 66 days

from the start of the previous year then no deduction will be available under

this section in respect of such workers appointed or employed after that date

and therefore, this approach of the AO is not correct.

reproduced above, the deduction is allowable for three years including the

year in which the employment is provided. Hence, in each of such three

years it has to be seen that the workmen was employed for at least 300 days

during that previous year and that such work men was not a casual

workmen or workmen employed through contract labour. Therefore, if some

work men were employed for a period less than 300 days in the previous

year then no deduction is allowable in respect of payment of wage to such

work men in the present year even if such work men was employed in the

24 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

preceding year for more than 300 days but in the present year, such work

men was not employed for 300 days or more. In this view of the matter, we

find no infirmity in the order of the ld.CIT(A) on this issue.

Apex Court cited by the ld. AR of the assessee. In our considered opinion,

the issue in dispute in that case was entirely different and therefore, this

judgment is not applicable in the present case.

not render any help to the assessee. Hence, this ground is rejected.

Ground no.9 is as under;

“9. The ld. CIT(A) LTU erred in rejecting the appellant’s claim for:

Grant of deduction u/s 35(2AB) n expenditure incurred on

scientific, research with effect from 01-04-2004 as against deduction

granted on expenditure incurred from 21-09-2004 (being the date of issue of

notification) notifying ‘automobile components’ as eligible article for

deduction u/s 35(2AB);

Granting the deduction u/s 35(2AB) on gross expenditure.

rendered in the case of DCIT(LTU) Vs M/s Microlab Ltd. as reported in 39

ITR(T) 585. He also placed reliance on the judgment of the Hon’ble Gujarat

25 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

High Court rendered the case of CIT Vs Claris Lifesciences Limited.2008-

TIOL-484-HC-AHM-IT.

has been decided by the ld, CIT(A) as per para-16,16.1 & 16.1.1. of his

order. These paras are reproduced below for the sake of ready reference;

“ 16. Ground 6 which deals with denial of deduction claimed u/s 35(2AB)reads as under;

16.1 A scrutiny of the facts reveal that the appellant had claimed deduction of Rs.6,39,54,500/-u/s 35(2AB) which refers to ‘expenditure’ incurred on Research & Development which according to the appellant should be allowed with reference to the gross expenditure without reducing receipts from this activity. However, it was ascertained by the AO from a perusal of the Certificate inform-3CL from the Dept. of Scientific & Industrial Research (DSIR) that the deduction to be claimed by the appellant was the expenditure reduced by related income which has been approved by the prescribed authority. The AO accordingly, concluded that the income received from R & D activities as nothing but reimbursement of the related expenditure and that, therefore, the deduction would have to be allowed on the net expenditure claimed by the

26 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

appellant in its R/I for AY: 2005-06 and certified by the prescribed authority. However, no separate addition was made by the AO as the appellant itself had claimed the net amount after reducing the receipts from the expenditure in its statement of computation of total income filed along with its R/I for AY: 2005-06.

16.1.1. Vide its written submissions, the appellant smutted that neither Sec.35(2AB) nor From -3CL envisaged reduction from the gross expenditure, receipts of the R&D Centre. Consequently, the appellant reiterated that DSIR had incorrectly reduced the receipts of the R&D Centre from the gross expenditure and wrongly advised h Director General, Exemptions to allow weighted deduction u/s 35(2AB) on the net expenditure. The appellant also raised an additional ground that the AO ought to have granted deduction u/s 35(2AB) on expenditure incurred on scientific research w.e.f.01-04-2004 as against deduction granted on expenditure incurred from 21-09- 2004, being the date of issue of Notification notifying ‘automobile components’ as eligible articles for deduction u/s 35(2AB). On a careful consideration of the factual & legal position, I am unable to accept the appellant’s contentions in view of the Certificate in form-3CL from the Dept. of Scientific & Industrial Research(DSIR) which categorically states that the deduction to be claimed by the appellant was the expenditure reduced by related income which has been approved by the prescribed authority. Moreover, it is quite apparent that the Notification notifying ‘automobile components’ as articles eligible for deduction u/s 35(2AB) came into effect only from 21-

27 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

09-2004. Incidentally, the fact that the appellant itself had claimed the net amount after reducing the receipts from the expenditure in its statement of computation of total income filed along with its R/I for AY: 25005-06 is irrefutable and undeniable. Ground 6, accordingly fails”.

sec.35(2AB) of the IT Act, 1961 as under;

“35(2AB)

][(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule]] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to "one and one-half times" of the expenditure] so incurred.

["Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred.";]

[Explanation.—For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure

28 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).]

reduced by the assessee from the expenditure is not in the nature of

reimbursement of expenditure incurred, it has to be held that deduction is to

29 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

be allowed by the AO on the net expenditure after reimbursement at

prescribed percentage of such net expenditure because, if there is any

reimbursement of expenditure then the amount of expenditure incurred by

assessee stands reduced. In this view of the matter, we find no infirmity in

the order of the ld. CIT(A) on this issue.

the ld. AR of the assessee.

the case of DCIT(LTU) Vs M/s Microlab Ltd (Supra). In that case, it was not

a case that the receipt of the assessee was in the nature of reimbursement of

expenditure incurred as in the present case and therefore, this Tribunal

order is not rendering any help to the assessee in the present case.

rendered in the case of CIT Vs Claris Lifesciences Ltd., (Supra), we find that

in that case, the assessee set up in-house R&D facility and applied for

approval. An approval came with a specific date and the assessee claimed

deduction of the entire expenditure for setting up the facility and the AO

allowed the deduction but with a rider that the expenditure prior to the date

of approval is not allowable. The ld CIT(A) approved the assessment order on

this issue in that case, but the Tribunal held in favour of the assessee on this

basis that once the R&D facility is approved the entire expenditure is to be

allowed.

30 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

21.09.2004 is the date of issuing of notification notifying the automobile

components as eligible articles for deduction u/s 35(2AB) of the Act. In a

case, where an industry is in the list of approved industry, but the assessee

applies for approval of its unit after the start of the previous year and the

same is approved by DSIR, then deduction can be allowed from April even if

the approval is granted on a later date in the same year. But in the present

case, till 20th September, 2004, automobile components was not an approved

article for deduction u/s 35(2AB) and therefore, the approval granted after

this date cannot relate back prior to this and therefore, we find no infirmity

in the order of the ld. CIT(A). This ground of appeal of the assessee is

rejected, because on both these aspects of the matter, there is no infirmity in

the order of the ld. CIT(*A) i.e. regarding netting of reimbursement of

expenses and date of notification.

statistical purpose.

IT(TP)A No.719(Bang)/2011.

The grounds raised by the revenue are as under;

“1. The order of the CIT(A) in so far as it is prejudicial to the revenue, is opposed to law and facts of the case.

31 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

32 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

are regarding TP issues and since in the appeal of the assessee, TP issues are

also raised and it has been argued by the ld. AR of the assessee that the

matter regarding TP issues should be restored back to the file of the ld.

CIT(A), the TP issues raised by the revenue in its appeal should also be

restored back to the file of the ld. CIT(A).

by the learned DR of the revenue. In view of the facts noted above as per

which both sides agreed that the TP issues as per revenue’s appeal should

also be restored back to the file of the ld. CIT(A), we set aside the order of the

ld.CIT(A) on TP issues and restore back the TP issue to the file of ld. IT(A) for

a fresh decision along with the decision in respect of TP issues raised by the

33 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

assessee in its appeal and restored back to us to the file of the ld. CIT(A) for a

fresh decision. Accordingly, ground no.1 to 7 of the revenue appeal are

allowed for statistical purposes.

revenue supported the assessment order whereas the ld.AR of the assessee

supported the order of the ld. CIT(A). He also submitted that para-14.1.1 of

the order of the ld. CIT(A) is relevant for this issue, as per which ld. CIT(A)

has simply followed the Tribunal order in assessee’s own case for earlier

years i.e. 2003-04 and 2004-05.

First of all we reproduce para-14.1.1 of the order of the ld.CIT(A).

“14.1.1 At the appellate stage, the appellant drew attention to the

decision of the Hon’ble ITAT, Bangalore Bench in the appellant’s own case for

AY: 2004-05 (ITA NO.329(B)/2009 dated 31-0-8-2009) squarely on this issue

which was followed subsequently by the jurisdictional ITAT for AY: 2003-04

(ITA Nos.706 & 707/B/2010 dt.22-10-2010) A plan reading of the order

dated 31.08.2009 reveals that the Hon’ble ITAT concluded vide para-6.6 of its

order that the appellant was entitled to claim depreciation on ‘business

information’ amounting to Rs.1.38 Crores under the category of ‘other

identifiable intangi9bles (goodwill) following the principle laid down by he

Hon’ble ITAT Mumbai Bench ‘SMC’ in the case of Skyline Caterers ()P)Ltd., Vs

ITO (2008) 20 SOT 266(Mum.) the relevant extract of which is reproduced

below;

34 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

“ A perusal of the provisions of s.32(1)(ii) shows that the Legislature has specified certain intangible assets on which depreciation can be claimed, namely. Know-how, patents, copyrights, trademarks, license, franchises. These specific intangible assets are followed by the expression ‘any other business or commercial rights of similar nature’. In such a situation, the rule of Ejusdem Generis would apply. The scope of the rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. The general words take the colour from the specific words. The specific words in the above section reveal the similarity in the sense that all the intangible assets specified are tools of the trade, which facilitate the assessee carrying on the business. Therefore, the expression ‘any other’ business or commercial rights of similar nature’ would include such rights which can be used as a tool to carry on the business.

in facts in the present year, we find no reason to take a contrary view in the

present year and therefore, respectfully following the earlier Tribunal orders

in assessee’s own case, we decline to interfere with the order of the ld. CIT(A)

on this issue. Accordingly, ground no.8 to 10 of the revenue are rejected.

Ground no.11 & 12 of the revenue’s appeal are general in nature

requires no specific adjudication

statistical purposes.

35 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

No.1211(B)/2015 in the course of proceedings u/s 154 of the IT Act, 1961.

The grounds raised by the assessee are as under;

“ 1. That the ld.CIT(A), LTU ought to have allowed appellant’s claim for weighted deduction u/s 35(2AB) on the gross amount of expenditure and not on the net amount of expenditure, having regard to the provisions of section 35(2AB).

identical to ground no.9 in assessee’s appeal for assessment year 2005-06

and therefore, the same can be decided on similar line in the present case

also.

by the ld. AR.

appeal for the assessment year 2005-06, we have decided this issue against

as per para-35. Accordingly, in the present appeal also, this issue is decided

on the same line and these grounds of the assessee are rejected.

36 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

2006-07 in ITA No.665(B)/2011.

The grounds raised by the revenue are as under;

“1.The order of the CIT(A) in so far as it is prejudicial to the revenue, is opposed to law and facts of the case.

37 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

general in nature and it needs no specific adjudication. He further submitted

that although, the revenue has raised as many as seven grounds of appeal

but the only issue involved is regarding the action of the ld.CIT(A) to allow

depreciation on intangible assets i.e. goodwill. He submitted that the same

issue has been raised by the revenue in appeal for the assessment year

2005-06 as per ground no.8 to 10 and therefore, in the present year also,

this issue may be decided on similar lines.

the ld. DR of the revenue.

assessment year 2005-06, while deciding Grounds 8 to 10 in the appeal of

the revenue, this issue has been decided by us in favour of the assessee as

per Para 42above and hence in the present year also, this issue is decided in

favour of the assessee and accordingly, these grounds of the revenue are

rejected.

the assessment year 2006-07. The grounds raised by the assessee are as

under;

38 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

“1. The ld. CIT(A),LTU erred in upholding the action of the AO in not allowing a deduction for the provision made towards interest payable to Central Excise and Customs Dept. amounting to Rs.93,25,345/- although the appellant had followed mercantile system of accounting.

2.1 The ld. CIT(A) LTU erred in upholding the expenditure towards trademark as capital expenditure and granting depreciation as against the appellant’s claim of amortization over 36 months given the facts and circumstances in the appellant’s case.

2.2 The ld. CIT(A) LTU erred in upholding the action of the DCIT in changing the character of the expenditure from revenue to capital after two year of its incurrence.

assessee that this issue is identical to ground no.6 raised by the assessee in

its appeal for the assessment year 2005-06. Similarly, for ground no.2 in the

present year, it was submitted by the ld.AR that this issue is identical to

39 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

ground no.7 raised by the assessee in its appeal for the assessment year:

2005-06. Similarly, for ground no.3 raised by the assessee, he submitted

that it is also identical to Ground no.8 raised by the assessee in assessment

year 2005-06. For Ground no.4 in the present year, he submitted that this

issue is identical to ground no.9 raised by the assessee in appeal for the

assessment year 2005-06. He further submitted that these four grounds

raised in the present year may be decided in line with the Tribunal’s decision

in assessment year 2005-06.

by the ld.AR of the assessee.

no.1 to 4 in the present year are identical to ground no.6 to 9 raised by the

assessee in its appeal for the assessment year 2005-06 and since no

difference in facts could be pointed out by any side, we find no reason to take

a contrary view in the present year. Accordingly, in line with our decision in

assessment year 2005-06, we decide these four grounds in the present year

on similar line.

appeal were rejected and therefore, in the present year also, ground no.1 to 4

of the assessee are rejected.

40 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

revenue for assessment year 2005-06 are partly allowed. Whereas the

remaining appeal of the assessee for assessment year 2005-06 u/s154 is

dismissed and the cross appeals of the assessee and revenue for assessment

year 2006-07 are dismissed.

Order pronounced in the open court on the date mentioned on the caption

page.

Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Bangalore: D a t e d : 08.09.2016 am*

Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file

By order, AR, ITAT, Bangalore

41 ITA Nos.671,672,665 & 719((TP)A2011 & ITA No.1211(B)/15

2.तार�ख, �जस पर टाइप �कया हुआ मसौदे, संबंिधत सदःय के सामने रखा गया ह� DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER………………………………………………………………………………………..

6 आदेश अपलोड करने क� ितिथ DATE OF UPLOADING THE ORDER ON WEBSITE………………………………………….. 7. अगर अपलोड नह�ं �कया तो, उसका कारण IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO…………………………. 8. ब�च िल�पक के पास फाइल जाने क� ितिथ DATE ON WHICH THE FILE GOES TO THE BENCH CLERK……………………………….. 9. आदेश ज़ेरो�स/पृ�ांकन के िलए भेजने क� ितिथ DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT……………………… 10. फाइल मु�य िल�पक के पास जाने क� ितिथ DATE ON WHICH THE FILE GOES TO THE HEAD CLERK………………………………… 11. आदेश पर हःता�र के िलए फाइल सहायक र�जःशार के पास जाने क� ितिथ THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER………………………………………………………………………….