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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Sanjay Arora, A. M.: These are cross appeals, i.e., by the Assessee and the Revenue, directed against the Order by the Commissioner of Income Tax (Appeals)-35, Mumbai (‘CIT(A)’ for short) dated 16.7.2014, partly allowing the assessee’s appeal contesting it’s assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2010-11 vide order dated 20.3.2013.
The first issue arising per the Revenue’s appeal is qua depreciation, claimed at Rs.47,05,738/-, on new Windmill (purchased by the assessee-firm from M/s. Ercon, Daman on 31.03.2010) (PB pgs.16-22). The assessee’s claim is based on commissioning of the said plant - which had been consigned to the project site (at Wind Farms Site, Krishna, Andhra Pradesh) in its various parts (as evidenced by their Delivery Notes and Lorry Receipts) since 19.2.2010 (PB ps. 123-136), as per the commissioning certificate dated 31.3.2010, issued by AP Central Power Distribution Corporation Ltd. (PB pg. 32). The Windmill, it is contended, was put to trial run and commercial production is not necessary – which though came to be in the following year. In the view of the Revenue, however, the assessee’s claim is not valid. The Windmill cannot be said to have been put to use in-as-much as no electricity had been produced. The authorization for conducting trial run and commissioning of Windmill, is itself dated 30.3.2010 (PB pg. 33), and it is inconceivable that the entire processes leading to the commissioning of the Windmill stand completed by 31.3.2010, i.e., in one-day. The assessee’s claim stands allowed in appeal on the basis that the trial run/production would also be construed as having put the machinery to use for the purpose of business.
We have heard the parties, and perused the material on record. Discussion 3.1 The question before us is if the assessee is eligible for it’s claim of depreciation allowance on the new Windmill acquired by it. Section 32(1), which provides for depreciation allowance under the Act, reads as under: ‘Depreciation. 32. (1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, 3 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided ……..’ [emphasis, ours] User is thus one of the two preconditions or prerequisites – the other being ownership (of the capital asset), for the claim of the depreciation allowance u/s. 32(1) of the Act. The word employed in the provision is ‘used’, as emphasized by the Hon’ble jurisdictional High Court in Dineshkumar Gulabchand Agrawal vs. CIT [2004] 267 ITR 768 (Bom) (SLP against which stands dismissed by the Apex Court, reported at ([2004] 266 ITR (St.) 106), so that an asset, to be eligible for the claim of depreciation in its respect, is to be actually used, i.e., as the word ‘used’ occurring therein was considered by the Hon’ble Court as denoting, and that a ‘ready to use’ state shall not entitle a claim or depreciation qua the said asset. In the facts of Whittle Anderson Ltd. vs. CIT [1971] 79 ITR 613 (Bom), referred to by the Hon’ble Court, the agreement clearly provided two of the four presses which were diverted in the pooling arrangement were to remain idle while the two presses worked; the owners of those presses had to keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time. The machines were thus under forced idleness and, accordingly, liable to be considered as in use during the relevant period in-as-much as they were kept ready for use at any moment. Similar was the situation in CIT vs. Vishwanath Bhaskar Sathe [1937] 5 ITR 621 (Bom). How, we wonder, could a different view be taken; the machine being kept ready for use at any moment. They were surely deployed in business, and their being put to actual use being a contingency over which they had no control and, further, which 4 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports could arise at any time. In fact, the identity of the machines which were idle and which worked would keep changing from time to time, and, was not relevant; the purport of the arrangement being to keep some machines (productive capacity) in surplus, as a standby, so that the production did not suffer on account of a breakdown in any of the working machines (operating capacity). How could then, one may ask, a difference be made, for the machine ‘used’ vis-à-vis that ‘not used’, all of which formed part of a pool, made available, some of which were to necessarily remain idle at any given time, albeit liable to be used at any time. In CIT vs. G. N. Agrawal [1996] 217 ITR 250 (Bom), again, the trucks under repair during the relevant year were already part of the assessee’s business (operational) assets, having been put to use earlier, as also in the subsequent year. Their being thus under repair during the relevant year was considered by the Hon’ble Court as of no moment. Surely, the capital assets already deployed in, and committed to the business could not be regarded as not in use merely on account of the suspension from active user on account of withdrawal from service for repairs, which is only to ensure the continuity of their service. It was under such like circumstances, signifying passive user, as against an active one, that the Hon’ble Court found the same as satisfying the test of ‘user’ and, thus, liable to be regarded as ‘used’ in terms of section 32(1). Can, for example, a plant or machinery, which could not be used for want of (say) feedstock or energy, be regarded as ‘used’, so as to be eligible for depreciation. The answer, to our mind, would depend on whether the same is functional as also if it stands put to use earlier. Surely, where so, temporary non-user will not disqualify the same as the same could only be regarded as available for use and, accordingly, a case of a passive user. Where, however, the machinery has not been put to use as any time earlier, and is to be put to use for the assessee’s business for the first time, it cannot be regarded as an asset in passive use. Then, again, what may also be relevant is if the same is liable to be used in future. If (say), the user is proscribed in-as-much as the manufacturing process requires a raw material which is 5 ITA Nos. 5736 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports banned, so that the machinery cannot be under normal circumstances restored to production, there is no question of it being regarded as a passive user, in contradistinction to an active one, entitling depreciation. Idleness or temporary suspension from active user would not therefore disentitle a claim for depreciation.
3.2 Continuing further, a plant or machine (or any capital asset for that matter), therefore, cannot be regarded as setup or established or, put differently, ready to be commenced, unless the same is commissioned and ready to function, i.e., for its intended use. Where it is the first plant, set up for manufacturing a particular good, to produce which constitutes the business of the assessee, the same (business) itself cannot be treated as set-up or established unless the plant is ready to commence production. Reference in this context may be made to the decision in CIT vs. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 0478 (SC), where the question arose if the unit was set up (by a particular date). It would be so, it was explained, only where it is ready to discharge the functions for which it was set up. And that the operations for establishment of the unit cannot be equated with the establishment or the setting up of the unit itself. The said processes are preparatory in nature. In its words: ‘A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up.’ Operations for the establishment of a unit, from the very nature of that expression used in the proviso to section 5(1)(xxi), can only signify steps that have to be taken to establish the unit. The word "set up" in the principal clause to section 5(1)(xxi) is equivalent to the word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the unit is held to have been set up for purposes of the principal clause.’ The Hon’ble Court, in so deciding, referred to and applied the principle laid down in Western India Vegetables Products Ltd. vs. CIT [1954] 26 ITR 151 (Bom), 6 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports thereby approving it. The question was finally answered by it in the negative in-as- much as the manufacture of absorbent cotton wool, for which the unit was being set up, could not take place or be produced. Similarly, in CIT vs. Industrial Solvents and Chemicals Pvt. Ltd. [1979] 119 ITR 608 (Bom), the business of the assessee-company was held to be set up only on the receipt of the power connection and not earlier on the purchase of raw material or even the installation of the machinery subsequently. A business is thus set up or established only when it is ready to be commenced, all antecedent processes being preparatory in nature. Now, if the business has not commenced, how could the machinery be said to have been used for its purposes, so that in such a case even a ‘ready to use’ state of the machinery also may not be sufficient.
3.3 Trial run is in fact a stage anterior to the ready to use state. That is, the set-up or the ready-to-use state is a stage subsequent to the trial run or trial production, to which a plant or machine is subject, to test it’s operational fitness, i.e., of it being able to produce or manufacture an article or thing it is acquired for and, therefore, deliver. It is a process of setting up the plant for the intended purpose, i.e., of it being operationally fit. Serious glitches may be discovered at this stage, so that the plant is not ready for production and, therefore, not ready for use, and which would therefore require being suitably addressed. In fact, as explained by the assessee itself during assessment proceedings, the process of generating electricity through the wind turbine is a complex process, requiring many machines like shafts, rotor blades, generators, turbines, transformers and converters. All these machines are interconnected via large networked supply lines and delicate electrical circuits. There are many electrical engineers along with energy specialists working together in unison to setup and commission the windmill project at the site. Computer programming is done at the site on the windmill system, so that heavy electrical circuits run on automation and fail- stop in case of overloads to protect the system. After erection and set up, such systems are tested to affirm whether the machines are working in unison without over loading, 7 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports electrical surges or other glitches. It is only thereafter that it can be said to be commissioned or operational. A fit trial run is thus a testing phase before which a plant can be declared as fit and ready for use, i.e., commissioned. No wonder, all the expenditure up to this stage stands to be capitalized as cost of the project (also refer: Challapalli Sugars Ltd. vs. CIT [1975] 98 ITR 167 (SC)). How, then, can a plant or machinery be regarded as being capable of being used, much less actually used, even if passively, prior thereto?
3.4 The facts in Industrial Solvents & Chemicals Pvt. Ltd. (supra) are relevant. The issue that arose in that case was as to when the business, plant and machinery could be said to be ready to use for the manufacture of industrial solvents and ether. The Hon’ble Court, after examining the facts of the case found that the installation of the machinery (which was completed by end of December, 1960 or January, 1961) was not sufficient, and that it could be said to be ready for production and the business, accordingly, ready to be commenced and the business therefore setup only by 19.8.1961 and not earlier on February 1961 whereat the finished product produced was not marketable. The claim of depreciation and development rebate was accordingly held to be admissible only with reference to the said, later date. To similar effect is the decision in the case of CIT vs. L & T. Mcneil Ltd. [1993] 202 ITR 662 (Bom). To capsule, it is only on a successful completion of the trial run and, thus, commissioning of the plant, that the business is to be regarded as set-up. How could a plant or machinery be regarded as used for the purpose of business when the same (business) is itself not set-up? Section 28 only contemplates income of a business or profession carried on by the assessee at any time during the year. Only, therefore, a ready to use state signifying a passive user, i.e., in contradistinction to an active user, so that the non-user was only on account of a business decision to not put to use, could be regarded as qualifying for depreciation.
8 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports 3.5 The first question, therefore, is if the assessee’s Windmill is set-up or commissioned by 31.3. 2010? This is as only once it is so that its user, if only passive, for the purpose of the assessee’s business, can be examined, so as to satisfy the user test. It needs to be clarified, even as would be apparent from the foregoing delineation of the law per the binding case law, along with the relevant facts, that a ‘ready to use’ state is itself not sufficient to qualify for depreciation, and that the same is regarded as so only where it constitutes a passive user. We have also explained that such user is ordinarily not possible in the case of first user, as in the present case. Rather, where the machinery is the first production unit, the said unit and the business itself is not ready to be commenced up to such date. Section 28(i) contemplates computation of income only of a business/profession carried on by the assessee at any time during the relevant previous year. Coming to the facts of the case, we observe that the only evidence on the basis of which the assessee claims depreciation is commissioning certificate (PB page 32), which reads as follows: ANDHRA PRADESH CENTRAL POWER DISTRIBUTION CORPORATION LIMITED From To The Divisional Engineer (Operations) M/s. G Shoe Export APCPDCL, Nandyal, 1, Hitex, Industrial Estate, Kurnool Dist. Andhra Pradesh. S.V. Road, Dahisar (East) Mumbai - 400068 LR.NO: DEE/O/NDL/TECHL/F.NO /D.NO. 593-6 Dated: 31-03-2010 COMMISSIONING CERTIFICATE This is to certify that 01 No x 800 KW (0.8 MW) Enercon make Wind Energy Converter of M/s. G Shoe Export, near Kondameedipalli village in Kolimigundla mandal, Kurnool district, Andhra Pradesh, has been erected and interconnected to APTRANSCO grid on 31-03-2010. From the date of interconnection, the machines are under trial run until the company declares commercial operation date. Sd/- Divisional Engineer (Operations) APCPDCL, Nandyal 9 ITA Nos. 5736 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports The same is preceded by a temporary authorization dated 30/3/2010 (PB page 33). The same is by the Chief Electrical Inspector and, in its operative part, reads as under: ‘This authorisation issued is purely temporary and is valid upto 29.4.2010. This authorisation is issued for conducting trial run of the equipment and commissioning of the WindMill. You should submit the Compliance report for the defects pointed out during the inspection and communicated to you separately on or before that date and get it regularised under Rule 47 ‘A’ and Rule 63(2) of Indian Electricity Rules, 1956. Under Rules 30(3), 46(3) and 65(7) of Indian Electricity Rules, 1956, you are at all times solely responsible for the maintenance of the above installation in such condition as to be free from danger.’ The sector being highly regulated, the purpose of the authorization is for trial run and commissioning. It is to be followed by a compliance report, which only implies, as apparent from its reading, removing the defects pointed out, of which reference is to be made therein. No compliance report is on record or produced by the assessee at any stage. It is only thereupon that the machine could be regarded as commissioned. The commission certificate dated 31/3/2010, again, only conveys that the Windmill has been connected to the ATTRANSCO grid and under trial run, i.e., till the company declares the commercial production date. The same by itself is not an evidence of trial production, as construed by the ld. CIT(A). The date cannot be declared unless all the defects as pointed out on the trial run are removed and a compliance report filed and okayed, and approval u/r. 47 ‘A’ and 63(2) of the Indian Electricity Rules, 1956 regularizing the authorization, which is purely temporary till such time, and only for the purpose of trial run. There is nothing to show that the electrical engineers and energy specialists were, as stated, working in unison at the site, much less having conducted trial runs, and successfully – as is required to be, within a day! There is in fact no evidence on record of any electricity generated on the trial run. How could there be a trial run/production without generation of electricity, the quality, volume and regularity of which would only determine if the plant (Windmill) is functioning properly. How can, under such circumstances, the Windmill 10 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports be said to be commissioned? The ld. AR was specifically questioned by the Bench during hearing as to if the assessee had any other material evidencing trial production and/or commissioning, to which he replied in the negative. In our clear view, much less commissioning, the trial run of the concerned Windmill itself (by 31/3/2010) is not proven; there be nothing to indicate that. Why, the Electricity Authority itself allowed – in the first instance, a period of 30 days for the commissioning of the plant. The question of its user, active or passive, so as to qualify for depreciation does not arise. Sans any generation of electricity, the assessee’s case, based on trial production, is without any factual basis. The same, i.e., trial production, has rather to lead to the commissioning, i.e., a ready to use state, of which there is, again, nothing to suggest, much less prove. The same is, as explained with reference to the decisions by the Hon’ble jurisdictional High Court, to further lead to a passive user, whereupon only, in the facts as of facts and circumstances of the case, could it be regarded as an actual user, so as to satisfy the statutory mandate of ‘used’, which is required to be met. The assessee has even as much as not given the date of commissioning of the plant/windmill and/or the regularization of its connection (with the Grid) or authorization. A ready to use (or commissioned) state, it is clear, would require approval from the concerned Electricity Board/Regulatory Authority in-as-much as electricity is to be, through connection with the grid, delivered for commercial consumption.
Conclusion 4. In our clear view, therefore, the assessee’s claim for depreciation is without basis, both on facts and in law. We have, after visiting the law, explained by the Hon’ble Apex Court and the Hon’ble jurisdictional High Court, based on factual findings and on the basis of material on record, found the assessee’s case, resting on claim of trial production, as completely unfounded, even exhorting the assessee qua any further material to evidence it’s claim of trial production, which is facile in the absence of any material on record, nay, even generation of any electricity, a fact 11 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports emphasized by the Assessing Officer (AO) and confirmed by us during hearing. Rather, the trial production should lead to the removal of operational glitches or defects, even as explained by the assessee itself per its submissions before the Revenue authorities – finding reproduction in their orders, leading to regularizing its authorization, and of which the assessee ought to have adequate evidence in the regular course. The allowance by the ld. CIT(A) is on the ground of trial production, a claim we find as without basis in-as-much as there is nothing to show that the Windmill worked or even any electricity generated, by 31.3.2010. How could there be, one may ask, trial production without any production? The question of it being concluded successfully, removing all operational glitches, etc., as is required to be, is farfetched. As regards, the several decisions relied upon by the assessee, suffies to say that whether any asset has been put to use or not (by a particular date) is a matter of fact, even as emphasized in CIT vs. Vindhyachal Distilleries (P) Ltd. [2005] 272 ITR 583 (MP) relied upon by the assessee. As held therein, the question whether the plant was put to use for the purpose of business of the assessee from a particular date is question of fact (para 3). Reference in this context may also be drawn to, inter alia, the decision in Industrial Solvents and Chemicals Pvt. Ltd. (supra), including its’ facts. The said reliance by the assessee would thus be of no consequence. We have in fact already shown with reference to the binding decisions qua passive user, that the same only enables deciding whether an asset, ready to be used, is actually used, which only entitles depreciation, or not, further explaining that the concept of ready to use as per se entitling depreciation, stands rejected by the Hon’ble jurisdictional High Court in Dineshkumar Gulabchand Agrawal (supra). The foregoing decides Grounds (i) and (ii) of the Revenue’s appeal accordingly, which stand thus allowed.
The second issue arising in the instant case is the assessment of short-term capital gain (STCG) on the sale of the old Windmill; the said sale (at Rs.322.84 lacs)
12 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports resulting in a surplus in-as-much as the written down value (WDV) of the relevant block was Rs.9.48 lacs. No capital gain, however, was disclosed as before the year- end another windmill, falling in the same block, came to be acquired by the assessee at a cost of Rs.431 lacs. It is the year-end figure (of the block) that is relevant. In the AO’s view, which though did not find favour with the ld. CIT(A), the value of the block had to be considered as on the date of sale of the old Windmill, resulting in a surplus or gain on that date. The acquisition of the new Windmill was a only a subsequent event.
We have heard the parties, and perused the material on record. We are principally in agreement with the first appellate authority that it is the status of the block, positive or negative - STCG resulting in the latter case, as at the end of the year, which is to be seen in-as-much as the depreciation is to be computed only at the year-end, and on the value of the block thereat (refer s. 43(6)). This in fact is plain from the bare language of s.50, reproduced as under, whereunder the ‘surplus’ arising on the transfer of a depreciable asset forming part of a block of assets is deemed as a capital gain arising on the transfer of a short term capital asset, i.e., STCG, by definition, also prescribing the manner of its computation: ‘Special provision for computation of capital gains in case of depreciable assets. 50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :— (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; 13 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.’ So, however, a particular machinery (asset) can be a part of the block of assets only where it satisfies the condition of depreciation for the relevant year. Until then it is only an acquisition of an asset which may or may not enter the block of assets, which, by definition, is a group of assets for which the same rate of depreciation is provided per the Income-tax Rules, 1962 (‘the Rules’ hereinafter) (s. 2(11)). This is apparent from the clear language of section 32(1) (refer paragraph 3 of this order) in- as-much as only assets – tangible or intangible, owned and used, would stand to form part of any particular block of assets. Rule 5(1) of the Rules, reading as under, further clarifies this aspect as only those block of assets, as used for the purpose of business at any time during the year, are eligible for depreciation thereon u/s. 32(1) r/w s. 43(6) of the Act: ‘Depreciation. 5. (1) Subject to the provisions of sub-rule (2), the allowance under clause (ii) of sub- section (1) of section 32 in respect of depreciation of any block of assets shall be calculated at the percentages specified in the second column of the Table in Appendix I to these rules on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year.’ The fore-going is the only harmonious interpretation on a conjoint reading of the different provisions noted above. Not so reading the same would tantamount to 14 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports allowing depreciation, which is to be allowed on satisfaction of the precedent condition of the user, on the assets acquired during the year independent of their user, defeating thereby s. 32(1), as explained, with reference to the decisions by the Hon'ble jurisdictional High Court, per the preceding part of this order. It would be incongruent and internally inconsistent to state that while an asset qualifies to form part of a block of assets, depreciation thereon is not exigible on account of its non-user. We have already adjudicated on the eligibility of the new Windmill, purchased on 31.3.2010, for depreciation, deciding against it in view of its’ non-user (refer paras 3 & 4 of this order). The same would, therefore, not enter the block of assets as at the relevant year-end, and its correct representation in the final accounts (as at the year- end) is as (part of) ‘capital work-in-progress’. The WDV of the relevant block (i.e., comprised of Windmills) would therefore stand to be computed without including the same, with consequential effect on the computation of STCG u/s.
The said provision, we may further add, is by way of a legal fiction, which however is limited to the computation of the gain arising on the transfer of depreciable assets, i.e., modifies the computational provisions of ss. 48 & 49 only. The character of the gain, nevertheless, and even as explained in CIT vs. Ace Builders (P) Ltd. [2006] 281 ITR 210 (Bom), would remain the same. As such, where the capital asset (old Windmill) transferred is beyond the minimum holding period prescribed in its respect (thirty six months), the same would be a long term capital gain, subject to tax u/s. 112 of the Act. We decide accordingly. This decides Gd. (iii) of the Revenue’s – which has taxed the gain as STCG, appeal partly in its favour.
Gd. (iv) of the Revenue’s appeal concerns the disallowance of commission allowed to foreign agents (Rs.16,01,833/-) in-as-much as tax was not deducted thereon at source. The assessee’s case is that services, which are not technical in nature, were rendered by the sale agents abroad. No part of them were rendered in India and are de hors any business connection in India. The A.O., while admitting that the services were rendered by the assessee’s Italy based sale agents outside India, was 15 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports of the view that the right to receive, which the words ‘accrue’ or ‘arise’ signify, arose in India in-as-much as the supply (purchase) orders were executed in India. Reliance stands placed by him on the decision by the Authority for Advance Rulings (AAR) dated 22.2.2012 in SKF Boilers and Driers Pvt. Ltd. [2012] 343 ITR 385, reproducing there-from, and which in turn also drawn on its decision in Rajive Malhotra, In re (AAR No. 671 of 2005, reported at [2006] 284 ITR 564 (AAR)). The ld. CIT(A) allowed the assessee’s claim on the basis that the payment under reference is covered by the CBDT Circular No. 786 dated 7.2.2000, and that its withdrawal per Circular No. 7 of 2009 (dated 22.10.2009) could not be given a retrospective effect. Reliance for this proposition is placed on number of decisions by the tribunal, as in the case of CIT (Dy.) vs. Sanjiv Gupta [2011] 135 TTJ 641 (Luck).
We have heard the parties, and perused the material on record. As explained in CIT vs. R. D. Aggarwal & Co. [1965] 56 ITR 20 (SC), which stands referred to in CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC), and continues to govern the field, business connection involves the relationship between the business carried on by a non-resident (outside taxable territories), which yields profits or gains, and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits and gains. It predicates an element of continuity, and postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity – the Agents in the present case. The matter is, thus, principally and primarily factual. This is also what the Board Circular 23 (supra) explains, i.e., whether the non-resident has a business connection in India, from which income, profits or gains can be said to arise within the meaning of section 9 has to be determined in the facts of each case. This is also what it states in substance, which will not get whittled down when in the latter part, by way of an illustration, it states that for a foreign agent operating in his own country, no part of his income can be said 16 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports to arise in India – a proposition on which there could be no dispute in principle, and which is what the Hon’ble Apex Court has endorsed in Toshoku Ltd. (supra). This cannot, and by no means, is meant to or could substitute a factual determination of whether there is any business connection which would only be upon examining the scope and activities in the taxable territory (India) and the relation with that carried in the territory outside India from which income is earned. A Circular cannot, and it would be presumptuous to think otherwise, decide whether there is in the facts and circumstances of the case, a business connection, i.e., a relation between the trading activity in the taxable and the non-taxable territories, and any income arises to the non-residents on account of that relationship, as the law is, and stands explained. That is, the said Circular is in conformity with the law. Reference in this context may also be made to the decision in the case of Elve Corporation (in ITA Nos. 4108 & 6279/Mum/2012 dated 20.11.2015). In the facts of the case, the commission is for soliciting sale orders. No part of the said activity is stated as carried out in India, where there is admittedly no permanent establishment (PE) of the non-resident agents. The income is by way of commission per se, so that no part of it can be said to be taxable in India, as clarified by the Apex Court in Toshoku Ltd. (supra). The reliance by the Revenue on the decision in Rajive Malhotra (supra) is misplaced. In the facts of that case, the commission was in respect of participation in a show in India, which was facilitated by the agent by booking orders by non-resident Exhibitors. The sales in the instant case, on the supply of goods in pursuance to the purchase order booked by the agents, and for which therefore commission is allowed to them, takes place outside India. The decision in the case of GE India Technology Centre (P) Ltd. vs. CIT [2010] 327 ITR 456 (SC) would, accordingly, clearly apply in the facts of the case, so that the provisions of section 195 of the Act and, consequently, of section 40(a)(i), are inapplicable. We decide accordingly, and the assessee succeeds.
17 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports 9. The next [(v) and (vi)] grounds of the Revenue’s appeal relates to the disallowance of the claim for damaged goods (at Rs.15,98,677/-). The basis of the disallowance is the assessee’s inability to prove the same. The claim was firstly without details as to the consignment or the defects. The goods claimed to be damaged were not returned back, as would normally be the case where the part of the consignment is rejected as so. The e-mails, furnished in support (of the claim), can neither be regarded as authentic nor were verifiable. In fact, the consignment details provided were in respect of the goods exported during a preceding year. In other words, the claim for damaged goods was not backed by reliable evidence, so that it was, rather, considered by the A.O. as a ploy to lower the tax liability. The assessee, however, found favour in appeal on the ground of commercial expediency.
Before us, on a question by the Bench as to why the supplies having been made through sale agents, and even otherwise as a matter of business practice, were the defect not pointed out or identified on their receipt and only much later. In fact, communicating the damaged/defective state of the goods immediately would ordinarily be the first thing that a buyer would do on receipt of a consignment. This becomes imperative as the goods supplied were presumably in okay condition, conforming to the design and quality standards. Further, what are those defects, or how were the grounds damaged, etc. which continue to remain unspecified? Did the assessee pursue the insurance claim or any other agency involved in shipment, etc., on account of delinquency on whose part the damage had occurred? On these and such like queries; it being apparently odd and queer that claims for damaged goods are received on a regular basis, much later to the supply of goods, and accepted as such, i.e., without proper verification, particularly considering that the assessee is represented by sale agents who could ensure that the goods supplied are thoroughly examined on delivery, so as to verify and vet the claim for damaged goods and, further, no preventive measure taken, the ld. counsel conceded that the claim is in fact for reduction in the amount receivable (on sale). The supplies being already made, the 18 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports assessee, in view of the continuity of trade, which is profitable, accepts the same. This is a normal feature of trade with Italy. The buyers being in a dominant position, i.e., in trading terms, the claims are accepted, which stands also explained before the ld. CIT(A). The ld. DR would on this submit that this materially alters the nature of the assessee’s claim qua which there is no finding in the matter by the ld. CIT(A).
We have heard the parties, and perused the material on record. We agree that the candid declaration before us materially alters the nature of the assessee’s claim, so that the Revenue’s stance would also be required to be revised. It is unfortunate that the assessee comes out with the facts at a much later stage and not before the Revenue, particularly before the assessing authority. Be that as it may, the same, in view thereof, is to be regarded as a trade discount allowed by the assessee to its foreign buyers. Under the circumstances, we only consider it proper that the matter is restored to the file of the A.O. to examine the assessee’s claim – which is to be looked at from a businessman’s point of view, in light of the facts admitted before us, and who shall decide the same in accordance with the law, be it u/s. 37(1) or u/s. 36(1)(vi), issuing definite findings of fact. We decide accordingly.
Gds. (vii) and (viii) are general in nature, warranting no adjudication.
In the result, the Revenue’s appeal is partly allowed.
Assessee’s Appeal (in
Vide Gd. 1 of its appeal, the assessee claims depreciation at 80%, i.e., the rate exigible on Windmill, on the following expenditure, being components of its cost, viz. (a) development rights for restoration, paid to the State Government of Andhra Pradesh; (b) Erection and commissioning expenditure; and (c) Transportation expenditure, as against at 15% allowed to it. For each of the expenses, the assessee claims its’ case to be covered by a decision by the tribunal, quoting its citation per the relevant ground itself.
19 & 6209/M/2014 (A.Y. 2010-11) G. Shoes Exports 15. We have heard the parties, and perused the material on record. We find no reason not to accept the assessee’s claim or to take any different view in the matter in the admitted facts of the case, i.e., each of the expenditure forming part of the cost of the windmill, i.e., up to its’ commissioning stage, on which, therefore, depreciation is allowed. It is well settled that all the expenditure up to the commissioning of the plant is to be capitalized and, therefore, no differentiation could be made between one expenditure and another; all the expenditure incurred to bring the capital asset to the condition and location of its intended use forming part of, and is to be accordingly capitalized at its cost. We decide accordingly, and the assessee succeeds.
Gd. 2 of the assessee’s appeal is in respect of the foreign travel expenditure of Priya Kejriwal, wife of Shri Sahil Kejriwal, partner in the assessee- firm. The claim is made on the basis of her having accompanied her husband on foreign travel, actively assisting him thereon. The same stands denied by the Revenue on the ground that the claim is totally unevidenced. There is, in fact, no evidence of her, who is neither a partner nor an employee in the assessee-firm, being involved in the day-to-day work of the organization. The only inference that follows under the circumstances is that she was simply accompanying her husband on foreign travel/s. Before us, it was explained by the ld. AR that as sellers, the representatives of the assessee-firm have to carry large sample bags from buyer to buyer, and for which otherwise physical assistance, at a cost, would be required. Secondly, Priya Kejriwal, being also a member of the family, involved in its business, participates in ensuing discussions with the buyers, so that the expenditure ought to be allowed.