ELGI EQUIPMENTS LTD.,COIMBATORE vs. JCIT, COIMBATORE

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

First, we take up assessee appeal in 2. of assessment year 2010-2011 for adjudication :- The assessee has raised three substantive grounds on disallowance (i) foreign travel expenses (ii) payment of fee to the Bombay Stock Exchange and (iii) disallowance of legal and professional expenditure in connection with acquisition.

The Brief facts of the case is that the assessee is in the 3. business of manufacturing of Air Compressors and Engines and filed return of income on 14.10.2010 with total income of �88,06,76,132/- and return was processed u/s.143(1) of the Act and the case was selected for scrutiny and notice u/s.143(2) of the Act dated 26.08.2011 was issued. In compliance to notices, the ld. Authorised Representative of assessee appeared from time to time and filed details and explanation. The ld. Assessing Officer on perusal of profit & 2943/Mds/14 :- 3 -: and loss account found that assessee has claimed an expenditure of �1,76,97,063/- as foreign travel expenses incurred in the financial year 2009-2010 and the ld. Assessing Officer issued office letter dated 10.10.2012 to furnish the details of foreign travel expenses with name of the employees, designation in the company and purpose of visit and the same was furnished by the assessee. The ld. Assessing Officer verified that the assessee company has subsidiaries at France and China and the middle and senior level management personnel were sent to these countries for executing the work relating to subsidiaries in the nature of ERP finance module implementation for integration of accounts of subsidiary with the Holding company, business review meetings, vendor development, product inspection and other business strategies. The assessee company debited �7,45,016/- expenditure incurred for the business visits of the Managing Director to these subsidiary companies and the ld. Assessing Officer observed that the expenditure incurred relating to the subsidiary company should be disallowed as they are not related to the earning income for the assessee company and the ld. Authorised Representative could not substantiate how the expenses are related to earning income and disallowed foreign travel expenses on the subsidiary company �46,34,383/-. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). & 2943/Mds/14 :- 4 -:

3.1 In the appellate proceedings, the ld. Authorised Representative explained that the expenditure of foreign travel are to comply the various business functional activities of the company in foreign countries on assignments and also includes the expenditure on visits to the subsidiaries companies. The Board of Directors and top management professional travelling abroad for undertaking assignments for the benefit of the assessee company being holding company. Further, the assessee submitted paper book explaining the details of travels made by the employees and the expenses are wholly and exclusively for the purpose of business. The assessee company has subsidiary in China and the Managing Director travels for the business developments which are within the main objects of the assessee company. The expenditure incurred relating to the foreign subsidiary as under:-

(i) ERP Finance Module Implementation for integration of accounts. (ii) Business Review Meeting. (iii) Vendor Development and Production Inspection. (iv) Market Study and Strategy (v) Implementation of Compressor Assembly process.

The ld. Assessing Officer has disallowed the expenditure without appreciating the nature of expenses incurred on foreign travel to China which the ld. Commissioner of Income Tax (Appeals) discussed elaborately at page 8 to 10 of his order and concluded considering & 2943/Mds/14 :- 5 -: the brand image of the company and partially allowed the expenditure relying on the assessee submissions observed at para 11 at page 10 of his order as under:- ‘’I have gone through the detailed submissions made by the appellant and also analyzed the nature of business expenditure incurred. As seen from the details of the individual expenditure, statements etc. the vendor development related travel is definitely in the interest of the holding company since procurement of the components for the holding company was also done from China. Since the brand name of the company "ElGI" has to be maintained, the vendor development and product inspection do play an important role in the daily business activity of the appellant company. During the Financial Year 2009-10, M/s. Elgi India imported to the tune of Rs.20 Crores from China, whereas, the total turnover of China Subsidiary itself was about ₹1Crore only. Considering these facts, it is clear that the vendor development and product inspection has to be considered as the business expenditure of the appellant company. As submitted by the appellant, the foreign travel .expenditure relating to vendor development and product inspection amounting to ₹11,80,255/- is to be allowed. The other head is regarding the submissions made for Import Purchase, Production and Gear Sourcing for ELGI INDIA, is in the interest of the appellant company, hence it has to be treated as expenditure incurred for the business of the appellant company amounting to ₹15,04,203/-. Regarding the other expenditure incurred by the appellant amounting to ₹17,42,595/- cannot be stated as exclusively and wholly for the business of the appellant. It is more in the interest of the subsidiary and the appellant company should have apportioned the major expenditure of foreign travel to the subsidiary. After considering the above facts, the Assessing Officer is directed to allow the expenditure of Rs.26,84,458/- and the balance expenditure of ₹17,42,595/- is to be disallowed. This ground of appeal is partly allowed’’.

Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee assailed an appeal before Tribunal.

3.2 Before us, the ld. Authorised Representative reiterated the submissions made before assessment and appellate proceedings and & 2943/Mds/14 :- 6 -: substantiated his arguments with information filed in appellate hearing alongwith supporting judicial decisions were the ld. Commissioner of Income Tax (Appeals) erred in confirming the disallowance of foreign travel expenses to the extent of �17,42,595/- without appreciating the business reviews and foreign travel is exclusively for the purpose of business, the investments in subsidiary company are on business module for global operations and such travel is solely for the benefit of business of the assessee and not to subsidiary and the ld. Commissioner of Income Tax (Appeals) has not adjudicated the difference amount of foreign travel expenses disallowance of �2,07,330/- and supported the arguments by submitting information on foreign travel expenses and judicial decisions.

3.3 Contra, the ld. Departmental Representative relied on the orders of the lower authorities and vehemently opposed to the grounds.

3.4 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Authorised Representative argued that the ld. Commissioner of Income Tax (Appeals) has partially allowed the appeal considering the material submitted in the appellate proceedings. But on a remaining amount of ₹17,45,595/-., the ld. Commissioner of Income Tax (Appeals) has reserved his objections & 2943/Mds/14 :- 7 -: though considered elaborately in his order on various development products promoted by the company. The findings of the ld.CIT(A) that the amount of travel expenditure to subsidiary company should be apportioned and observed that the expenditure of foreign travel is incurred exclusively for conducting the business globally and there is nothing on record or valid reasons that this expenditure is incurred for the benefit of the Holding company. The ld. Authorised Representative submitted Annual report and drew attention to page nos.41 to 45 and Accounting standard 18 on related party disclosures tried to explain the reasons of gradual increase in sales compared to earlier years due to subsidiary company. But we are not convinced with the indirect beneficiary contribution by the subsidiary company in the progress of the assessee company on global business activities. We are of the opinion that expenditure of foreign travel to subsidiary companies shall be separately allocated to cost of project of subsidiary company and holding company and upheld the order of the Commissioner of Income Tax (Appeals) on this ground as the ld. Commissioner of Income Tax (Appeals) discussed the issue and gave finding on subsidiary company and restricted the disallowance to �17,45,595/-.

As the balance amount of �2,07,330/- was not adjudicated, we remit the issue to the file of Assessing Officer to verify the genuineness of & 2943/Mds/14 :- 8 -: transaction and allow the claim. The ground of the assessee is partly allowed.

4 The second ground raised by the assessee that the ld. Commissioner of Income Tax (Appeals) has sustained the addition of �55,150/- paid by the assessee to Bombay Stock Exchange in connection to the amalgamation of business.

4.1 In the assessment proceedings, the ld. Assessing Officer found that an amount of �2,28,40,000/- was incurred towards legal and professional charges in the previous year 2009-2010 and the assessee filed details with breakup of expenditure incurred during the year alongwith name, description and amount. Out of the above amount, the ld. Assessing Officer found �55,150/- and �1,17,069/- both aggregating to �1,72,219/- are the payments made to Bombay Stock Exchange as amalgamation charges being incidental to the business on acquisition amalgamation of another company. The ld. Assessing Officer not satisfied with explanations on the issue and treated �1,72,219/- as capital expenditure. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

4.2 In the appellate proceedings, the ld. Authorised Representative explained the nature of expenditure which includes & 2943/Mds/14 :- 9 -: professional charges paid to Company Secretaries and produced the bills. The ld. Commissioner of Income Tax (Appeals) considering the grounds and findings of the ld. Assessing Officer and judicial decisions relied by the ld. Assessing Officer found that the expenditure is incurred in connection with the amalgamation of the company intimating to the Bombay Stock Exchange. The above expenditure was incurred by the assessee company to merge M/s. Elgi Industrial Products Limited carrying on complementary business and the amalgamation was necessary for the smooth conduct of the business.

The ld. Commissioner of Income Tax (Appeals) considering decision of the Apex Court and bills of legal and professional charges found that �55,150/- was paid to Bombay Stock Exchange and balance amount �1,17,069/- professional charges paid to Company Secretaries for preparing secretarial Audit report and Auditing is Revenue Expenses and allowed u/s.37(1) of the Act but confirmed the addition of amalgamation fees of �55,150/- being capital expenditure. Against this, the assessee assailed an appeal before Tribunal.

4.3 Before us, the ld. Authorised Representative explained the amalgamation of the company and the legal and professional charges incurred in connection with amalgamation and supported his arguments that Bombay Stock Exchange fees of �55,150/- is Revenue expenditure and ld. Commissioner of Income Tax (Appeals) & 2943/Mds/14 :- 10 -: has partly allowed the claim and sustained the addition as capital expenditure and prayed for allowing the claim.

4.4 Contra, the ld. Departmental Representative relied on the orders of Commissioner of Income Tax (Appeals) and opposed to the grounds.

4.5 We heard the rival submissions, perused the material on record. The ld. Authorised Representative contention that the amalgamation fees is in the nature of Revenue expenses and the facts are that the amount of �55,150/- was paid to Bombay Stock Exchange is not disputed and was paid in the process of amalgamation. The assessee company incurred this expenditure to merge M/s. Elgi Industrial Products Ltd for the smooth conduct of business and prime face this fees is paid once in life time for amalgamation of the company with enduring benefits we are of the opinion the expenditure has to be apportioned and transferred to profit and loss account as per the provisions of Sec. 35DD of the Act and we direct the ld. Assessing Officer to allow apportioned claim in the previous year being the first year and this ground of the assessee is partly allowed.

5 The last ground raised by the assessee is respect of disallowance of expenditure of �21,33,539/- as legal and professional charges paid to overseas parties. & 2943/Mds/14 :- 11 -:

5.1 In the assessment proceedings, the assessee filed breakup of expenditure alongwith name, description and amount. On verification, the ld. Assessing Officer found �19,55,555/- was paid as fees to M/s. Stehlin and Associates at Paris towards services rendered in connection with acquisition of France company M/s. Belair SA at Paris and the services includes translation, documentation, corporate matters and associated filing and balance �1,77,984/- for other overseas consultants. The ld. Assessing Officer is of the opinion that the expenditure incurred towards acquisition of France Company is not related to assessee business earnings and income. Such expenditure was incurred in connection with a new unit feasibility and acquisition of a capital asset and not allowable u/s.37(1) of the Act. The ld. Assessing Officer relied on the judicial decisions and provisions of law and also Accounting standard of the Institute of Chartered Accountants of India (ICAI). The ld. Assessing Officer heard the explanations and was not convinced with the submissions and activities of the company and discussed elaborately at page 18 to 20 of his order and also distinguished the decision relied by the assessee and treated the expenditure as not related to the business and disallowed �21,33,539/. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). & 2943/Mds/14 :- 12 -:

5.2 In the appellate proceedings, the ld. Authorised Representative explained that the assessee company paid fees to overseas consultancy firm towards the services and market survey in Asia and South Africa incurred by the parent company in India. The ld. Commissioner of Income Tax (Appeals) considered the grounds and submissions and bifurcation of legal and professional charges paid to three overseas parties and submissions on payment of fees to M/s.

Stehlin & Associates whose services have been utilized and expenditure incurred being part of regular business expenses to understand the acquisition and smooth conduct of business in Europe and has to be treated as Revenue expenditure and relied on the Apex Court decisions. The ld. Commissioner of Income Tax (Appeals) has examined the invoice of M/s. Stehin and Associates and also breakup of amount and came to a unilateral conclusion that the expenditure is nothing to do with regular business and expenditure is incurred for acquisition of shares of M/s. Belair, France and the assessee could not furnish evidence to prove that the said acquisition was in the course of carrying on of the assessee business and deleted the addition of �1,77,984/- and sustained expenditure of �19,55,555/- paid to M/s.

Stehin and Associates. Against the order of Commissioner of Income Tax (Appeals), the assessee assailed an appeal before Tribunal. & 2943/Mds/14 :- 13 -:

5.3 Before us, the ld. Authorised Representative reiterated the submissions on acquisition made before assessment and appellate proceedings and this professional expenditure of �19,55,555/- was incurred in connection of acquisition of M/s. Belair, France towards expansion of assessee business in Europe and incurred wholly and exclusively in connection with business and relied on the judicial decisions. Further, the assessee company is a multinational company with foreign subsidiaries and prayed for deletion of addition.

5.4 Contra, the ld. Departmental Representative relied on the orders of Commissioner of Income Tax (Appeals) and opposed to the grounds.

5.5 We heard the rival submissions and perused the material on record. The ld. Authorised Representative submissions being the assessee company has foreign subsidiaries and it is necessary for smooth running of business and expand global operations it become mandatory to acquire foreign companies and acquisition of M/s. Belair SA at Paris is in the interest of the company. The expenditure is in the nature of legal and professional fee paid for services of translation, documentation, corporate matters and associated filing and such expenditure is wholly and exclusively for the business purpose and expenditure is genuine and relied on the decision of Apex Court. We & 2943/Mds/14 :- 14 -: found that the assessee company acquired of Shares of M/s. Belair SA at Paris is for conducting business in Europe region and activity does relate to investment for enduring value and the expenses on acquisition of shares of foreign company directly or indirectly takes the character of capital in nature and shall be part of Business acquisition.

Therefore, considering the apparent facts, necessity of expenditure and overseas payment, we are of the opinion that the professional charges paid to M/s. Stehlin & Associates, Paris in connection with acquisition is capital expenditure and we upheld the order of CIT() on this ground and the ground of the assessee is dismissed..

6 In the result, the appeal of the assessee in of assessment year 2010-2011 is partly allowed for statistical purpose. .

7 Now, we take up Department appeal in of assessment year 2010-11 for adjudication.

7.1 The first ground raised by the Department is that Commissioner of Income Tax (Appeals) ought to have called for a remand report as laid out under Rule 46A of Income Tax Rules, 1962 while adjudicating the issue of foreign travel expenses. & 2943/Mds/14 :- 15 -:

7.2 The ld. Commissioner of Income Tax (Appeals) has partly allowed the appeal of the assessee based on the submissions in the appellate proceedings. The ld. Departmental Representative alleged that ld. Commissioner of Income Tax (Appeals) has not called for the remand report while adjudicating on the disputed issue. The ld. Authorised Representative agitated the grounds of the Revenue as no fresh material was brought before Commissioner of Income Tax (Appeals) and the explanations filed before Commissioner of Income Tax (Appeals) are part of the assessment record. The assessee company has incurred the expenditure for Business reviews of subsidiary companies in foreign countries and no fresh material was filed before Commissioner of Income Tax (Appeals) and prayed for dismissing the appeal.

7.3 We heard the rival submissions, perused the material on record. The ld. Authorised Representative submissions that no fresh material was brought before Commissioner of Income Tax (Appeals).

We perused the assessment order para 5 at page 7 the ld. Assessing Officer issued letter dated 10.10.2010 to furnish complete details of foreign travel expenses including name of employees, designation in the company, country visited, purpose of visit and amount spent. In compliance, the ld. Authorised Representative has provided the details of the expenditure incurred and the ld. Assessing Officer has & 2943/Mds/14 :- 16 -: examined the information and discussed at para 5 on ERP finance module implementation for integration of accounts of subsidiary alongwith the holding company. Further, on verifying the Commissioner of Income Tax (Appeals) order at page 6 in para 9, we found that the assessee has submitted paper book with explanations on breakup of expenditure and other related information. The ld. Commissioner of Income Tax (Appeals) has elaborately discussed on breakup of expenditure and business activities and granted partial relief. Considering the apparent facts, we are of the opinion that the assessee has submitted information before Commissioner of Income Tax (Appeals) which the ld. AO could not verify and ld. Commissioner of Income Tax (Appeals) has not called for comments or remand report and not complied the provisions of Rule 46A. We therefore, set aside the disputed issue to the file of the ld. Assessing Officer for limited purpose to verify the genuineness of statements filed in the appellate proceedings and the ld. Assessing Officer shall provide adequate opportunity of being heard to the assessee before passing the orders and the ground of the Revenue is allowed for statistical purpose.

8 The second ground raised by the Revenue is that Commissioner of Income Tax (Appeals) erred in concluding that Holyroyd Machinery replaced comes under ‘’Repairs and Maintenance’’ & 2943/Mds/14 :- 17 -: and hence allowable u/s.37 of the Act, which is factually incorrect, since the facts and circumstances of the case indicate that it is clearly a new machinery installed.

8.1 The assessee company has incurred expenditure under the head repairs and maintenance. Out of the above amount, the company has incurred expenditure under the Head Holyroyd Precision Limited having purchased a new dual type PC technology based controlling system with CAN (Control Areas Network) fitted by replacing the existing CNC (Computer Numerical Control) drive system.

The ld. Assessing Officer observed and considered the submissions of the ld. Authorised Representative and is of the opinion that expenditure is capital in nature and discussed elaborately at page 11 to 14 of his order and the submissions of the assessee company on 27.02.2013 and came to a final conclusion that the expenditure incurred for importing and erecting Holyroyd dual type PC technology being independent controlling system and treated the expenditure as capital expenditure. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

8.2 The ld. Commissioner of Income Tax (Appeals) considered the findings of the ld. Assessing Officer and discussed elaborately considering the judicial decisions and nature of technology at page 11 & 2943/Mds/14 :- 18 -: to 14 and examined the photographs of various parts and details of working of Holyroid Machine and discussed in reconditioning for spares observed at para 16 as under:-

‘’I had gone through the original purchase order placed by the appellant company with M/s. HOLROYD MACHINE TOOLS on 09.03.1996. As seen from the placement order along with the quotation given by M/s. HOLROYD, it is very clear that the CNC System control was a part of the machine and this technology becoming obsolete, it was replaced by modified electronic system. The CNC upgradation helped the appellant company to minimize the failures or to achieve the zero failure related to electrical and electronics circuits. As seen from the photos submitted by the appellant, the parts in the electrical panel were replaced with the updated Electrical Panel and Display Unit. As stated by the Assessing Officer in his order, it is not a question of replacement of an existing machine with a new machine. The Operating System of the machine was only replaced, which is a revenue expenditure allowable u/s 37 of the Income Tax Act, 1961. The Assessing Officer is accordingly directed to allow the same. This ground of appeal is allowed’’. and allowed the expenditure as Revenue. Against the order of Commissioner of Income Tax (Appeals), the Revenue has assailed an appeal before us.

8.3 Before us, the ld. Departmental Representative argued that the claim of the assessee that Holyroid Machine is only replacement is not correct and it is clear case of new installation of machinery and prayed for allowing the appeal.

8.4 Contra, the ld. Authorised Representative filed photographs of machinery being replaced and also the working of Holyroid Machine & 2943/Mds/14 :- 19 -: with upgrade proposal and prayed the expenditure is in the nature of repairs and maintenance as the company is in engineering industry and the value of replacement does increase its capacity and consists of electrical panel and shall cannot function independently and the components forming part of larger machines and prayed for dismissing the appeal.

8.5 We heard the rival submissions, perused the material on record and judicial decisions. The contention of the ld. Departmental Representative that the assessee has installed new machinery and could not substantiate with material evidence being Revenue expenditure except relying on the finding of the Commissioner of Income Tax (Appeals) were it was dealt based on the operation and technical feasibility of the machine and on upgradation of Holyroid Machinery. The ld. Departmental Representative further explained that the replacement of parts play a important role in machinery and can work independently and shall provide perpetual enduring benefit and increase the life of existing machine. The ld. Authorised Representative substantiated his arguments with evidence of photographs of units and also upgrade proposal of the company and relied on judicial decision of Apex Court. We considering the apparent facts, functional test, submissions and judicial decisions set aside the order of Commissioner of Income Tax (Appeals) and remit the entire & 2943/Mds/14 :- 20 -: disputed issue to the file of Assessing Officer as the assessee has submitted photographs and material before us and which need to be examined with technical report and pass the order on merits after providing adequate opportunity of being heard to the assessee and the ground of the Revenue is partly allowed for statistical purpose.

251(1)(a) of the Act and ld. Commissioner of Income Tax (Appeals) ought to have appreciated the fact that the ld. Assessing Officer had already decided the issue on the basis of very same evidences produced before the Commissioner of Income Tax (Appeals) and cannot therefore, review the decision of the Assessing Officer.

9.1 The assessee company in computation of income for the assessment year 2010-2011 claimed deduction of carry forward loss to the extent of �1,03,27,094/- and filed details explaining the additional brought forward depreciation of amalgamating company M/s. Egli Industrial Products Limited merged in financial year 2009-2010 amounting to �60,13,991/-. The ld. Assessing Officer found that additional depreciation of amalgamated company claimed for the & 2943/Mds/14 :- 21 -: assessment year 1999-2000 cannot be allowable to the transferred company and relied on the decision of Apex Court. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

9.2 In the appellate proceedings, the ld. Authorised Representative argued that claim made at the time of scrutiny assessment for adjustment of carrying forward loss was not considered. The ld. Commissioner of Income Tax (Appeals) found that assessee company has filed revised return for the assessment year 2010-2011 withdrawing the weighted deduction claimed u/s. 35(2AB) of the Act alongwith benefit of carry forward loss not originally claimed. The ld. Commissioner of Income Tax (Appeals) relied on the decision of CIT vs. Sam Global Securities Ltd (2013) 38 taxmann.com 129 (Del) observed at para 23 of his order and allowed the ground of the assessee by directing the Assessing Officer to examine the claim of additional brought forward depreciation of the amalgamating company and allow in accordance with law. Aggrieved by the order, the Revenue assailed an appeal before Tribunal.

9.3 Before us, the ld. Departmental Representative argued that the ld. Commissioner of Income Tax (Appeals) does not have power to & 2943/Mds/14 :- 22 -: remit the issue to the ld. Assessing Officer as per provisions of Sec.

251(1)(a) of the Act and prayed for allowing the appeal.

9.4 On the other hand, the ld. Authorised Representative relied on the order of CIT(A) in directing ld. Assessing Officer to examine the claim of the assessee based on the Apex Court decision and vehemently opposed to the grounds of Revenue.

9.5 We heard the rival submissions, perused the material on record. The contention of the ld. Departmental Representative that the ld. Commissioner of Income Tax (Appeals) remitting the issue to the file of ld. Assessing Officer is in violation of provisions of Sec. 251 (1)(a) of the Act. We considered the findings of the ld.CIT(A) on the judicial decisions of Hon’ble High Court and Supreme Court and ld. Commissioner of Income Tax (Appeals) has only directed the ld. Assessing Officer to examine the claim and allow as per law. We found ld. Commissioner of Income Tax (Appeals) has only directed the ld. Assessing Officer with a condition to verify and the power of Commissioner of Income Tax (Appeals) are co-terminus with Assessing Officer and we considering the facts are of the opinion that the action of Commissioner of Income Tax (Appeals) is justified and we dismiss the ground of the Revenue. & 2943/Mds/14 :- 23 -:

Order pronounced on Tuesday, the 28th day of June, 2016, at Chennai.