M/S. BAJAJ HERBALS PVT. LTD.,,AHMEDABAD vs. THE INCOME TAX OFFICER,WARD-1(2),, AHMEDABAD

The cross appeals by the Revenue and Assessee are directed against the order dated 18.05.2015 passed by the CIT(A)-1, Ahmedabad arising out of the order dated 28.03.2013 passed by the ITO Wd-1(2), Ahmedabad u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for Assessment Years 2010-11.

This appeal relates to disallowance of Rs. 46,52,291/- by the Revenue treating the same as prior period expenses. The said expenses found to be crystallized in the F.Y. 2009-10 and hence disallowed by the Ld. AO, which was, in turn confirmed by the Ld. CIT(A). Hence, the appeal before us.

The assessee company engaged in manufacturing of cosmetic products for domestic as well as exports filed it return on 08.04.2011 declaring income at Rs. (-) 4,57,78,741/- and book profit u/s. 115JB of the Act at Rs. 50,82,397/-. Notice under section 143(2) dated 22.09.2011 was issued and served upon the assessee flowed by and further notice dated 18.05.2012 and a detail questionnaire under section 142(1) of the Act dated 23.08.2012.

The case of the assessee before the CIT(A) is this that though the said expenses pertain to prior period that is F.Y. 2008-09 there were some dispute between those parties and hence expenses were not claimed in the A.Y. 2009-10. Only upon settlements of those disputes in the A.Y. 2010-11, the liability in respect of the same was finalized and the claim was made during the A.Y. 2010- 11. However, such justification made by the assessee was not found acceptable by the First Appellate Authority and hence addition made by the AO was confirmed.

At the time of hearing of the instant appeal of the Sr. Ld. Counsel appearing for the assessee submitted before us that the disputes were settled in the A.Y. 2010-11. The expenses were crystallized only during that year under consideration and hence claim was made. Apart from that, the genuineness of the quantum of expenses were neither doubted by the Revenue as also argued by him. He had also taken us to the ledger accounts of those concerned person appearing at Page 228 to 248 of the Paper Book on record before us. The Ld. Senior Counsel appearing for the assessee further argued that the authorities below failed to appreciate that the tax rate remain the same in both the years, whenever it is claimed and thus there is no loss of revenue and hence the discussion and/or observation made by the authorities below are merely academic. On this aspect he relied upon the judgment passed by the Apex Court in the case of CIT vs. Excel Industries Ltd. 358 ITR 295 (SC) and the jurisdictional High Court in the case of CIT vs. Nagri Mills Co. 33 ITR 681 (Bom.).

On the other hand, the Ld. DR relied upon the order passed by the authorities below.

The Revenue has filed the instant appeal with the following grounds:- “

These grounds of appeal relate to disallowance of freight expenses of Rs. 34,14,124/- made under section 40(a)(ia) of the Act. The Learned AO discussed payment of such amount to eight parties in respect of expenses on account of deduction of TDS upon rejecting the appellant’s contention that TDS was deducted as per the provisions on the basis of evidences being photocopies of the invoices raised by these parties. However, the Learned CIT(A) while dealing with this ground observed as follows:-

It is the case of the assessee that while exporting its goods, it books the container of various foreign shipping companies through their offices in India/clearing and forwarding agents (C&F) who deal with the office of such shipping companies. In fact upon receipt of bills for freight and other related charges of shipping companies the assessee pays to clearing and forwarding agents, who in turn, make such payment to the concerned shipping companies. As it appears from the records that such bills comprise of freight in foreign currency, terminal handling charges, consolidation and documentation charges, detention charges etc. It is further the case of the assessee that the assessee has duly deducted tax at source on terminal handling charges, documentation charges etc paid to these agents. However, the payment made to the non-resident shipping company in foreign currency by such agents is reimbursement of actual expenses and thus no (M/s. Bajaj Herbals Pvt. Ltd. vs. ITO) A.Y. 2010-11, (ITO vs. M/s. Bajaj Herbals Pvt. Ltd.) A.Y. 2010-11 7 tax is required to be deducted at source on the same as it appears from the records which has been duly taken care of by the Learned CITA.

It is relevant to mention that as per CBDT circular No. 723 dated 19.09.1995 since agents acts on behalf of the non-resident ship-owner he therefore steps into the shoes of the principal. Accordingly provision of Sec.172 shall apply and provisions of Sec.194C and Sec.195 would not apply. Having regard to the this particular aspect of the matter the Learned CIT(A) has deleted such disallowance made under section 40(a)(ia) of the Act.

Alternatively in the event the C&F agents have declared terminal handling charges, documentation charges etc. as income and pay tax thereon disallowance under section 40(a)(ia) is not called for. In this regard the assessee relied upon the judgement passed by the Hon’ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township Pvt. Ltd. reported in 377 ITR 635(Del). In that view of the matter the order passed by the Learned CIT(A), in our considered opinion, just and proper and without any ambiguity so as to warrant interference. Thus, the order is passed in the affirmative i.e. in favour of the assessee and against the Revenue. Hence, Revenue’s appeal on this ground is dismissed.

These ground relate to deletion of disallowance made in respect of interest and insurance expenses claimed on vehicles, and part disallowance in respect of depreciation and incidental expenses claimed on vehicle. The following expenses were disallowed by the Learned AO in respect of Toyota Corolla Altis on the ground that the said car was registered in the name of the director of the company:

It is the case of the assessee that the car is reflected as an asset in the balance sheet of the company and the car loan also appears as a liability in the balance sheet of the company. Further that the company has passed a resolution for registration of the said car in the name of the director but the company has domination over the said car and the same is used wholly and exclusively for the business of the company. However, this plea of the assessee has found to be confronted by the ld.DR but he failed to bring any decision in his favour.

Heard the parties and perused the records. It is the settled principle of law that though cars are brought by a company the name of its director, the company is eligible for claiming depreciation on the same. In this regard, the assessee relied upon the judgement passed in the matter of CIT vs. Aravalli Finlease reported in 341 ITR 282(Guj) which we have carefully perused.

As we find that the Learned CIT(A) deleted additions made in respect of “Interest Rs. 82,121/-” and “Insurance Rs. 23,370/-”; However, addition in respect of “Depreciation Rs. 1,36,000/-” and “car expense Rs. 28,995/-” has been partly deleted to extent of 75% i.e. 25% which according to us is unambiguous taking into consideration of the assesses books of accounts maintained in regard to the said asset as it appears from the records and thus we uphold the same. Hence, this ground of appeal preferred by the Revenue is dismissed.

This ground is against the disallowance of expenses of Rs.6,72,442/- for web designing and development has been challenged before us by the Revenue.

Heard the parties, perused the relevant materials available on record.

As it appears from the records that the Learned AO treated the said website design and development expenses of Rs.8,96,589/- as capital in nature and allowed (M/s. Bajaj Herbals Pvt. Ltd. vs. ITO) A.Y. 2010-11, (ITO vs. M/s. Bajaj Herbals Pvt. Ltd.) A.Y. 2010-11 9 the precision on the same @ 25%, and therefore the impugned disallowance of Rs.6 ,72,442/- were appeal against before the Learned CIT(A).

It is a common practice of the present business scenario that a company creates a website so as to display all the information about its products and such website needs to be updated at frequent intervals. Therefore, such expenditure needs to be incurred each and every year. We have further perused the ledgers and invoices which is on record before us commencing from page 186 to 199 of the paper book filed by the assessee before us, wherefrom, it appears that the payment to “BC Web Design P. Ltd.” was for part of payment of initial one time set up cost of design and development of website; payment to “Innovative Design Engineering” was for design and development of various products through computer based research and field research; payment to “M/s. Paragraphic” was for various brochure designing and incidental work such as photography, digital printing, Arabic translation of printed material, etc. It also appears that the assessee has also deducted tax at source while releasing such payments. Thus, it becomes amply clear that the underlying expenses have been incurred for day-to-day running of the business of the assessee. No asset has come into existence on account of incurring such expenditure, and such expenditure has not resulted into any enduring benefit to the assessee. More so, expenses have been incurred wholly and exclusively in connection with the business of the assessee. In view of the above, the underlying expenses are undoubtedly revenue. In this regard, the Learned AR relied upon the judgement passed by the Hon’ble jurisdictional High Court in the matter of PCIT vs. Zydus Wellness Ltd. reported in(2017) 81 taxmann.com 159(Guj). We have perused the judgement and find that since the underlying expenses has undoubtedly revenue in nature, the impugned disallowance has been rightly deleted by the Learned CIT(A) relying upon the ratio laid down by the judgement as aforesaid. Hence, we find no merit in the ground of appeal preferred by the Revenue. The same is, thus, dismissed.

This ground relates to deletion of disallowance of Rs.8,71,278/- for market survey and production of TV commercial has been challenged before us by the Revenue. Such expenses in question have been incurred for carrying out market survey prior to launch of assesse’s products in foreign markets and this expenses in question are part of sales and marketing expenses since it is essential for the company to carry out some such market survey prior to launching its product in the market as the case made out by the assessee.

Heard the parties, perused the relevant materials available on records. It appears from the above discussion that the expenditure in question has not resulted into any enduring benefit to the assessee. Further that such expenses have been incurred wholly and exclusively in connection with the business of the assessee as it appears from the records being revenue in nature, and relying upon the judgement passed by the jurisdictional High Court in the matter of PCIT vs. Zydus Wellness Ltd. reported in(2017) 81 taxmann.com 159(Guj.), we find no ambiguity in the order passed by the Learned CIT(A). Hence, we reject the ground of appeal preferred by the Revenue.

This ground relates to disallowance of expenses paid to Triton Communication for making advertisement film at Rs. 30,20,703/-.

Heard the parties and perused the relevant materials available on record.

This ground relates to disallowance of Rs. 1,16,539/- being credit card expenses.

Heard the parties and perused the relevant materials available on record.

It appears that the AO disallowed credit card expenses of Rs. 1,16,539/- without appreciating facts of the case in its entirety. These expenses have been incurred in relating to the business of the assessee. Whenever directors go out for business promotion it is not always convenient for them to pay various expenses in cash and thus the expenses are made through credit card. We have also carefully considered the ledger of credit card of those concerned expenses which appear at Page 254 to 255 of the Paper Book on record before us. Assessee’s turnover is Rs. (M/s. Bajaj Herbals Pvt. Ltd. vs. ITO) A.Y. 2010-11, (ITO vs. M/s. Bajaj Herbals Pvt. Ltd.) A.Y. 2010-11 12 16,64,10,392/- for the year under consideration which appears at Page 54 of the Paper Book. Accordingly, the impugned expense is only 0.07% of the total turnover. Thus, ultimately, the impugned expenses have been found to be incurred wholly and exclusively for the business of the assessee by the ld.CIT(A), which finding according to us is without any ambiguity and needs no interference. The same have been deleted by the Ld. CIT(A). Hence, we reject this ground preferred by Revenue.

This ground relates to the addition of Rs.13,44,47,290/- made on account of under-invoicing of sales made to sister concern.

Heard the parties and perused the relevant materials on record.

It appears that AO made the ad-hoc addition of Rs. 13,44,47,290/- on account of alleged under-invoicing of sales made to sister concerns. The assessee has made exports of Rs. 2,42,67,490/- to its sister concern viz. Bajaj Herbal FZE LLP. The AO further found that the assessee had exported same products to various other parties as well. The estimated value is 84.71% which appears at Page 22 of the Paper Book. We have carefully considered the documents relied upon by the appellant which is forming part of the records before us. We find that the assessee has also submitted break-up of exports with comparison, sample copy of bills issued to its sister concern along with ledgers of its sister concern and other parties. However, after careful consideration of the matter, we find that the AO failed to appreciate that difference in sales price could be on account of various factors such as, strength of the product, terms of payment, the concerned country being the final destination, stability of political conditions in those countries, quantity supplied, quality supplied, creditworthiness of parties, market conditions, risk factor, etc.

Apart from that Assessee’s exports to its sister concern for AY 2010-11 are of Rs. 2,42,67,490/- whereas AO has worked out under-invoicing of exports to a huge sum of Rs. 13,44,47,290/- i.e. almost 5.54 times of exports to sister concern shown by the assessee. We also find that the total turnover for Asst. Year 2010-11 is Rs. 16,64,10,392/- as appears at Page No. 54 of the Paper Book. After addition of Rs. 13,44,47,290/- in respect of alleged under invoicing the Gross Profit rate and Net Profit rate shall be 64,79% & 46.38% which is not possible. In fact, a survey was took place on 22.02.10 which is at the fag end of the year. The assessee are duly audited all books of accounts. After taking into consideration the entire aspect of the matter, we find the Ld. CIT(A) has rightly deleted the impugned (M/s. Bajaj Herbals Pvt. Ltd. vs. ITO) A.Y. 2010-11, (ITO vs. M/s. Bajaj Herbals Pvt. Ltd.) A.Y. 2010-11 14 disallowance. Hence, in the absence of any merit, we dismiss the ground raised by the Revenue.

In the result, assessee’s appeal is allowed, and that of the Revenue is dismissed.