THRIVEI EARTHMOVERS PVT. LTD.,,SALEM vs. ACIT, CENTRAL CIRCLE (I/C),, SALEM

O R D E R

PER MAHAVIR SINGH, VICE PRESIDENT:

- 2 - ACIT, Central Circle (i/c), Salem for the assessment year 2013-14 u/s.143(3) of the Income Tax Act, 1961, (hereinafter ‘the Act’) vide order dated 31.03.2016.

According to ld.AR, this was specifically replied vide letter dated 01.12.2015 by replying as under:- “11) Quality Allowance & Claims

- 4 - The company is engaged in providing Mines Development and Operation (MDO) services to various mine owners. The MDO operation is an end to end services where the company undertakes right from mines development, exploration, excavation and mining, hauling, processing of ore and dispatching as per mine owners instruction. In view of our performing the complete activity any quality claim and allowance arising from supply of unsized ore and ore quality shall be borne by the raising contractor. Secondly, the contract rates entitlement is a certain % of the sale price of the ore or rates proportionate to ore sale prices and on account of this, the quality claims and allowances are borne by us. Such claims and allowances paid by the company are charged to Quality Allowance & Claims head. Details of quality allowance and claim is furnished in Annexure 6.

5.1 The AO after considering all the details allowed the claim of assessee. He further stated that even this issue arose in assessment year 2014-15 and the Tribunal while taking up Revenue’s appeal in has examined this issue in detail and allowed the claim of assessee by dismissing the same vide para 55 as under:- 55. Ground No.2 challenges the decision of the ld. CIT(A) allowing the claims on quality from the buyers of the ore of A44,54,80,402/-. The Assessing Officer disallowed quality allowances and claims primarily for the following reasons.

(i) There is no agreement between assessee company and the mine owners to bear the quality allowances and claims in case of mining low grade ores.

(ii) Mine owners only do sampling of Ore at crushing and screening plant as well as at the point of dispatch.

Assessee company being contractor may have to further process any produce if desired by the mine owners for the purpose of improving the quality of the mines ores. Admittedly, there is no clause in the agreement between assessee company and mine owners regarding who has to bear the - 5 - liability of the claims from the buyers of the ore on account of low grade ore etc., There is no proximate connection between assessee company and the buyers of the ore. The reasons as to why liability of the claim is borne by the assessee company is explained before the Assessing Officer as under:- the following are the four major payments which relate to the iron ore mining operation. The other payments mainly relate to coal trading and aggregate division.

S.No. Name of the party to whom paid Amount 1 SHYAMMETALICS AND 16,54,50,411 ENERGY LTD 2 SHYAMSEL&POWER LTD 17,61,51,327 3 BAITLOGITECH PVT. LTD 3,16,10,248 4 BHUSHAN POWER & STEEL 7,22,68,416 LTD TOTAL 44,54,80,402 Our company is a contractor engaged mainly in providing iron ore mines development and operation services to the private mine owners. In this regard, we had submitted the work orders issued by the various mine owners. Though the work orders issued by the mine owners did not have any specific clause on Quality allowance, subsequently after mutual discussion the mine owners have orally stated that any claims from the buyers arising out of quality issues shall be borne/settled by raising contractor.

The contract revenue for our company as mutually agreed with the mine owners is either affixed percentage of the sale price of the ore or fixed rate per Metric Ton as specified in the work order. Such revenue rates awarded to our company are comparatively higher and result in much better realization per MT as compared to rates awarded by other entities namely Odisha Mining Corporation, a state Govt. undertaking. The rates are agreed upon to compensate the considerable risk involved, the totality of the services of an end to end nature of work, scientific mining with state of the art mining equipment and maximizing the returns by optimizing productivity.

After mutual discussion it was agreed between the mine owner and the contractor that any compensation arising out of quality issues shall be borne by the contractor and has to be mutually settled by the buyer and the - 6 - contractor. Contractor has agreed upon to bear the cost of compensation in view of the higher price awarded and to continue the future business relationship with the mine owner. This is purely a commercial decision taken by the contractor completely weighing the pros and cons of the proposal and for the betterment of relation with mine owner and continuity of business. The cost of compensation borne by the contractor has ultimately been passed on to the buyer. This has got close nexus with the business carried on by the assessee and being revenue in nature, rightly allowable under section 37(1) of the Income tax Act.

• Link between the purchaser and the raising contractor: With regard to the AO’s observation that there is no direct link between the purchaser of ore and assessee company, we submit that owing to the nature of operation carried out by the contractor and as per the commercial arrangement with the mine owner, the “Quality allowance/ claim” expenditure has been borne by the contractor.

• On all material dispatched are of Hood quality only: With regard to AO ‘s observation that f the ore mined by assessee company is of low grade, it has to be only reprocessed for improving the quality and once, ore is dispatched from mines, it is considered of good quality, we beg to differ. We submit that mine owners representative does only sampling of the ore for quality, at the crushing or screening plant at the mines and with large quantities of ore being processed and dispatched, it would not be possible to ensure entire material sent confirms to specifications. Subsequently after the material is dispatched, the buyer if not satisfied with the quality of the processed iron ore, is entitled to raise the same. The quality allowance! claim is made by the buyer after the receipt of the material at his place. It would not be possible to transport such material back to the mines for reprocessing. Such move would negate any cost advantage of the price of the ore.

• The clause on reprocessing of ore would occur and be applicable only where the material remains at the mines or mine stock yard and not when dispatch has occurred to the buyer. Further, in respect of the work order issued by our company to sub contractors engaged by us, the clause in the contract “sub contractor shall not be entitled for payment if low grade ore raised or accumulated and remain unsold, “we submit that this clause is applicable only when the low grade material remains unsold. Whereas in the case of quality allowance claimed by us, the material has been dispatched to the buyer who has in turn raised debit notes on our company.

• On rebate charged being equivalent to rate paid for ore: The mine owner sells the processed iron ore 5-18, 10-30 and fines material to the buyer at - 7 - mutually agreed market rates as per the purchase order issued by the buyer. As already stated, owing to the nature of operation and services rendered by the contractor, it has been agreed that any quality issues or claim or allowance relating to the processed ore shall be borne and settled by the contractor. As far as the buyer is concerned, any quality allowance or claim shall be relating to the total price paid by him for the material. Generally, the sale price of 5-18 is around Rs.5500/ per MT and Rs.1600 to 1800/per MT for fines. The buyer is not concerned about the rate or the price which the contractor gets. The quality allowance paid, amounts to around 20% of the total sale price of the ore. We are submitting few copies of the purchase order issued by the buyer to mine owner (Annexure-I) which contains the quantity and rate agreed in the case of 1)Shyam Metalics and 2) Shyam Power Sel Ltd. We submit that the comparison of rebate on account of quality allowance to what the contractor gets would not be appropriate to the instant case.

Payments made to a) Shyam Metalics and Energy Ltd. and b) Shyam Sel &Power Ltd. We submit copies of statement received from Shyam Metallics & Energy Ltd. for the period 2013-1 4 which confirms the quality allowance received by them • Payments to Bhusan Steel & Power Ltd: Rs. 7,22,68,416/- In respect of payments made to Bhusan Steel &Power Ltd. we have enclosed copies of all the debit notes issued by the party. The rebate in the case of Bhusan Steel &Power Ltd. amounted to Rs. 105/- per metric Ton.

• Bait Logitech Private Limited: Rs.3,16,10,248/- Our company had entered into an MOU with M/s.Bait Logitech Private Limited to facilitate BLPL to participate in a open tender (copy enclosed- Annexure 3) for supply of iron ore fines for 3.53 lakh MT by MMTC Ltd. to the integrated steel plant at Nelachal Isptat Nigam Ltd. Under the arrangement, if the BLPL is awarded the contract for iron ore fines supply, it shall flfl the fines material that is accumulated and held at the Serajuddin &Co. Balda mines. Our company had entered with such an arrangement with BLPL to ensure that fines stock of Serajuddin &Co. is disposed and in the process stand to benefit from getting it’s raising contract charges for fines material dispatched. Under the MOU, our company agreed to pay Rs.50 lakh for the arrangement and services rendered by BLPL. Our company agreed to bear differential price between the purchase price of BLPL and the tender awarded rate. Besides, TEMPL agreed to bear any punitive charges, terminal charges, dead freight and demurrage charges levied by MIvITL on the said supply of iron ore fines.Pursuant to the tender,

- 8 - MMTC Ltd. issued an order for supply of iron ore fines to BLPL for 176160 MT Under this business arrangement, BLPL purchased iron ore fines of 176160 MT from Serajuddin & Co and supplied to NINL over a period of three months plus April to July,2013. On completion of the supplies, BLPL raised following debit notes ( )for the differential price as listed below:

Sl.No. Debit Note Debit Note Description Oty in MT Amount No. Date 1 2 31.01.2014 Differential 176160 1,46,01,886 Price on 2 3 28.02.2014 1,07,97,962 Purchase 3 4 31.03.2014 62,10,400 and Sales Total 3,16,10,248 • Our company had accounted the above loss under the head Quality allowances & claims. The price differential per MT works out to around 180/- per MT. On the other hand our company had realized its share of revenue for raising work offines at around Rs. 780/- to 820/- per MT We submit the quality allowance expenditure has a direct nexus with the business carried on by the assessee and being revenue in nature rightly allowable under section 3 7(1) of the Income Tax Act for the following reasons: a) It is directly related to the business of the assessee b) Owing to the nature of operation whereby entire work of mining, hauling and processing is done by the contractor. c) Is as per mutually agreed commercial terms d) The practice of quality allowance payment has been in vogue in earlier periods e) The higher contract price per MT awarded/rate linked to sale price of ore to the con tractor vis a vis other similar contracts of state Govt. undertaking supports and justfies the Quality allowance being borne by the contractor. f) The cost of quality claim borne by the contractor has ultimately been passed on to the buyer.”

More importantly, the Assessing Officer had not doubted the genuineness of the expenditure. The Assessing Officer is only questioning the necessity

- 9 - of the expenditure. In the backdrop of the fact that there is no clause in the agreement between assessee company and the mine owners to bear the liability of claim of buyers of the ores. The circumstances under which expenditure was incurred by the assessee company before Assessing Officer as well a ld. CIT(A) stating that expedition disposal of the ore and realization thereof would benefit the assessee company in the form of lower working capital and the continuous business relationship with mine owners and higher revenue from the contract compared to the market rates etc., Submissions made by the assessee company remain uncontroverted by the Assessing Officer. The Assessing Officer had also not questioned the genuineness of the expenditure but disallowance was made by the Assessing Officer questioning the necessity of the expenditure. Now, it is settled position of law that it is not for the Assessing Officer to dictate the assessee as to how the assessee should conduct his business and it is not for him to tell the assessee on what expenditure assessee can incur. The Hon'ble Supreme Court in the case of Eastern Investments Ltd vs. CIT, 20 ITR 1 held that it is not necessary to show expenditure was profitable or in fact any profit was earned. The relevant para is as under:-

‘(4) that the transaction was more in the interest of the shareholder Scott than that of the company.

The decision of this appeal rests on the true construction of Section 12(2). In our opinion, the law on this point has been correctly summarised in the judgment of the High Court. The following principles are relevant:— (a) though the question must be decided on the facts of each case the final conclusion is one of law: Indian Radio & Cable Communi cation Ltd. v. The Commissioner of Income-tax, Bombay [1937] 5 ITR 270 PC, and Tata Hydro- Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay [1937] 5 ITR 202 PC; (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned : Moore v. Stewarts and Lloyds [1906] 6 Tax Cas. 501and Usher's case [1915] AC 433; (c) it is enough to show that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business".

- 10 - 13 British Insulated and Helsby Cables Ltd. v. Athertonh [1926] AC 205; and (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word "solely ".

Further, subsequently the Hon'ble Supreme Court in the case of CIT vs. Walchand and Co. Pvt Ltd, 65 ITR 381 had held that while applying the test of commercial expediency whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It is further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits is erroneous. In the case of Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC), the Supreme Court after referring to the legislative history held that Assessing Officer cannot question the necessity of the expenditure nor is that necessary for the assessee to show that any expenditure incurred by the assessee for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business. The relevant para is reproduced hereunder:-

‘’20…………………… It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed" The introduction of the word "necessarily" in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This - 11 - Court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at page 48 :

"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party—Usher's Wiltshire Brewerv v. Bruce 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby — [Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."

The issue in the present case is required to be adjudicated having regard to the principle enumerated in the above decisions. Admittedly, in the present case, the Assessing Officer had not doubted the expenditure, he only questioned the necessity of the expenditure in the backdrop of the facts that there is no clause in the agreement entered between assessee company and mine owners to bear the loss claims from the buyers of the ore. The explanation offered to substantiate that payments were made out of business expediency remain unconverted by the Assessing Officer. Having regard to the principles enumerated above, it is not for the Assessing Officer to question the necessity of expenditure irrespective of the fact whether expenditure has resulted in profit or more income, as long as payment was made wholly and exclusively for business purpose, the same should be allowed as deduction. From the material on record, it can inferred that expenditure was incurred voluntarily indirectly to facilitate the carrying on of the assessee company as the expenditure was incurred on grounds of commercial expediency. The Hon’ble SC in the case Gordon Woodrofee Leather Mfg vs. CIT, 44 ITR 551 (SC) held that any expenditure expended on the ground of commercial expediency in order to indirectly facilitate the carrying on the business is allowable as deduction. Therefore the claim falls within the purview of the provisions

- 12 - Section37(1) of the Act. In the circumstances, the order of the ld. CIT(A) is based on proper appreciation of facts and legal principles governing the issue on hand. Therefore we do not find any reason to interfere with the order of the ld. CIT(A). Thus the ground of appeal No. 2 raised by the Revenue is dismissed.”

5.2 In view of the above, the ld.AR stated that this issue is squarely covered in favour of assessee by Tribunal’s decision and even otherwise there is consideration of this issue by AO while framing original assessment. Hence, revision proceeding is bad in law on this issue.

- 13 - own case, there is no scope for revision proceedings on this issue. Accordingly, this issue of assessee’s appeal is allowed.

Order pronounced in the open court on 23rd December, 2022 at Chennai.