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Income Tax Appellate Tribunal, DELHI BENCH : F : NEW DELHI
Before: SHRI R.K. PANDA & MS SUCHITRA KAMBLE
per TDS at Rs.3,10,81,172/-, and service tax for Rs.38,41,632/-, the assessee has accounted for revenue from operation at Rs.99,53,591/-. Further, as per the balance sheet, a sum of Rs.3,14,30,524/- has been shown as receivable which has been computed by adding income and service tax and deducting TDS thereon. He, therefore, asked the assessee to explain as to why the income/receipt for the year under consideration may not be taken at Rs.3,10,81,172/-. He asked the assessee to furnish all documentary evidence to support the claim and furnish the financial statements with schedules of M/s Hyundai Motor India Ltd. for the year ending 31.03.2013 showing the amount booked by the said concern and the amount shown as advance in their books. The assessee, in response to the same, submitted that the income is recognized at cost plus 8% which has been correctly followed by the assessee. It was submitted that the total expenses incurred by it is Rs.92,16,288/- and profit @ 8% on the above comes to Rs.7,37,303/-. Therefore, the total revenue has correctly been accounted by the assessee at Rs.99,53,591/-. It was submitted that under Rule 3(b) of the Service Tax Point of Taxation Rules, service tax has to be paid on generation of invoice and it does not matter whether it relates to income or advance. It was submitted that the money receivable in installments was more than the income in terms of the agreement. Hence, the service tax returns show a higher figure than the income as per the audited accounts. The income has been recognized at cost plus 8% 2 and the advance has been adjusted in future months and income recognized on a consistent basis. Therefore, there is no loss of revenue. The assessee also submitted the copy of agreement with M/s Hyundai Motors India Ltd., Chennai.
The Assessing Officer obtained information from Hyundai Motors India Ltd., who vide their reply dated 2nd February, 2016, submitted that they have paid an amount of Rs.3,10,81,172/- to M/s Hyundai Capital India Pvt. Ltd. and the above amount was treated as expenditure in their books of account. Therefore, the question of advance does not arise. Since the payer company confirmed that during the year the payment was made against invoice No.201303/01 dated 31.03.2013 and payments were treated as expenditure in their books of account and not as advance, therefore, the Assessing Officer confronted the same to the assessee to explain as to why the total revenue during the year of a sum of Rs.3,10,81,172/- should not be recognized. The assessee replied that the contract between HMI and the assessee clearly states that the income is to be recognized based on the total cost incurred plus a margin of 8%. Such income is restricted in terms of the agreement, the balance ad hoc installment amount remains as an advance. The assessee has accordingly correctly recognized the income at Rs.99,53,591/-. It was submitted that HMI recognized the expense based on the ad hoc installment amount which is incorrect. It was argued that the assessee should not be penalized for incorrect computation of income by its client HMI. It was further submitted that taxing the advance receivable amount of Rs.2,11,27,581/- in the hands of the assessee in the year ending 31st March, 2013 will lead to double taxation of the same amount as the assessee has paid tax as and when income has been recognized in future years. It was accordingly pleaded that the advance receivable of Rs.2,1127,581/- be treated as an advance receivable by not taxing it as income in the year under scrutiny. Without prejudice to the above, it was pleaded that in case the submission of the assessee is not accepted, a protective assessment order may be passed wherein the matter may remain suspended till a substantive assessment of HMI is carried out.
4. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. He noted that the revenue has to be recognized on the basis of the invoice raised upto 31.03.2013 for the following reasons:-
“1. The important aspect to be noted here is that in its service tax return, assessee has accounted the gross revenue as Rs.3,10,81,172/- and paid service tax accordingly. 2. In the copy of invoice raised, word advance has not been mentioned.
3. The amount received from M/s Hyundai Motors India Ltd has been immediately remitted to the holding company M/s Hyundai Capital Services Inc, Korea.
The Payer company, M/s Hyundai Motors India Ltd, has accounted the bill amount as expense and there has to be matching in the accounting standard of both the companies following mandatory mercantile system of accounting i.e., payee as well as payee . So accounting of the said income has to be in tune with the same for offering it for relevant year under consideration.”
He noted that the assessee has raised the invoice, therefore, this payment was received and the payer has also confirmed that it is not an advance. The Assessing Officer further noted that the money has been credited in the bank account before raising the invoice and that money has been further remitted to the holding company of the assessee in Korea. Further, the holding company in Korea as well as the payer company and payee company are related parties. Rejecting the various explanations given by the assessee, the Assessing Officer has addition of Rs.2,11,27,581/- to the total income of the assessee.
6. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing as under:-
“8. I have examined the materials on record. It is noticed that invoice dated 31.02.2013 has been raised on Hyundai Motors India Ltd for an amount of Rs.3,10,81,172/- after deducting services tax of Rs.38,41,633/-. TDS amounting to Rs.34,92,281/- has been claimed by the appellant in its Return of Income. The account of Hyundai Motor India Ltd. in the books of appellant company for the period of 01.04.2012 to 31.03.2013 shows Fee Revenue of Rs.99,53,591/- and Advance income of Rs.2,11,27,581/-. It is clear that once invoice is raised, payment is legally due, service tax is accounted for, full credit for TDS is claimed, assessee cannot choose when & how much is to be treated as income as per its whims and wishes. It is obvious that there is no uncertainty/ contingency with respect to the receipt/accrual of income and therefore, offering of only a part of the total accrued income for taxation cannot be accepted.
9. Thus, it is seen that while one party i.e. Hyundai Motor India Ltd. makes full payment of Rs.3,10,81,172/- on the basis of invoice raised by the appellant and debits it as expenses in its books, the appellant company recognizes only Rs.99,53,591/- as fee income i.e. less than l/3rd of the total payment.
It is clear that giving up of part of its fee receipt by the assessee is unilateral and according to its own wishes. The conduct of Hyundai Motors India Ltd. in treating the payment amounting to Rs.3,10,81,172/- by claiming it as expenses is material evidence of the fact that a sum of Rs.3,10,81,172/- accrued to the assessee during the year under consideration and is taxable. It is settled law that income accrues when it falls due, that is to say when it become legally recoverable and accrued income is that income which the assessee has a legal right to receive.
11. The appellant company admittedly maintains its accounts according to the mercantile system. In this system and as per Accounting Standards, credit entries are made in respect of amounts due immediately once they become legally due. In the present facts and circumstances of the case, there remains no doubt that the appellant has wrongly offered income receipt Rs.99,53,591/- instead of Rs.3,10,81,172/-. Accrued income represents the income which has been earned but yet not reclaimed and undoubtedly the income must be recorded in the accounting period in which it is earned. The assessee company has failed to recognize the entire income which arose in the previous year relevant to assessment year 2013-14 and rather shifted it to subsequent year which cannot be accepted being contrary to established laws.
Appellant's insistence that income has been recognized on the basis of installment plan agreed between the two parties as mentioned in Consulting Service Agreement (CSA) does not carry any credence as the said agreement is between two parties working under the same umbrella of 'Hyundai Groups of Companies' and such agreement cannot override the basic accountings principles. This is particularly so when I find that the said agreement is undated and made on a stamp paper dated 26.03.2013 suggesting that the agreement is a product of after thought and making it clear that the insisted sanctity of the said CAS is misplaced. Accordingly, appellant's argument that Returned Income of appellant’s argument that Returned income of the assessee was as per installment plan based on the income recognition terms of the CSA is not acceptable. Even if the said agreement is to be believed, the payment structure for the year under examination clearly shows that a sum of Rs.3,10,81,172/- is the service fee for the period from December, 2012 to March, 2013, which is confirmed by the payment made and claimed as expenses by HMI in its Return of Income Tax A.Y. 2013-14. The case laws relied upon by the Appellant are not relevant in the facts & circumstances of the case. 13. As regards, appellant's contention that as it has an arrangement of cost plus 8% with its client, on booking the revenue of Rs.2,11,27,581/- the A.O. should have allowed an expense of Rs.1,95,62,575/-, the same cannot be accepted as allowability of expenses cannot be on adhoc basis but on incurring of the same and on debiting to P&L A/c. 14. As regards appellant's claim that tax on Rs.2,11,27,581/- has been paid in the subsequent year, it would be worthwhile to mention that in tax jurisprudence, it is a settled legal principle that later events cannot affect the earlier nature of a receipt as also its quantum.
15. Keeping in view of the above, the addition made by the AO amounting to Rs.2,11,27,581/- is hereby confirmed.
In the result, the appeal is dismissed.”
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal raising the following grounds:-
“1. That the additions made by the Assessing Officer (“AO”) assessing the total income of the Appellant at Rs. 2,17,89,101/- is illegal and bad in law.
That the CIT(A) has erred in upholding the addition made by the AO on account of advance received by the Appellant from its client, as per the ad hoc payment schedule, agreed upon in the Consultancy Service Agreement (hereinafter referred to as “CSA”).
3. That on the facts and circumstances of the case the AO has erred in taxing the advance received amounting to Rs. 2,11,27,581/- which represents the amounts invoiced to customer as and when the billing milestone as per the CSA are triggered but in respect to which no services have been rendered neither any cost has been incurred by the appellant during the subject year.
4. That the CIT(A) and AO have failed to appreciate that the aforesaid advance received have been offered to tax in subsequent assessment year when the work is performed and cost is incurred, the addition of the same to the total income of subject assessment year shall amount to double taxation.
5. That the assessee has been recognising the income as per the applicable accounting standards and principles. Further the appellant has been consistently following this approach. Both the lower authorities have erred in disturbing the regular method of accounting followed by the appellant and disregarding the judicial precedent laid down in this regard by the Hon’ble Supreme Court.
That without prejudice to the above the method of recognition of income has been accepted by the department in subsequent years i.e AY 2014-15, as for the succeeding year returned income has been accepted in order under section 143(3) of the Act, though the same method of recognition was consistently followed. 7. That without prejudice, the whole exercise of the Revenue is tax neutral as total amount of the contract has been credited as income in the subsequent year. 8. That the evidence filed and materials available on record have not been properly construed and judiciously interpreted, hence the addition made is uncalled for.
9. That the observation and the additions made are unjust, illegal, arbitrary, bad in law, highly excessive and based on surmise conjecture.
10. That interest U/s 234B, 234C and 234D of the Income Tax Act, 1961 has been wrongly and illegally charged and has been wrongly worked out. 11. That the applicant craves leave to add, amend, alter and/or delete any of the above grounds of appeal at or before the time of hearing.
The ld. counsel for the assessee strongly challenged the order of the CIT(A) upholding the action of the Assessing Officer. Referring to page 1 to 9 of the paper book, the ld. counsel drew the attention of the Consultancy Service Agreement entered into with HMI. Referring to page 8 of the agreement, he drew the attention of the Bench to the clause relating to service fee according to which: “the service fee for both Basic Services and Financial Project Services shall be based on cost in relation to providing services to the company plus 8% (a margin of eight percent) margin.”
Referring to Profit & Loss Account for the period November 12, 2012 to March 31, 2013, the ld. counsel drew the attention of the Bench to the revenue from operation – Fee for services at Rs.99,53,591/-. Referring to page 47 of the paper book, he drew the attention of the Bench to the order passed u/s 143(3) for assessment year 2014-15 wherein the assessee has declared total income at Rs.40,86,810/-. So far as the allegation of the Assessing Officer that the assessee has received the amount and sent the money to Korea is concerned, the ld. counsel for the assessee, referring to the balance sheet of the assessee company as on 31st March, 2013 stated that an amount of Rs.3,14,30,524/- is shown as receivable as per Note No.9 which includes the amount of Rs.2,11,27,581/-. So far as the allegation of the Assessing Officer that the service tax has been paid is concerned, he submitted that it is payable on advance received as
per the service tax rules. So far as the allegation of the Assessing Officer that Honda Motors India Ltd., has claimed the same as expenditure in their accounts for the impugned year is concerned, he submitted that the assessee cannot be penalized for the wrong interpretation by the other company. Merely because they have declared the same as expenditure, it does not automatically become the income of the assessee.
Further, in subsequent year, the assessee has declared the income, which has been accepted by the Revenue in the order passed u/s 143(3), therefore, it will amount to taxation of the same amount twice if the version of the Assessing Officer is accepted.
He submitted that when the Assessing Officer is confirming the receipt from Hyundai Motors India Ltd., they could have also verified the date of agreement. Therefore, the whole basis on which addition has been made by the Assessing Officer and confirmed by the CIT(A) is not justified.
In his alternate contention, he submitted that the matter may be restored to the file of the Assessing Officer with a direction to verify as to what statement has been given by Hyundai Motors. Referring to the invoice raised by the assessee to Hyundai Motors Ltd., he submitted that the invoice shows installments as per agreement for the month of December, 2012 to March, 2013 at Rs.3,10,81,172/-. Referring to the decision of the Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd., reported in 358 ITR 295 (SC), the ld. counsel for the assessee drew the attention of the Bench to para 32 of the order which reads as under:-
“32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.”
10. Referring to the confirmation of consultancy service agreement issued by the assessee as well as the Hyundai Motors India Ltd., he submitted that the consultancy agreement was signed on 26th March, 2013 and is binding on both the parties. He accordingly submitted that the addition made by the Assessing Officer and sustained by the CIT(A) is not justified.
The ld. DR, on the other hand, heavily relied on the order of the Assessing Officer and CIT(A). Referring to copy of the agreement, he submitted that there is no date mentioned in the consultancy service agreement and it is blank. The stamp paper was purchased on 26th March, 2013 which is verifiable. Therefore, this document is nothing, but, a self serving document. Referring to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, reported in 227 ITR 172, the ld. DR drew the attention of the Bench to para 32 of the order which reads as under:-
“32. But this is an entirely different case. Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that 10 income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation.”
12. He also relied on the decisions of the Hon'ble Supreme Court in the case of CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC) and in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT 1971 AIR 2145.
It was also the submission of the ld. DR that the stamp paper was purchased on 26th March, 2013 and there is no date mentioned in the Consulting Service Agreement and the invoices from the month of December, 2012, therefore, the documents produced by the assessee are self serving documents.
The ld. counsel for the assessee, in his rejoinder, submitted that the Assessing Officer has made the addition on the basis of the agreement. Now, that it has been clarified by both the sides that the agreement which was signed on 26th March, 2013 is binding on both the parties and, therefore, the addition made by the Assessing Officer and upheld by the CIT(A) is not sustainable.
We have considered the rival arguments made by both the sides and perused the relevant material available on record. We have also considered the various decisions cited before us. We find, the assessee, in the instant case, has shown an amount of Rs.99,53,591/- as revenue from operations as against Rs.3,10,81,172/- as per the TDS certificate and claimed credit of TDS at Rs.34,92,281/-. The Assessing Officer made addition of Rs.2,11,27,581/- being the difference between Rs.3,10,81,172/- and Rs.99,53,591/-. While doing so, he noted that the payer company M/s Hyundai Motor India Ltd. has accounted the bill amount as expenditure. The amount received from Hyundai Motor India Ltd., has been immediately remitted to the holding company M/s Hyundai Capital Services Inc., Korea and in the copy of invoice raised, the word ‘advance’ has not been mentioned. Further, the assessee in its service tax return has accounted the gross revenue as Rs.3,10,81,172/-. We find, the ld.CIT(A) upheld the action of the Assessing Officer the reasons for which has been reproduced in the preceding paragraphs. It is the submission of the ld. counsel for the assessee that the assessee in the subsequent year has offered the balance amount to tax which has been accepted in the order passed u/s 143(3) and, therefore, taxing the same in the impugned assessment year will amount to double taxation. It is also his submission that merely because the other party has declared the same as expenditure, it does not automatically become the income of the assessee and the certificate issued by the payer company which has been countersigned by the assessee company is binding on both the sides. It is also his submission that total receipts and expenditure are fully matching as per the matching concept.
16. It is the alternate submission of the ld. counsel for the assessee that the matter may be restored to the file of the Assessing Officer with a direction to verify as to what statement has been given by Hindustan Motors in their accounts. We find some force in the argument of the ld. counsel for the assessee regarding the alternate contention. A perusal of the Consulting Service Agreement shows that the stamp paper was purchased on 26th March, 2013 and the date in the Consulting Service Agreement is blank. A certificate was furnished by the ld. counsel for the assessee which reads as under:- “This is to state and confirm that the enclosed Consulting Service Agreement was executed and signed between Hyundai Motor India Limited and Hyundai Capital India Private Limited on March 26, 2013 and is binding on both parties. The copy of said agreement is annexed herewith. Inadvertently, the date of execution was omitted to be mentioned on the said agreement.”
Since this certificate was furnished at the time of hearing and was not available before the Assessing Officer or the CIT(A), therefore, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to obtain further information from Hyundai Motor India Ltd. regarding the nature of the agreement. He should also keep in mind the order passed u/s 143(3) in the subsequent assessment year where the assessee has shown the income which was shown as receivable in the impugned assessment year. The Assessing Officer shall decide the issue as per fact and law, after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
The decision was pronounced in the open court on 30.04.2019.