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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
Before: SHRI N.V. VASUDEVAN & SHRI JASON P BOAZ
O R D E R Per N.V. VASUDEVAN, VP: These are appeals filed by the assessee against two orders, both dated 8/10/2018 of the CIT(Appeals), Huballi, relating to assessment years 2005-06 and 2010-11. Issues involved n both the appeals are common and therefore, we deem it appropriate to pass common order.
The issue that needs to be considered in these two appeals is with regard to addition of Rs.6,86,350/- made in assessment year 2005-06 and addition of Rs.1,35,72,766/- made in assessment year 2010-11. The aforesaid additions were made by the AO under the following circumstances: & 62/Bang/2019 Page 2 of 10 The assessee is a partnership firm. The assessee acts as distributor for M/s.JCB India Ltd. As per TDS certificate issued by M/s.JCB India Ltd. a sum of Rs.2,47,15,765/- was payable to the assessee in assessment year 2010-11 and in assessment year 2005-06 a sum of Rs.30,70,145/- was payable by M/s.JCB India Ltd. to the assessee. The assessee had disclosed only a sum of Rs.1,11,42,999/- as receivables from M/s.JCB India Ltd. in assessment year 2010-11 and the sum of Rs.22,66,303/- in the assessment year 2005-06. The difference between sum shown as payable by M/s.JCB India Ltd. to assessee and that shown by the Assessee as receivable from M/S.JCB India Ltd., in both the assessment years was added to the total income of the assessee by the AO.
As far as assessment year 2005-06 is concerned, issue had earlier come up for consideration before Hon’ble ITAT in ITA No.950/Bang/2010. The Tribunal by order dated 21/12/2011 had remanded the issue for fresh consideration by the Assessing Officer (AO). In the order passed giving effect to the directions of the Tribunal, the AO again made the addition which was confirmed by the CIT(A).
The plea of the assessee was that M/s.JCB India Ltd. is a manufacturer of earth moving machinery and, on every machine, sold by its dealers, like the assessee, there is one-year & 62/Bang/2019 Page 3 of 10 warranty period and 10 free services to be provided to the purchaser of earth moving machinery by the dealer. As far as M/s.JCB India Ltd. is concerned, it not only accounts for annual sale value of M/s.JCB India Ltd. but also accounts for probable warranty claims and liability on account of replacement of defective parts and for carrying out 10 free services. The probable liability on account of such warranty and other obligations is treated as provision liability by M/S.JCB India Ltd., in its books of accounts. On this basis, it provides for payments to be made to dealers in its books of account as a provision for future liability. Since in respect of such provision, M/s.JCB India Ltd., was obliged to deduct tax at source u/s 194C of the Act and therefore, they show these amounts on account of warranty liability, free services and replacement of defectives parts as payable to the assessee. The dealer’s account however, is not credited at that stage and only a provision is made for future liability. The difference between the sum shown as payable to the Assessee by JCB India Ltd., and receivable from JCB India Ltd., was explained by the Assessee as on account of above facts. The plea of the assessee was that money in question cannot be regarded as income of the assessee as it has neither right to receive the same nor was it received. The assessee submitted that though it follows mercantile system of & 62/Bang/2019 Page 4 of 10 accounting, it cannot account for income/receipt which is in the realm of probabilities or suspicion.
This plea was, however, rejected by the AO as well as the CIT(Appeals) for the reason that when it comes to claim credit for taxes paid, the assessee claims credit of the entire taxes paid by M/s.JCB India Ltd. but when it comes to accounting for income, assessee wants to take a plea that part of payment reflected in TDS certificate is not receivable and not in the nature of income of the assessee. According to AO, the said contradictory stand was not permissible. The AO was also of the view that M/s.JCB India Ltd. was justified in deducting tax at source and has rightly followed the mandate of section 194C and 194H of the Act. The above are primary reasons for the revenue authorities to reject the claim of the assessee.
Aggrieved by the orders of the Revenue authorities, the assessee is in appeal before us. Learned counsel for assessee reiterated the submissions that were made before Revenue authorities. Learned counsel for assessee also placed reliance on the following judicial pronouncements: i. ACIT vs. Kulathinethu Ram Krishnakurup Sadasivan Nair DTD 19/02/2018 (218 Taxpundit 267) ii. ITO vs. SAB Miller India Ltd. ITA No.1011/DEL/2012 (ITAT)(Delhi)
ITA Nos.61 & 62/Bang/2019 Page 5 of 10 iii. IBM India Pvt. Ltd. vs. ITO (TDS) LTU, in to 752/Bang/2012 & 1588 to 1591/Bang/2012 dt.14/05/2015( ITAT, Bengaluru)
Learned DR relied on the order of the CIT(Appeals).
We have considered the rival submissions. It is no doubt true that M/s.JCB India Ltd. accounts for the provision made in their books of account for liability to be incurred by them in future and payable to the assessee in future. Doing so is the mandate of sections 194C and 194H of the Act. As per those provisions, TDS requirements are to be complied with at the time of credit in the books of account in the name of the payee or actual payment whichever is earlier. As far as the assessee is concerned, the question is whether they have to account the same as their income just because M/s.JCB India Ltd. has made an entry showing them as payee. Even under concept of mercantile system of accounting, accrual of income depends on right to receive. As far as the assessee is concerned, the question is whether it has right to receive the amount shown by M/s.JCB India Ltd., in its books of account as payable to the assessee. In respect of commission income is concerned, such income would accrue to the assessee when sale is affected. As far as claims warranty claims or provision of free services or replacement of parts to a purchaser, income or right to receive from JCB India Ltd., would arise when the services are rendered & 62/Bang/2019 Page 6 of 10 in respect of warranty claims or provision of free services or replacement of parts.
9. The CIT(Appeals) has however, in assessment year 2010-11 proceeded as if dispute relates only to commission income. In assessment year 2005-06, however, the dispute is only with regard to commission and this is clear from the order of the AO giving effect to the directions of the Tribunal. As far as assessment year 2005-06 is concerned, the AO has given the following reasons for making impugned additions: “The supplier M/s JCB India Ltd has certified vide certificate dated 03/01/2008 that the commission amount aggregating to 30,70,145/- was provided based on the machines sold to the assessee M/s. Aishwarya Earthmovers for the financial year 31/03/2005, though the actual amount paid to the assessee during the said financial year is Rs.23',18,899/-. The said Company has also deducted TDS on the said aggregate commission of Rs.30,70,145/ in the name of the assessee and also issued TDS certificates to the assessee and which the assessee has claimed in its return of income. Hence the said commission aggregating to Rs.30,70,145/- accrued to the assessee though the said amount was withheld for fulfillment of the terms and conditions i.e Full amount of machine's sale value is received from the customer; "C" Forms or any other mandatory sales tax forms are received from the customer etc. Hence the fresh evidence (certificates from the JCB India Ltd) now furnished by the assessee in fact justifies findings of the Assessing Officer and the Commissioner of Income-tax (Appeals). Further as could be seen from the certificates dated 28/11/2011 (for FY 200506, 2006-07 and 2007-08), the supplier has paid the amount of commission payable for the said financial years in the subsequent financial years. In view of this the assessee was also required to account for the said commission on accrual basis instead of accounting on receipt basis since the assessee is following mercantile system of accounting. In case the assessee could not receive any such accrued commission owing to non-fulfillment of terms, the assessee had option to claim such deduction being bad debts in accordance with law. It is also pertinent to note that the certificate dated 03/01/2008 issued by M/s. JCB India Ltd for the financial & 62/Bang/2019 Page 7 of 10 year under consideration i.e. 2004-05 does not indicate (as indicated in the certificates dated 28/11/2011 issued for other financial years) that any amount out of commission payable for the financial year 2004-05 (Rs.30,70,145/-) has been written back by the Company during the subsequent financial years.”
We are of the view that in assessment year 2005-06 the addition is justified and cannot be questioned.
As far as assessment year 2010-11 is concerned, the break-up of the amounts credited by M/s.JCB India Ltd. as payable to assessee and the sum shown as receivable from M/S.JCB India Ltd., by the Assessee were as follows:
Amount credited by M/S.JCB India Ltd.
T.D.S Amount Credited Month SL Date of Credited no by JCB India Ltd April DEL J05267D 7,42,500 16,848 20/05/2009 1 May DEL J05267D 5,50,000 12,480 2 20/06/2009 3 20/07/2009 June DEL J05267D 6,17,229 14,008 ' 20/08/2009 July DEL J05267D 6,87,500 15,600 4 5 20/09/2009 Aug DEL J05267D 1190000 27,005 20/10/2009 Sep DEL J05267D 1402500 31,824 6 7 20/11/2009 Oct DEL J05267D 1732500 39,312 8 20/12/2009 Nov DEL J05267D 2462000 49,240 9 20/01/2010 Dec DEL J05267D 1,17,500 2,350 10 20/02/2010 3777500 75,550 Jan DEL J05267D 11 20/03/2010 Feb DEL J05267D 2838059 56,761 12 20/04/2010 March DEL J05267D 1,34,198 2,684 13 20/04/2010 March DEL J05267D 2970000 59,400 14 20/09/2009 July DEL J05267D 4,28,500 48,550 15 20/11/2009 Oct DEL J05267D 3,750 375 16 20/12/2009 Nov DEL J05267D 95,000 10,764 17 20/01/2010 Dec DEL J05267D 6,60,841 _ 67,396 18 20/03/2010 Feb DEL J05267D 1440400 1,44,439 19 20/04/2010 March DEL J05267D 1275022 1,27,503 20 04/06/2010 March DEL J05267D 1590766 159789 Total 2,47,15,765 9,61,878 & 62/Bang/2019 Page 8 of 10 Amounts shown as receivable by the Assessee from M/s.JCB India Ltd.
Income offered under the head Amount 1 Service Commission 44,38,962 2 Incentive as sales 29,75,346 3 Business promotion Reimbursement 17,29,572 4 Parts purchase : Hubli 10,03,610 5 Discount on parts 9,27,077 6 Legal 8c, consultation fees 27,000 7 Customer meet Exps: Belgaum 21,388 8 Customer meet Exps: Bagalkot 20,044 Total 1,11,42,999
The submission of the assessee was as follows:
“8. It is submitted that the difference amount not declared is nothing but the excess amount which has been debited by the company towards Service Claims and crediting Service Claims payable. A schedule is maintained under this account. At this stage neither the payee is ascertained nor is the amount payable crystallized. Only on account of explanation II to section 194C, even when the sum payable and the payee are uncertain, the Company is duty bound to deduct TDS only for the reason that the Company has made a provision in its books and booked expenditure and it does not tantamount to income accruing to the Appellant/dealer. Only when the Appellant has provided the services and followed all the stringent norms formulated by the Principals, it accrues to the Appellant and becomes the income of the Appellant in that year only as informed by the Company and automatically gets reflected in the subsequent years. It is again emphasized that a dealer becomes entitled to claim the amount towards service claims only after he has provided the service which is unascertainable at the time of making provision of the same by M/s JCB Ltd. Likewise the commission on sale of machines is released only on receipt of sale consideration and other mandatory forms.
Under the back drop of these facts it is submitted that the Appellant did not declare the additional amount as stated in the TDS certificates in as much as there was no reason for the Appellant to declare so, in view of the fact that the amount debited by M/s JCB India Ltd., was neither known nor ascertainable as the Company had its duty under the provisions of the Income-tax Act, 1961 only. It is. only after the respective dealers service the machines, are they entitled to the service commission. This being the factual position, there arose no circumstance for the Appellant to declare the additional amount of income shown in the TDS & 62/Bang/2019 Page 9 of 10 certificates which was done by the Company/Principal only to adhere to the provisions of the Income-tax Act, 1961 irrespective of the hardship caused by the draconian law. The only reason the Appellant claimed the TDS amount as reflected in the certificates was due to the fact that it did not have a choice as it had to claim the excess TDS deducted and claim the refund there from for the relevant assessment year. Thus, when the payee itself is not certain, only to adhere to the provisions of section 194C of the Act, the Appellant cannot be saddled with the responsibility of declaring a higher commission knowing fully well that it may not be the ultimate beneficiary at all. It is one thing to state that certain amount has accrued to a dealer and credit its accounts and thereby deduct TDS in accordance with the provisions of section 194C of the Act, but it is fallacious to deduct TDS only on assumption and presumptions not knowing who the ultimate beneficiary of the service claims is going to be as also acknowledged by M/s JCB India Ltd., Further the amount which the Company writes back over the years is not even intimated to the Appellant nor the TDS amount refunded thereby amounting to double taxation. 9.1 The Principal M/s JCB India Ltd., has by an unilateral act, without knowing ' which dealer is going to be the ultimate beneficiary of receiving of service claims, only on the basis of the sale of machines by the Appellant, made a mention of the Appellant in the Service Claims payable a/c in its books of accounts; however it has not credited the account of the Appellant with the said commission. The Company being well aware that the Appellant may not be the final recipient of the service claims, yet showed the amount of commission as accrued to the Appellant in the TDS certificate and deducted TDS accordingly.”
The above said submissions, having not been considered by the CIT(Appeals), as is evident from paras.5.1 and 5.2 of the impugned order. The CIT(Appeals) has proceeded only on the basis that the assessee follows mercantile system of accounting and therefore, whatever is receivables should be part of its turnover. As we have already submitted this aspect is not in accordance with mercantile system of accounting and the facts and circumstances of the present case. Since this issue has not been examined in the proper perspective by calling for details of & 62/Bang/2019 Page 10 of 10 what is ultimate adjustment on account of commission and service charges and warranty claims between assessee and M/s.JCB India Ltd., we deem it appropriate to set aside the order of the CIT(Appeals) on this issue for fresh consideration by the AO. The AO will decide the issue afresh in accordance with law after affording opportunity of being heard to the assessee and after keeping in mind various observations made in this order.
Thus, the appeal being is dismissed while is treated as allowed for statistical purposes.