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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R Per Dr. A. L. Saini:
The captioned appeals filed by the Revenue and Assessee, pertaining to assessment years2008-09, 2009-10 & 2010-11 respectively, are directed against the separate orders passed by the Commissioner of Income Tax (Appeals), Kolkata, which in turn arise out of fair assessment orders passed by the Assessing Officer u/s 143(3)/144C(3) of the Income Tax Act, 1961 (in short the ‘Act’) which incorporate the findings of the Transfer Pricing Officer u/s 92CA (3) of the Income Tax Act, 1961.
Ground relating to Transfer Pricing Ground No. 4 raised by the Revenue in ITA No. 1333/Kol/2017 for A.Y. 2008-09 relates to Transfer Pricing in respect of determination of arm’s length price of royalty paid by the assessee. The grounds of appeal raised by the Revenue reads as follows: 4.Whether the ld. CIT(A) was correct in deleting the addition of Rs. 1,18,83,649/- on the ground that the rate of Royalty paid by the assessee company is at Arm’s Length?
Brief facts qua the issue are that the assessee is engaged in the business of manufacturing and trailing of Refractories. During the relevant F.Y.2007-08, it was noticedby the Transfer Pricing Officer (TPO) that the assessee has entered into international transaction with it its Associated Enterprises [AEs] namely, Vesuvius Crucible Company and Vesuvius Group SA, Belgium on account of royalty payment. From the transfer pricing report submitted, it noticedby TPO that assessee paid royalty to Vesuvius Crucible Company ("Refractory licensor") and Vesuvius Group SA, Belgium ("Systems Licensor"). According to the terms of the Page | 2
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royalty agreement between the assessee and its Associated Enterprises (AEs), the assessee is required to pay royalty to Refractory Licenser a royalty rate of 3% on the domestic sales and 5% on export sales and to the Systems Licensor, a royalty of 2% on the domestic sales and 3% on export sales. In order to justify the arm's length nature of its transaction, the assessee has applied the CUP method where it has stated that the assessee has compared the royalty rates for other Indian companies and it is observed that the same is at par with the rates at which royalty is paid by VIL. [Page - 11 of the Transfer Pricing Report). However,the TPO noticed that in order to verify the assessee's claim, the assessee has not brought on record the details of such Indian companies to which the assessee's claims its case to be comparable. The characteristics of comparables are considered important for comparison in the CUP method. In the case of Intangible property, it would comprise the form of transaction (e.g. licensing or sale), the type of property (e.g. patent, trademark, or know-how), the duration and degree of protection, and the anticipated benefits from the use of the property. The question thus, came before the TPO that which is the most appropriate method - CUP or TNMM for determining ALP? Traditional transaction methods, such as CUP, are normally the most direct method for determining ALP. The transactional profit split method, on the other hand, is based on an approximation of the division of profits that independent enterprises would have expected to realize from engaging in the transaction(s). The TPO noted that the greatest weakness is that the net margin of a taxpayer can be influenced by some factors that either do not have an effect, or have a less substantial or direct effect, on price or gross margins. These aspects make accurate and reliable determinations of arm's length net margins difficult. Thus, so far as the appropriateness of the method is concerned, CUP is the most appropriate method for determining the transactions here, namely, royalty. Then TPO cited the judgment of coordinate bench of ITATMumbai in the case of Gharda Chemicals vs DCIT (ITA No. 2242/Mum/06, AY 2002-03) wherein it was held that CUP method is preferred over other method.As the assessee has not conducted any search to benchmark its royalty payment, an independent search analysis was conducted by TPO using the Royaltystatdatabase,
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
which yielded four comparable companies. A show cause letter dt.27.10.2011 was issued to the assessee which is reproduced below (to the extent applicable for our discussion): "From the Transfer Pricing document submitted to this office, it is noted that the assessee is making royalty payment to its Associated Enterprises [AEs] at the rate of 3% on the net domestic sales and 5% on the net export sales as well as 2% on the net domestic sales and 3% on the net export sales towards Refractory License and Systems License respectively i.e. for both the product and process. During the course of hearing, it was learnt that-such royalty payment is being made by the assessee on the products identified as 'viso' and 'Slidegate' to its AEs, on which both the Refractory License rate and Systems License rate are applicable. In other words, the assessee in reality is actually paying royalty at the rate of 5% [3% + 2%] on net domestic sales and 8% [3%+5%] on the net export sales.
In order to verify the arm`s length nature of the assessee`s international transaction with respect to royalty payment, a search analysis was conducted by the TPO using the Royalty Statdatabase which is mentioned on page 31 of order of ld CIT(A).
During the TPO proceedings, the assessee in its reply dated 31.10.2011 has submitted that with respect to the royalty agreement between stone Mountain finishes, Inc, and special Shrine surfaces, Es3 Inc, the assessee has claimed that the royalty rate should be considered at 7% on sales which has been shown as 5% [on the royalty stat database] based on the following:
Sl. No. Sale of value of products Rate of royalty payable 1. Upto $ 50 million 7% 2. More than $ 50 million &upto $ 150 million 6% 3. More than $ 150 million &upto $ 300 million 5% 4. More than $ 300 million &upto $ 600 million 4% 5. Above $ 600 million 3%
The assessee has contended that if the assessee’s sale of products liable to royalty is considered within $ 50 million, then the royalty rate/or Stone Mountain Finishes, Inc, should be considered as 7% instead of 5%.
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
However, Ld TPO did not accept the contention of the assessee on the ground that the assessee has not provided any reasoning for its claim. In fact, the rate of 5% provided on the database was the average rate of royalty payable, hence the rate as available on the database is reasonable. In view of the same, the assessee’s request for computation of the average rate to 4.75% instead of 4.25% was rejected. The assessee has also further submitted that the regulatory authority in India have permitted payment of royalty at 5% on domestic sales and 8% on export sales. The conditions imposed by the regulatory authority in India regarding payment of royalty are governed by other consideration other than taxation issues. It is linked to the fund inflow-outflow from the country, forex reserve management and other broader economic parameters. The rate is not determined from the perspective of arm’s length principle which is a principle of taxation and hence any limits specified by the regulatory authorities may not be a correct benchmark to determine the arm’s length price of an international transaction.
5 Therefore, the ld. TPO rejected the submissions of the assessee and computed the arm’s length price of royalty, observing the followings:
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
This way, the ld TPO, by using the CUP method, computed the arm`s length price (ALP) to the tune of Rs. 1,18,83,649/-.
Aggrieved by the addition made by the TPO/AO, the assessee carried the matter in appeal before the ld. CIT(A), who has deleted the addition made by the TPO/AO observing the following: “1. I have carefully considered the arguments of the ld. TPO and the submissions offered by the ld. A/Rs for the assessee. After careful examination, I find that the impugned adjustment made by the learned TPO is based on an incorrect approach of the situation and an incorrect approach towards the impugned transactions. I am of the considered view that this adjustment is not sustainable. 2.The ld. TPO has furnished 4 comparable agreements, the arithmetic mean rate of royalty of which is 4.25%. It was contended by the assessee that in view of the incorrect selection of the comparables, the arm’s length price determined by the ld. TPO is improper. I find that the various cases relied upon by the ld. TPO cannot be considered as a comparable with terms and scope of royalty payment by the assessee to its AEs. They are different in respect of scope, geographical locations and industries / sector. The agreements relied on by the ld. TPO deals with Biotechnology and Drugs Industry Refuse System Industry and Motor & Generators Industry, whereas the assessee operates in the Refractory Industry. Therefore, the case relied upon by the learned TPO cannot be considered as a comparable. 3.The comparable agreements submitted by the assessee ld. A.Rs have been duly considered by me and from the perusal of the same it can be said the rate of royalty paid by the assessee is at arm’s length. In view of the above discussion, I hold that the adjustment made by the ld. TPO was improper. Accordingly, the same are required to be deleted.”
Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand the ld. Counsel for the assessee has defended the order of the ld. CIT(A).
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that Vesuvius India Limited, is a public limited company engaged in the business of manufacture and sale of refractories. During the year, the assessee had entered into various international transactions with its Associated Enterprises ('AEs'). During the proceedings before the Ld. TPO, various details, information & explanations (including transfer pricing documentation study report) as requisitioned were filed before the Ld. TPO in support of arm's length nature of International Transactions entered into with its AEs. During the course of proceedings, the Ld. TPO has accepted the transactions entered into by the assessee with its AEs to be at arm's length except in the case of the international transaction relating to payment of royalty by the assessee to its AEs wherein a downward adjustment was made by Ld TPO to the tune of Rs. 1,18,83,649/- out of payment of royalty of Rs. 5,34,42,085/- made by the assessee to its AEs. We note that the assessee has entered into a Technology License Agreement dated 28th September, 1992 read with Supplemental Agreement dated 1st February, 2000 read with Second Supplemental Agreement dated 16th April, 2007 with its Associated Enterprises ('AEs') i.e. Vesuvius Crucible Company, USA (herein-after referred as 'Refractory Licensor') & Vesuvius Group SA, Belgium (herein-after referred as 'System Licensor') respectively. In terms of the said agreement, Refractory & System Licensor has granted the assessee a license to use the Technical Information to manufacture and a license to use the Technical Information to market, sell and service the products. Further, in terms of the said agreement, the assessee has to pay royalty to the Refractory Licensor @ 3% on the Net Ex-factory sales price of
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
the product sold in India and @ 5% on the FOB price of the product sold outside India and to the System Licensor @ 2% on the Net Ex-factory sales price of the product sold in India and @ 3% on the FOB price of the product sold outside India.
We note that during the assessment year, the assessee has paid royalty to its AEs as follows: (a). To Refractory Licensor, royalty of Rs.2,47,85,557/- at the rate of 3% on the Net Ex- factory sales price of the product sold in India; (b). To Refractory Licensor, royalty of Rs. 75,83,015/- at the rate of 5% on the FOB price of the product sold outside India; (c ). To System Licensor, royalty of Rs.l,65,23,705/- at the rate of 2% on the Net Ex- factory sales price of the product sold in India; (d). To System Licensor, royalty of Rs.45,49,809/- at the rate of 3% on the FOB price of the product sold outside India.
We note that Ld. TPO raised objections with respect to the arm's length nature of the assessee's international transaction with respect to royalty payments. The Ld. TPO claimed that the two separate payments made to Refractory Licensor and System Licensor is actually being made by the assessee on the products 'viso' and 'Slidegate' and both the payments should be clubbed and Royalty Rates should be 5%[3% + 2%] on net domestic sales and 8%[3% + 5%] on the net export sales. The Ld. TPO relied on royalty payment data relating to certain companies extracted from 'Royaltystats.com' database and asked the assessee to show-cause that why adjustment should not be made in case of the assessee based on the said royalty data. The Ld. TPO computed the average rate of royalty payment by the alleged comparable agreements at 4.25% on net sales as against assessee's payment of royalty.
Before the Ld. TPO, it was submitted by the assessee that the assessee has receivedsubstantial benefits by paying royalty to its AEs which outweighs the
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
quantum of royalty payable. Further, it was also submitted that the said royalty rates were within the limits prescribed by the Govt. vide its Press Note 2 (2003 Series) dated 24th June, 2003 (5% on domestic sales & 8% on export sales). The assessee questioned on the comparable agreements selected by the Ld. TPO, as the companies between whom those agreements were entered were different in respect of Scope, Geographical Location, Industry and Terms of Payment etc. as compared to the assessee's royalty agreements with its AEs. Further, the assessee computed the effective rate of payment of royalty applying the same basis (Net Sales) as considered by the Ld. TPO in the aforesaid agreements. The effective rate of payment of royalty works out to be 4.18% and 4.62% on net domestic sales & exports respectively against 5% and 8% on Net Ex-factory Sales Price and FOB respectively. Thus, the assessee submitted that no adjustments should be warranted if the same basis is considered by the Ld. TPO as in the comparable agreements.
Further, in one of the comparable selected by the Ld. TPO, Stone Mountain Finishes, Inc. USA, the rate of royalty should have been considered @ 7% instead of 5% considering the assessee's turnover and thus, the average rate as computed would have stand increased to 4.75% instead of 4.25%. Further, the assessee submitted that the two royalty payments against Refractory Licensor and System Licensor shouldn't be clubbed as each of the two agreements have separate identifiable deliverables and should be compared individually for benchmarking. Further, the assessee also applied the overall TNMM contending that since its margin are higher that the margins earned by the industry, its international transaction (including payment of royalty) are at arm's length. The assessee submitted that it has been able to earn higher margins than the industry standards which have been possible due to technical assistance, support from the AEs, thus justifying the payments. We note that the Ld. TPO, rejected the contentions and submissions of the assessee and held that the assessee has not submitted any alternative search to prove that the royalty payment made by the assessee during the relevant A.Y. 2008-09 is at arm’s length and accordingly determined ALP mean rate of royalty @ 4.25% on net domestic & export sales furnished by the
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
assessee. Thus, the ld. TPO proposed a downward adjustment of Rs. 1,18,83,649/- in respect of royalty payment to its AEs.
We note that the assessee pays royalty pursuant to Technology License Agreement dated 28th September, 1992 read with Supplemental Agreement dated 1st February, 2000 read with Second Supplemental Agreement dated 16th April, 2007 between VIL and Vesuvius Crucible Company ("Refractory Licensor" or "VCC") and Vesuvius Group S.A. ("Systems Licensor''). The assessee had entered into a "Technology License Agreement" dated 28th day of September, 1992 with Refractory Licensor. In terms of the said agreement VCC, who is the owner & has the right to license valuable proprietary technical information and to provide technical assistance relating to designs, styles, specifications, components & manufacturing processes, plant & machinery, equipment, shares and assessors relating to Alumina Graphite Refractories, Accumetrix, process control equipments& other related products, granted the assessee, a license to use the Technical Information to manufacture and a license to use the Technical Information to market, sell and service the products. Under the terms of the agreement, the assessee is at liberty to sell the products in India and to export directly the products to all countries. Further, VCC provides the assessee with certain process specifications pursuant to which the assessee shall acquire machines and/or equipment to manufacture the products from third party equipment suppliers. VCC further warrants that the machines and/or equipment sold by it or its affiliates to the assessee together with the equipment procured from third party equipment supplier shall operate together with the Technical Information in such a way so as to enable the assessee to manufacture the Products. Further, in terms of the said agreement, VCC makes available and furnishes to the assessee, Technical Information relating to Products as under:
a) Technical and design drawings specifications for the products, tools and raw material mix necessary for the manufacture of the products;
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
b) Data regarding manufacturing, process and methods as the assessee may need relating to the product, and regarding certain moulds, product needs and fixtures necessary for manufacture of the product; c) Information regarding standards, product equipment and methods of manufacturing and servicing and product to the degree that both Refractory Licensor and the assessee agree that their implementation by the assessee is appropriate; d) Instructions regarding both in-process and final testing and quality control methods to be used in conjunction with the product and manufacturing process; e) Information regarding the most suitable packaging method for the products; f) Information regarding specifications for the material and other components to be used in the manufacturing process, and information regarding testing and quality assurance method relating to raw material and other components to the degree that licensor utilizes such testing quality assurance methods.
We also note that the said agreement, at Article XIII, provides that VCC shall license the assessee to use the Trademarks in connection with the marketing and sale of products outside India. Further, as per Article XIV the term of this agreement is for a period of seven years from the commencement of commercial production provided the commercial production is not delayed beyond three years from the date of the agreement. However, Article XVI on "Effect of Termination" states that on expiry of the agreement all obligations undertaken by VCC and the assessee shall terminate except inter alia that the licenses granted by VCC to the assessee, provided however, that such licenses shall thereafter be non-exclusive and no further Technical Information shall be disclosed by VCC to the assessee. However, VCC has under a separate sales agreement sold to Systems Licensor, the entire engineering activities inclusive of the rights, designs and know how, registered or unregistered. The assessee was interested to maintain the right to use the know how in producing the refractory products as well as to sell the refractory
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
products for use on any engineered systems previously developed by VCC or to be developed in future by VSA. Thus, with effect from 01-02-2000, further to the Technology License Agreement, a Supplemental Agreement between the assessee and Refractory Licensor & System Licensor was entered into to enable the assessee continued availability of technical information & related assistance, use of trademarks, patents etc. The said agreement was further extended by another supplemental agreement dated 16thApril, 2007. During the previous year relevant to the A. Y. 2008-09, the assessee has paid royalty to the Refractory Licensor @ of 3% on the Net Ex-factory sales price of the product sold in India and at rate of 5% on the FOB price of the product sold outside India and to the System Licensor @ 2% on the Net Ex-factory sales price of the product sold in India and at rate of 3% on the FOB price of the product sold outside India. Further, in terms of the aforesaid Supplementary Agreements, systems shall mean all mechanical equipment, measurement devices, hydraulic systems & manipulators, automation systems & process development designed by or for which the rights to design and know-how are owned by the Systems Licensor for blast furnace, basic oxygen furnaces, electric arc furnace, ladle and tundish or other measurement systems for use of the products as well as any and all new development and findings, improvements and upgrading of such mechanical equipment and measurement devices. Further, in terms of the said supplementary agreements, the assessee has been granted the right to supply the products on mechanical equipments or measurement devices designed or for which the rights to design and know how is owned by System Licensor. Thus, after the Supplemental Agreements, the Refractory Licensor granted a non-exclusive license to use the Technical Information to manufacture and a non-exclusive license to use the Technical Information to market, sell and service the products in India. The System Licensor granted a non-exclusive right to supply the Products for use in the systems for which it owns the right of design, know how or any other intellectual property, right and to supply the product in any and all new developments, improvements and upgrading of the systems.
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
The Refractory Licensor and Systems Licensor have been providing the following services to the assessee on a continuous basis:
(a). Refractory Licensor: • Provision of technical know-how, designs and drawings, etc in relation to product like Alumina Graphite Isostatically Press Products, Slide Gate refractories and such other products which may be developed by the Refractory Licensor; • Provision to the assessee such Technical Information like trade secrets, know-how and other proprietary information relating to design, product specification, methods of manufacture, material specifications, service methods & techniques, drawings, tooling, process technology and its related equipment and other documentation; • Provision of all new developments, updates and upgrades in the product or their specifications as and when they happen.
(b). Systems Licensor: • Provision of all designs and drawings of all mechanical equipment, measurement devices, hydraulic systems & manipulators, automation systems & process development designed by the Systems Licensor; • Assistance in the use of the products in the systems for blast furnace, basic oxygen furnaces, electric arc furnace, ladle and tundish or other measurement systems; • Provision to the assessee with all new development and findings, improvements and upgrading of such mechanical equipment and measurement devices.
As stated above, the assessee has been paying royalty for ongoing technical support received from its AEs in relation to various products. The product in respect of which the assessee has been paying royalty, are meant to be used on sophisticated systems like blast furnace, slide gate machineries etc. the Page | 13
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assesseefrom time to time refers various issues and queries to its group companies and receives support from them. It may be noted that the queries may not only be referred specifically to the System Licensor or Refractory Licensor but are also referred to any of its group companies. It is worthwhile to note that the assessee enjoys technical support because of its association with the Vesuvius Group for which it pays Royalty. Further, the counsel submits that Vesuvius Group has been engaged extensively in Research and Development (R&D) and has been constantly developing new products and systems. Over the years, through its own R&D and through various vertical acquisitions, Vesuvius Group has various patents at its name. The ld. Counsel for the assessee submits that the products in relation to which royalty has been paid are not standardized products and are to be designed based on customer specific requirements. Every time the assessee receives a new product enquiry, the specifications are sent to refractory licensor who provide technical details to the assessee to enable it to manufacture the requisite product as per the Vesuvius' standards. The aforesaid services are available on as and when needed by the assessee.
Further, the assessee has received online supports and other technical up- gradation emails, copies of which were also enclosed in the TP Document Study Report (Refer page no. 107-121 of the Paper Book). Thus ld counsel submits that the assessee pays royalty for on-going, ever-flowing and comprehensive bouquet of services (such as technical support, information, upgrades, use of trade-marks, patents, Vesuvius brand etc.). The benefits received by the assessee due to its association with AEs for outweighs the quantum of royalty payable @ 3% & 5% to Refractory Licensor and @ 2% & 3% to System Licensor on domestic &exports sales of certain specified products. Thus, it is submitted that the royalty payment to it AE's are at arm's length in view of the benefits received by the assessee. Based on the aforesaid, the ld Counsel submits that payment to Refractory & System Licensors should not be clubbed together and viewed separately while undertaking any comparative analysis since the Refractory Licensor and Systems Licensor have been providing the benefits on a continuous basis independent of each other
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
and each of the two agreements have separate identifiable deliverables. So, both must be compared individually for benchmarking.
We note that royalty data of various companies obtained from Royaltystats.com and used by TPO for applying CUP method are different from products, terms & scope of royalty payments made by the appellant and accordingly, application of CUP method by the TPO for determining ALP is not as per the law as held by the Hon'ble Jurisdictional Tribunal in the case of Akzo Nobel Chemicals (India) Ltd. v. DCIT [ITA No. 1477/PN/2010] & DCIT v. Emami Limited [ITA Nos.1065 & 1066/Kol/2017]. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.
The Ground No. 3 and 4 of ITA No. 206/Kol/2018 and Ground No. 1 and 2 in ITA No.207/Kol/2018 are common which are raised by the revenue inA.Y. 2009- 10 & 2010-11respectively,relate to transfer pricing adjustment with respect to payment for management services to AE in INR 3,10,48,978/-. Since this issue is common in these two appeals therefore, we take lead case in I.T.A. No. 207/Kol/2018 for A.Y. 2010-11.
Brief facts qua the issue are that the assessee has, inter alia, availed services in the nature of sales, marketing, VIP support, human resources, etc. from its AE, Vesuvius Group S.A., Belgium vide service agreement (SA) dated 22.02.2008 (INR 3,10,48,978/-). The aforesaid transaction was duly benchmarked by applying Cost plus method (CPM) wherein the assessee was charged a mark-up of 5% on the management service fees allocated to the assessee. Without prejudice, the assessee had also applied the Transactional Net Margin Method (TNMM) to contend that the transaction was made at Arm length’s price (ALP). The TPO rejecting all the contentions raised by the assessee disallowed and made
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
adjustment of amount of INR Rs.3,10,48,978/- by way of Transfer Pricing Adjustment on the following grounds: a) The services provided by the AE of the assessee under the SA fall into the category of stewardship activity; b) Services provided by the AE of the assessee under the SA were general supervisory activities which assisted the AE to control the activities of the assessee; c) Payments made by the assessee to the Group was not commensurate to the benefits received by the assessee for which huge payment would have been made had the services would have been provided by a third party to the assessee or performed by the assessee in-house. d) Services were rendered to the assessee by the Group because of the ownership interest and were duplicative in nature and provided indirect benefits to the assessee. Thus, Ld TPO made adjustment of INR 3,10,48,978/-.
Aggrieved by the order of the Assessing Officer/ TPO, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer observing the following: “1. I have carefully considered the arguments of the ld. TPO and the submissions offered by the ld. A.R.s of the appellant company. After careful examination, I find that the impugned adjustment made by the ld. TPO is based on an incorrect approach of the situation and an incorrect approach towards the impugned transactions. I am of the considered view that this adjustment is not sustainable. The TPO did not mention any reasons rejecting the method of benchmarking applied by the appellant and also did not apply any of the methods prescribed for benchmarking. 2. A voluminous set of documentary evidence such as sample evidences of communications, training manuals, and other relevant documents was submitted with the ld. TPO. The documentary evidence shows valuable commercial services received from AE. It is also not disputed that the management services was rendered exclusively for the Appellant Group, and that similar services was not provided to any third party. The appellant through execution of the agreement had has reaped benefits of operational efficiency, accounting & management reporting efficiency. 3. The Ld. TPO did not consider the plethora of facts, justifications, details & arguments as presented by the appellant and proceeded on the basis that Page | 16
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justbecause the Group Co. wanted to control its interest, allocated the cost to the appellant and therefore the services are in the nature of stewardship services. This approach of the Ld. TPO was erroneous. 4. As per the definition of intra-group service as per the US Regulations, first there should be an activity performed by one of the members of a group of related parties which lies within the ambit of definition of activity (the 'activity test') and second, that activity should result in a benefit (the 'benefit test') to one or more members of that group of related entities. In the interest of economy & efficiency, the appellant desired to obtain these services from its AE. It is the practice of the multinational to frequently concentrate various activities for the benefit of the entire group. 5. By availing the intragroup services, there has been substantial savings in total costs when compared with those which would otherwise be incurred if they were borne by the individual companies in various countries. It is not disputed by the TPO that had the appellant not received support from AE, it would need to perform the functions in-house or hire experienced and trained service providers. Such services are thus not in nature of simple oversight functions which have been performed to protect the interest in the Group. For the purpose of determination and explanation, the appellant has submitted documents evidencing the regular flow of valuable commercial services. From the above details submitted by the assessee it has been amply demonstrated that the benefits generated by the said services during the relevant financial year have undeniably added economic / commercial value to enhance the commercial position of the assessee and such services are received by the assessee on a continuous basis across its operational areas. Hence it is erroneous to classify the services to be in the nature of stewardship services. 6. The appellant during the course of hearing has submitted the decisions of Akzo Nobel India Limited vs DCIT [ITA No. 531/Kol/2014 & ITA No. 335/Kol/2014] &NLC ,Nalco (Indial Limited vs, DCIT [2016] 71 taxmann.com 57 (Kolkata - Trib.) by Hon'ble Jurisdictional ITAT. On perusal of the same, I am of the view that the appellant's case is squarely covered by these decisions and that the nature of services are not in the nature of stewardship activities and accordingly, the arm's length price of the transactions cannot be determined at NIL . In view of the above, the adjustment made by the ld. TPO / AO is not sustainable on the facts of the case, and the law applicable. The same is directed to be deleted, and as a result, this ground of appeal stands allowed.”
Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.
The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand the ld. Counsel for the assessee has defended the order of the ld. CIT(A). Page | 17
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We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the ld. CIT(A) after considering the submissions of the assessee had decided the matter in favour of the assessee based on the following observations:
a) The assessee has reaped benefits of operational efficiency, accounting & management reporting efficiency through the execution of the agreement. b) The services rendered by the AE were not in the nature of stewardship activities.
Ld Counsel submitted that appellant had entered into a Service Agreement (SA) dated 22-02-2008 with its AE, i.e. Vesuvius Group S.A, Belgium (VGSA) for provision of various management and support services. In terms of Article 3 of the SA, VGSA has provided various services to the appellant under the following categories:
• Sales, Marketing, VIP Support • Human Resources; • Manufacturing, Engineering Developments; & • Finance, Information Systems, Business Support & Development.
In terms of Article 4 of the SA, the appellant has agreed and undertaken to pay a Service fee for Specific and Shared Services. Further, in terms of the said Article, all direct and indirect cost incurred by VGSA in rendering such Services shall be broken into the following 3 service categories, including all costs of personnel, depreciation of equipment, outside services and overheads expenses:
• Marketing, VIP and technical sales support (Service Category - 1') Page | 18
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• Human Resources support (Service Category - 2) • Finance, Information Systems, Business support and development, manufacturing, Engineering developments,(Service Category - 3)
The basis of charge for Specific and Shared services were as under:
For Specific Services: On Cost Basis or the basis of man days @ Euro 2000/1500 for senior management/other employees respectively.
For Shared Services: On the basis of pre-defined allocation keys:
Service Category - 1 : On the basis of appellant's Direct sales vs. Vesuvius Division consolidated Direct sales; Service Category - 2: On the basis-of appellant's Personnel costs vs. Vesuvius Division's consolidated Personnel costs, excluding HQ costs Service Category - 3 : On the basis of appellant's Net Assets vs. Vesuvius Division's consolidated Net Assets after deduction of stewardship costs.
A mark-up of 5% is applied on the portion of allocated services after exclusion of external service fees and consultations allocated at cost subject to the condition that total amount of fees charged by VGSA shall not exceed 1 Mio. Euros on an annual basis.
We note that during the year, the appellant has availed management services from its AE amounting to Rs. 3,10,48,978/ - (including payment for specific services amounting to Rs. 26,48,778/-, (pb.9). The appellant had applied TNNM to benchmark the said transaction where the weighted average, operating industry margin on turnover (MOT) & margin on cost (MOC) was 16.98% and 20.45% respectively while the appellant was operating with MOT of 19.19% and MOC of 23.74% respectively [PB page 23-43 at Pg No. 39]. The appellant was charged a mark-up of 5% on the management service fees allocated to the appellant. It is Page | 19
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submitted that the weighted average margin on turnover in case of companies engaged in providing similar services is 15.23%(pb.43), which is much higher than the mark-up of 5% charged from the appellant and hence the said transaction is at ALP.In terms of the provision of Sec. 92C(3), the TPO can proceed to determine the ALP only on fulfilment of the conditions specified in Clause (a) to (d) of the said section. In the absence of any default in complying with the conditions as specified in provisions of 92C(3), rejection of appellant's benchmarking [by applying CPM read with TNMM] is not permissible under the law. For that assessee relied on the following CBDT circulars and precedents:
• CBDT'S Circular 12 of 2001 dated 23 rdAugust, 2001 • CBDT's Circular 14 of 2001 dated 22nd November 2001 • Philips Software Centre Private Limited - vs. - ACIT [(2008) 15 DTR 0505 (Bang.)] [affirmed by the Hon'ble Karnataka High Court in CIT v. Philips Software Centre (P.) Ltd. [2018] 95 taxmann.com 214 (Karnataka)] • NLC Nalco (India) Limited vs DCIT [ITA No. 529/Kol./2008 & ITA No. 1256/Kol/2009] • DCIT v. Landis+ Gyr Ltd. [2017] 86 taxmann.com 109 (Kolkata - Trib.)
Besides, services are not in nature of shareholder activity nor stewardship activities, asthe Email correspondences submitted [PB page 69-190] substantiate that the services are in the nature of Intra-group services (Para 7.14 of OECD Guidelines).That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and ground nos. 1 , 2 in ITA No. 207/KOl/2018 and ground no. 3 and 4 in ITA No. 206/Kol/2018 raised by the revenue are dismissed.
Other Grounds 21. Ground Nos. 1 and 2 raised by the assessee in I.T.A. No. 1289/Kol/2017, for A.Y.2008-09 and Ground No. 2 raised by the Revenue in I.T.A. No. 1333/Kol/2017 for A.Y. 2008-09 are identical and common therefore we Page | 20
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adjudicate them together. Revenue`s appeal in I.T.A. No. 1333/Kol/2017 for A.Y. 2008-09 is taken as the lead case. The Grounds of appeal raised by the Assessee and Revenue are as follows: (Assessee) I.T.A. No. 1289/Kol/2017 for A.Y. 2008-09 1. That on the facts and in the circumstances of the case, the ld. CIT(A) was not justified and grossly erred in not allowing deduction in respect of leave encashment on provision basis amounting to Rs. 34,33,302/-. 2. That on the facts and in the circumstances of the case, the ld. CIT(A) was not justified and grossly erred in not allowing deduction in respect of provision for leave encashment adjusted with the opening general reserve and deferred tax assets as per AS-15 (Revised 2005) amounting to Rs. 44,97,000/-.
( Revenue)I.T.A. No. 1333/Kol/2017 for A.Y. 2008-09
Whether the ld. CIT(A) was correct in deleting the addition without appreciating the fact that the provisioning has been made in the A.Y. 2008- 09 in respect of a claim of an expense pertaining to an earlier year and the said provisioning having not been debited to the P & L account but to the Reserve Account could not have been allowed as business deduction for the A.Y. 2008-09? Was not the ld. CIT(A) incorrect in not following the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals vs. CIT (227 ITR 172) in which the Hon’ble Court has held that even if there is an accounting practice for revenue recognition if it does not agree with the provisions of the Income Tax Act it has to be ignored?
Facts of the case which can be stated quite shortly are as follows:During the assessment proceedings, the assessing officer examined the books of accounts and computation of the assessee and noticed that the assessee had debited provision for leave encashment amounting to Rs.34,33,302/- in its profit and loss account. During the course of hearing, the assessee was asked to explain as to why the said provision for leave encashment should not be disallowed. In response, the assessee vide its letter dated 23.12.2011 has submitted that the provision was claimed as deduction on the basis of decision of Hon’ble Calcutta High Court in the case of Exide Industries Ltd. vs. Union of India (2007) 292 ITR 470 (Cal) wherein it has been held that insertion of clause (f) in section 43B and restricting the deduction in respect of leave encashment, which is otherwise a trading
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
liability, is arbitrary, unconscionable and de hors the Supreme court’s decision in the case of Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC). The assessee has further submitted that Apex Court vide its interim order no. CC12060 / 2008 dated 08.09.2008 has stayed the said order of Exide Industries Ltd. (supra) and vide the subsequent order no. 22889/2008 dated 08.05.2009 clarified that the assessee is entitled to lodge the claim in the return after payment of taxes. Based on the above, no disallowance u/s 43B is offered on account of provision for leave encashment.
However, the AO rejected the contention of the assessee and held that actual payment has not been made by the assessee before the due date, therefore the provision for leave encashment amounting to Rs. 34,33,302/- was disallowed.
AO`s observation about AS-15 adjustment are as follows.On perusal of computation of total income furnished by the assessee, it was noticed by the AO that the assessee has claimed an amount of Rs.1,95,78,000/- as deduction in its computation of total income on account of amount arising upon reinstatement of employees benefit obligation on account of Accounting Standard (AS)-15 adjustment. The said amount has not been debited to Profit & Loss Account and has not been routed through general Ledger in the Balance Sheet.The assessee was asked to explain the same. In response, the assessee has submitted the explanation in respect of the said claim. It has been explained that during the year under consideration the assessee has accounted for the employee retirement benefit as per Accounting Standard-15 "Accounting for retirement benefit". In accordance with the transitional provision in the revised Accounting Standard-15, Rs.1,95,78,000/- representing charge for employee benefit obligation for earlier years up to March 31, 2007, has been created partly by debiting the general reserve and deferred tax asset accounts. In this regard the details of the provisions for employee retirement benefit of Rs.1,95,78,000/- created as per AS-15 is shown as follows:-
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
Particulars Amount (Rs.) Post-retirement medical scheme 98,82,000/- Gratuity 51,99,000/- Leave Encashment 44,97,000/- Total 1,95,78,000/- Adjusted with the opening balance of General Reserve 1,29,23,000/- Opening balance of Deferred Tax Assets increased
It was further submitted by the assessee that provision for gratuity has already been paid during the year. Hence there is no question of disallowance of the same u/s 43B of the Act. In respect of provision for leave encashment the assessee submitted that as per Kolkata High Court Judgment in Exide Industries Ltd, (2007) 292 ITR 470 (Cal) and as per order of the Supreme Court in the case of Bharat Earth Movers (2000), 295 ITR 428, the provision of leave encashment is an allowable expense. The assessee has further submitted that stay on operation of the aforesaid judgment of Calcutta High Court in the case of Exide Industries was granted by the Supreme Court Vide order dated 08.09.2008 and subsequently the supreme Court vide order dated 08.05.2009 further clarified that during the pendency of appeal, the assessee will be liable to pay advance tax on leave encashment as if section 43B(f) is on the statute book but at the same time it will be entitled to claim the same deduction on provision basis. As regards provision for Post-Retirement Medical Scheme, the assessee submitted that the same was made as per actuarial valuation report. The assessee also referred to Note No. 1(ix)(1)(e) of Schedule-l7 [ Notes on Accounts] of the audited accounts wherein it is mentioned that the assessee has a single premium insurance policy towards insurance cover for post-retirement medical treatment. The assessee also clarified that since the above mentioned expenses have not been routed through Profit & Loss Account, the same has been claimed in computation of total income u/s 37(1) of the Act. However, AO rejected the contention of the assessee and made addition Rs.1,95,78,000/-.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has partly deleted the addition made by the Assessing Officer observing the following: Page | 23
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Findings of ld. CIT(A) in respect of provision for leave encashment: “I have considered the findings of the ld. Assessing Officer and the written submission and case laws/ judicial precedents filed by the ld. A.R.s. The provision for leave encashment is specifically covered by clause (f) of Sec. 43B and deduction for the same can be allowed only on payment basis.
The assessee challenged the disallowance of provision of leave encashment relying on the judgment of Hon'ble Calcutta High Court in Exide Industries Ltd v. UOI-292 ITR 470 (Cal) and also the judgment of Kerala High Court in Hindustan Latex Products. It is true that the Hon'ble Calcutta High Court has struck down provision of sec. 43B(f) while deciding he case of Exide Industries v. Union of India 292 ITR 470 (Cal). However, the Hon'ble Supreme Court in the case of CIT v. M/s Exide Industries Ltd. in SLP (Civil). CC 12060/2008 during hearing on 8.9.2008 rendered the following order: -
"Upon hearing counsel the Court made the following order, Issue notice, in the meantime, there shall be stay of the impugned judgment, until further orders. "
The Hon'ble Supreme Court during the hearing in the same case further on 8.5.2009 held as under: -
“upon hearing counsel the court made the following order :'- Delay condoned. Leave granted. Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as for as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed.
We further make it clear that the assessee would during the pendency of this Civil appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns. "
Thus, vide order dated 8.9.2008 in CIT v. Exide Industries Ltd. the Hon'ble Supreme Court had granted stay on the High Court judgment and further order. In the subsequent order dated 8.5.2009 in petition for special leave to appeal (Civil) No. 22889/2008, it was directed by Hon'ble Supreme Court that during the pendency of the civil appeal, the assessee would pay tax as if section43B(f) is on the statute book though it would be entitled to make claim in the return. In my considered view the stay granted earlier has not been vacated by the Hon'ble apex court. Therefore, I do not agree with the assessee that Hon'ble Supreme Court has not stayed the order of Hon'ble High Court, as the stay granted vide order dated 8.9.2008 continues to remain in force. Coming now to the other contention of the assessee, generally speaking it is true, that stay of an order of lower court affects only the parties of the concerned suit and the stay does not necessarily mean that ratio of the order of lower court does not remain in force. However, the issue under consideration in the case of Exide Industries Ltd. (supra) was the very legality and constitutional validity of the provisions, and therefore the Hon'ble Court order has wider ratification and its scope is not limited only to the parties to the suit. Therefore, the order of High Court in the case of Exide Industries Ltd. (supra) is at present not operational. Rather, the provision of section 43B(f) is to be considered to be in force keeping in view Page | 24
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the interim order of Hon'ble Supreme Court. Considering this legal position, with due respect to Hon'ble High Court, I am following the interim order of Hon'ble Supreme Court. Considering the same this ground taken by the assessee is dismissed, with a rider that this order is subject to modification in a situation whether the Hon’ble Apex Court ultimately decides the issue in favour of the assessee.”
Finding of ld. CIT(A) in respect of AS-15 Adjustments: “I have carefully considered the findings of the ld. Assessing Officer and the written submission and case laws filed by the ld. A.R.s for the assessee. The assessee-company has made provision for employee benefits by adjusting the opening General Reserve and deferred tax assets in accordance with Accounting Standard-15 (revised-2005). The ld. Assessing Officer had disallowed the same on the reasoning that the impugned expenses do not pertain to the year under consideration and that provisions are contingent in nature. The ld. AR.s have submitted that the provisions have been made because of the applicability of the Revised AS-15, and that the expenses which crystallized during the relevant assessment year are to be allowed in the current year. 2. Further, the aforesaid provisions have been worked out as per the Actuarial Valuation Report. Copy of Actuarial Valuation Reports has also been duly submitted by the. Ld. A.R. along with the Written Submissions. Therefore, the said provisions cannot be said to be contingent in nature. The various items are decided along the following lines:
Provision for Post-Retirement Medical Scheme of Rs.98,82,000/-. I find that this issue is squarely covered in favour of the assessee-company by the decisions of the Hon'ble Tribunal in Glaxo Smithkline Consumer Healthcare Ltd. -vs.- ACIT (2013) 36 CCH 21 (Chd) and Bokaro Power Supply Co. (P) Ltd. -vs.- DCIT (2013) 35 CCH 293 (Del). This issue is accordingly allowed in favour of the assessee.
As regards the Provision for Gratuity of Rs.51,99,000/-, it was submitted by the Ld. A.R. that the payment for the same has already been made during the relevant previous year and as per the provisions of sub-section (b) of Sec,43B, gratuity is allowable in the year in which payment is made. The Ld. AO is thereby directed to verify the payment, and where the contention of the assessee found correct, to allow the same. Accordingly, this item of expense is allowed for statistical purpose.
Provision for leave encashment of Rs.44,97,000/-: Provision for leave encashment is specifically covered by clause (f) of Sec. 43B and deduction for the same can be allowed only on payment basis. Further, the Hon'ble Supreme Court vide its interim order dated 08-09-2008 and 08-05-2009 against the order of Exide Industries Ltd. (2007) 292 ITR 470 (Cal) has allowed the operation of Sec. 43B(f) to continue until further orders. Accordingly, this claim of the assessee is not tenable, and requires to be dismissed, subject to such finding being amenable for modification in a situation where the Hon'ble Apex Court ultimately decides the issue in favour of the assessee.”
Aggrieved by the order of the ld. CIT(A), the Assessee is in appeal before us against the addition confirmed by CIT(A), in respect of provision of leave encashment of Rs. 34,33,302/-.
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
Whereas the Revenue is in appeal before us against the partly relief granted by CIT(A) in respect of, transitional provision as per AS-15, for post retirement medical scheme of Rs. 98,82,000/-, transitional provision as per AS-15, for gratuity of Rs. 51,99,000/- and transitional provision as per AS-15, for leave encashment of Rs. 54,97,000/-, ( Note: these transitional provisions were created on account of adoption of revised Accounting Standard -15, by assessee).
The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.
On the other hand, the ld. Counsel for the assessee submitted before us that during the previous year relevant to the assessment year under consideration, the assessee has made provision for employee benefit of Rs.l,95,78,000/- by adjusting the opening general reserve and deferred tax assets in accordance with Accounting Standard -15 (Revised 2005) "Employee Benefits". The aforesaid provision of Rs. 1,95,78,000/- comprises of provision for post retirement medical scheme of Rs. 98,82,000/-, provision for gratuity of Rs.51,99,000/- and provision for leave encashment of Rs.44,97,000/-. The aforesaid provision for employee benefits is made as per the actuarial valuation. In this regard a copy of the actuarial valuation report in respect of provision for post retirement medical scheme, provision for gratuity and provision for leave encashment has already been furnished during the appellate stage before the ld CIT(A). As regard provision for gratuity which is only allowable on payment basis as per Sec. 43B(b), the ldCounsel submitted that the same has also been paid during the yearunder consideration and hence allowable u/s 43B of the Act. The ld. Counsel for the assessee also submitted that the Institute of Chartered Accountants of India had revised Accounting Standard - 15 in 2005. The objective of AS-15 (revised) is to prescribe the accounting and disclosure for employee benefits. The Statement requires an enterprise to recognize:
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
(a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and (b) an expense when the enterprise consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.
As per AS-15 (revised), post employment benefit plan i.e. pension, etc are classified as either 'Defined Benefit Scheme' or 'Defined Contribution Scheme'. Under 'Defined benefit scheme' an enterprise obligation is to provide the agreed benefits to current and former employees. The actuarial risk and investment fall in substance on the employee. The AS-15 (revised) provides in detail about the actuarial valuation method and actuarial assumptions to be used for measuring the liability for employee benefits under the 'Defined Benefit Scheme'. This way, ld Counsel defended the order passed by ld CIT(A) and prayed before the Bench to allow provision for leave encashment.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that so far Provision for Post-Retirement Medical Scheme of Rs.98,82,000/- is concerned, we note that this issue is squarely covered in favour of the assessee company by the decisions of the Tribunal in Glaxo Smithkline Consumer Healthcare Ltd. -vs.- ACIT (2013) 36 CCH 21 (Chd) and Bokaro Power Supply Co. (P) Ltd. -vs.- DCIT (2013) 35 CCH 293 (Del). We are of the view that ld CIT(A) has rightly allowed the claim of the assessee company. That being so, we decline to interfere with the order of ld. CIT(A) in deleting the aforesaid addition,his order on this addition is, therefore, upheld and the grounds of appeal of the Revenue is dismissed.
As regards, provision for gratuity of Rs. 51,99,000/- adjusted with the opening general reserve and deferred tax assets as per AS-15 (Revised 2005), it is
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
submitted by the Counsel for the assessee that the payment for the same has already been made during the previous year relevant to the instant assessment year and as per the provisions of sub-section (b) of Sec 43B, gratuity is allowable in the year in which payment is made. We note that ld CIT(A) has already directedthe AO to verify the payment, and where the contention of the assessee company found correct, to allow the same. Accordingly, this item of expense was allowed by ld CIT(A) for statistical purpose. We do not find any infirmity in the order passed by the ld CIT(A), therefore, on this issue, we confirm the order of ld CIT(A).
We note that Provision for leave encashment of Rs.44,97,000/- pertains to transitional provisions of AS-15, and an amount of Rs. 34,33,302 pertains to current year provision for leave encashment. We note that issue under consideration is no longer res integra, it is covered by the judgment of the Coordinate Bench in the case of ITC Limited, in ITA No. 1222/Kol/2015, for A.Y. 2009-10, order dated 04.10.2017 wherein it was held as follows:
“2. The sole ground of appeal of the assessee is against the action of Ld. CIT(A) in confirming the action of the AO in disallowing a sum of Rs.7,32,113/- being the provision made for leave encashment in the current assessment year on the basis of actuarial valuation. 3. At the outset itself, the Ld. Counsel brought to our notice that the similar issue had come up before this Tribunal in M/s. S. R. Batliboi & Co. vs. DCIT, ITA No. 1598/Kol/2011 for AY 2007-08 wherein the Tribunal vide para 4 has held as under: “4. After hearing rival submissions and going through the facts and circumstances of the case and the order of the Tribunal cited supra, we find that the issue is dealt by the Coordinate bench of this Tribunal as under: “3. At the outset, ld. senior counsel for the assessee submitted that in all these three appeals, the issue relates to allowability of provision for leave encashment in terms of sub-section (f) of section 43B of the Income Tax Act. The assessee had advanced its claim relying on the decision of the Hon’ble Kolkata High Court in the case of M/s. Exide Industries Ltd. reported in 292 ITR 470. However, the Assessing Officer did not accept the assessee’s claim observing that Department has preferred a Special Leave Petition before the Hon’ble Supreme Court and stay of the order of the Hon’ble Kolkata High Court was granted by the Hon’ble Apex Court. Ld. senior counsel submitted that under identical circumstances, Tribunal has restored the matter to the Page | 28
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file of Assessing Officer to decide the issue in accordance with the decision of the Hon’ble Apex Court in the case of DCIT, Circle-8, Kolkata –vs.- M/s. Ernst & Young Pvt. Ltd. in ITA No. 1787/Kol./2008. He, therefore, submitted that the matter may be restored back to the file of Assessing Officer. 4. Learned Departmental Representative did not raise any objection. 5. We have considered the submissions of both the parties and have perused the records of the case. We find that Tribunal on identical issue in ITA No. 1787/Kol./2008 in the case of M/s. Ernst & Young Pvt. Ltd. has observed at para 12 in page 6 as under :- “12. Ground No. 5 of the revenue’s appeal is against the relief allowed by the CIT(A.) in respect of provision for leave encashment which was deleted by the CIT(A.) following the decision of the Hon’ble jurisdictional High Court in the case of M/s. Exide Industries Ltd. (supra). It was pointed out by the ld. DR that the Hon’ble Apex Court in” SLP (Civil) 22889 of 2008 has stayed the operation of the decision of the Hon’ble jurisdictional High Court. In view of the above, we set aside the orders of the authorities below on this point and restore the matter back to the file of the AO with the direction that he will readjudicate this issue as per decision of the Hon’ble Apex Court in the case of M/s. Exide Industries Ltd. (supra)”. Respectfully following the same we set aside the orders of authorities below on this point and restore the matter back to the file of Assessing Officer for adjudication as per the decision of the Hon’ble Apex Court in the case of M/s. Exide Industries Ltd.(supra).
In view of the aforesaid decision of the coordinate bench on a similar issue, we set aside the order of the Ld. CIT(A) and restore the matter back to the file of the AO for adjudication to await the final outcome of the Hon’ble Apex Court in SLP (Civil) 22889 of 2008 in M/s. Exide Industries Ltd. case and decide this issue as per the decision of Hon’ble Apex court in M/s. Exide Industries Ltd., supra. Thus, this ground of appeal of assessee is allowed for statistical purposes.”
Therefore, respectfully following the judgment of the Coordinate Bench in the case of ITC Limited (Supra), we set aside the order of the Ld. CIT(A) and restore the matter back to the file of the AO for adjudication to await the final outcome of the Hon’ble Apex Court in SLP (Civil) 22889 of 2008 in M/s. Exide Industries Ltd. case and decide this issue as per the decision of Hon’ble Apex court in M/s. Exide Industries Ltd., (supra). Thus, this ground of appeal of assessee is allowed for statistical purposes.
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
We shall take ground No. 1 raised by the Revenue in I.T.A. No. 1333/Kol/2017, which reads as follows: 1. Whether the ld. CIT(A) was correct in deleting the disallowance of Club Expenses for Rs.5,96,933/- despite the fact that the element of commercial expediency has not been established by the assessee company whether before the ld. Assessing Officer or before the ld. CIT(A)? Should not be element of Commercial Expediency that facilitates the business the thurst point in deciding the issue by the ld. CIT(A)?
Brief facts qua the issue are that during the assessment proceedings the AO noticed that the assessee has incurred expenditure on club subscription and catering service fees of Rs. 5,96,933/-. The particulars and details of these expenses are mentioned in Clause 17(d) r.w.annexure-8 of the Tax Audit Report. During the course of assessment proceedings, the assessee was asked to explain how the said expense were wholly and exclusively incurred for the purpose of business. In response to the same the assessee vide letter dated 09.12.2011 submitted a written reply. However,disregarding the submission made by the assessee, the AO in the order u/s 143(3) disallowed the expenditure incurred on club subscription and catering service fees by holding that the same is not incurred wholly and exclusively for the purpose of business.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has deleted the addition made by AO observing the following: “I have considered the findings of the ld. A.O. and the written submission and case laws filed by the ld. A.R. for the assessee. The ld. A.O. in the assessment order has disallowed this amount holding that the same was not expended wholly and exclusively for the purpose of business. The ld. A.R. in the written submission have brought on record that the assessee has incurred expenditure of Rs. 5,96,933/- towards corporate membership fees and subscription charges of club. Moreover, the said expenditure have been incurred to run the business more efficiently by providing an opportunity to its employees to get together with their business associates and in the process advance their business interest. Thus, the said expenditure can be stated to have been incurred for the purpose of business. Similar issue has also been decided in favour of the assessee by the decision of the Hon’ble Tribunal in A.Y. 2000-01 and 2001-02 and also by my predecessors in A.Y. 2003-04, A.Y. 2004-05and A.Y. 2006-07. Accordingly, following the order of Page | 30
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the hon’ble Tribunal and order of ld. CIT(A) in earlier years, this ground of appeal is allowed.”
Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.
The ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has defended the order of the ld. CIT(A).
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee has incurred Rs.5,96,933/- towards the corporate membership of various clubs and catering service charges. The aforesaid expenditure is incurred to run the business more efficiently. The membership of a club gives an opportunity to the Directors and other employees of the assessee to get together with their business associates and in that process, advance their business interest. The club provides platform for business interactions to improve business relations and prospects. Thus, club membership helps in maintaining business connection/contacts by the directors and senior executives of the assessee and therefore constitutes revenue expenditure. We note that the Hon`ble Gujarat High Court in the case of Gujarat State Export Corporation Ltd -vs.- CIT (1994) 209 ITR 649 (Guj), held as under: "For deciding the question as to whether the expenditure is of capital nature or revenue nature, one of the relevant criteria is whether it is for acquisition of a concern or assets or whether the expenditure is for carrying on a concern or for running the business. If the aim and object of the expenditure is for carrying on the concern, then it is revenue expenditure. Hence, in our view, it would be difficult for us to accept the contention of the Revenue that the entrance fee paid by the assessee for getting the membership of the sports club can be termed as capital expenditure. "
Therefore, we are of the view that expenditure incurred by assesseeof Rs.5,96,933/-towards the corporate membership of various clubs and catering Page | 31
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
service charges is for business purpose and allowable under section 37(1) of the Act. Hence, we do not find any infirmity in the order of ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue is dismissed.
Ground No. 3 raised by the Revenue in I.T.A. No. 1333/ Kol/2017, reads as follows: 3. Whether the ld. CIT(A) was correct in deleting the addition of Rs. 1,61,18,861/- on account of bogus purchase on the ground that no purchases for Rs. 1,61,18,861/- was made from M/s OCL India Ltd. as the later has categorically denied such transaction having been made with the assessee company? Was not the ld. CIT(A) incorrect in not enquiring into the veracity of M/s OCL India Ltd.’s letter dated 29.12.2011 and whether it was not an afterthought?
We note that assessing officer in his assessment order dealt the issue as follows: “The assessee was asked to furnish the name, address and amount in respect of purchase parties. As the assessee did not furnish the said details, Shri Harish Agarwal, the authorized representative was asked thefollowing vide order sheet noting dated 02.12.2011- "Shri Agarwal was reminded of the fact that details of sundry debtors which include purchase details have not been filed so far and therefore, deriving the Revenue of making enquiry of purchases. Hence, reasonable view in respect of purchases may be taken."
In response, a list of purchase parties was submitted by the assessee. In this connection notice u/s. 133(6) was sent to M/s. OCL India Ltd at the address 12A, Stephen House, 4, B.B.D.Bag, Kolkata-700 001. In response, a letter dated 13.12.2011 has been received from M/s. OCL India Ltd on 26.12.2011. The said letter has been signed by Shri Chinmoy Majumder, Dy. General Manage-Accounts which is as under:
"This is in response to your above letter directing us to produce information u/s 133(6) before you in connection with the transactions we had with M/s Vesuvius India Ltd. For the F. Y. 2007-08 relevant to the Assessment Year 2008-09. We would like to inform your honour that we do not had any transactions with M/s. Vesuvius India Ltd for the F.Y. 2007-08".
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
Shri Haish Agarwal, A/R was confronted with the above reply received from M/s. OCL India Ltd vide order sheet noting dated 27.12.2011. In response Shri Agarwal, A/R of the assessee has submitted the following explanation vide letter dated 29.12.2011:
"As regards OCL India Ltd it is humbly submitted that the party has inadvertently stated in its letter that there was no transaction with the assessee in the F. Y. 2007-08. In this regard copy of the ledger account of OCL India Ltd along with the specimen copy of invoice of F. Y. 2007-08 is marked and collectively enclosed as Annexure-7".
It is seen that the assessee has furnished the following details in respect of M/s. OCL India Ltd. –
Balance as on Transaction during Payment during the Balance as on 01.04.2007 the year year 31.3. 2008
10,56,039 1,61,18,861 1,39,49,450 32,25,450
The party M/s. OCL India Ltd has categorically denied of any transaction with the assessee company. Since the assessee has claimed the purchase expenses onus was always on the assessee to prove that the transaction genuine and for the purpose of the business. Merely submitting the ledger account and photo copy of certain documents which are not properly legible cannot make the claim of the assessee admissible and acceptable. Hence, the above explanation of the assessee cannot be accepted. Considering the above, the purchase expenses of Rs. 1,61,18,861/- is disallowed and added to the total income of the assessee.”
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has deleted the addition observing the following: “1. I have carefully considered the findings of the A.O. and the written submission and case laws filed by the A.R. The A.O. in the assessment order has disallowed the total purchases made from OCL India Ltd. of Rs. 1,61,18,861/- on the basis of reply submitted by OCL in response to notice u/s 133(6) issued during the course of assessment proceedings u/s 143(3). The relevant portion of the ld. A.O.’s order is reproduced below:
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
2.However, during the course the appellate proceedings, the ld. AR. submitted that OCL by an inadvertent error replied that it did not have any transactions with the assessee during the relevant previous year and that it had duly filed a revised letter dated 29.12.2011 accepting its transactions with the assessee during the relevant previous year. Further, the A.R. had also produced a letter dated 23.02.2016 along with ledger account substantiating the genuineness of the transactions of the assessee with OCL India Limited. On verification of the details furnished by the A.R., I find the transactions between the assessee and OCL India Ltd. to be genuine. Therefore, I delete the disallowance made by the A.O. and accordingly, this ground is allowed in favour of the assessee.”
Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.
The ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has defended the order of the ld. CIT(A).
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that during the appellate Page | 34
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proceedings the assesseehad produced a letter dated 23.02.2016 along with ledger account substantiating the genuineness of the transactions of the assessee with OCL India Limited. On verification of the details furnished by the assessee, the ld CIT(A) noticed that the transactions between the assessee and OCL India Ltd. to be genuine.
We note that in the course of assessment proceedings, the AO had issued notices u/s 133(6) to many parties with whom the assessee had transactions during the financial year relevant to the assessment year under consideration and asked them to furnish details of the transactions with the assessee. As and when the replies were received from the parties the AO asked the assessee to reconcile the closing balances if there was any difference in the balances. In response to the same the assessee vide letter dated 23-12-2011, 28-12-2011 & 29-12-2011 submitted detailed reconciliation. However, one of the parties, OCL India Ltd in its reply to the letter issued by the AO stated that there was no transaction with the assessee during the financial year relevant to the assessment year under consideration. Thereafter the assessee was asked to provide an explanation for the same. In response to the same, the assessee vide letter dated 29-12-2011 filed detailed reply along with the ledger copy of OCL India Ltd and specimen copies of the invoices. The ld Counsel submitted before us thatduring the assessment year under consideration, the assessee had purchased items from the refractory division of OCL but the letter u/s 133(6) was received by the cement division and the cement division without consulting the refractory division has inadvertently replied to the aforesaid letter stating that there was no transaction with the assessee during the aforesaid period. But subsequently, OCL filed a revised letter dated 29-12-2011 wherein it said that the information furnished vide letter dated 13-12-2011 declaring that the assessee did not have any transaction pertains to the cement division. However, OCL has agreed that the assessee had purchased refractory items from them and accordingly, they will be providing details for the same. Copy of the letter dated 29-12-2011 was submitted by assessee during the appellate proceedings. The ld Counsel based on these evidences submitted before
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
us that the OCL India Ltd. is a genuine party and the assessee had entered into various transactions with the said party. The payments to the said parties were duly made by account payee cheques therefore the genuineness of the transaction should not be doubted. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid addition,his order on this addition is, therefore, upheld and the grounds of appeal of the Revenue is dismissed.
Ground no. 1 raised by the revenue in I.T.A. No. 206/Kol/2018 for A.Y. 2009- 10 which is reproduced below: 1. The ld. CIT(A) has erred in deleting the disallowance of Rs. 23,58,959/- towards relining of kilnm at Mehsana unit ignoring the fact that the assessee itself has recognized the said expenditure as capital expenditure in its books of account instead of debiting the same to P & L A/c as revenue expenditure. The ld. CIT(A) has erred in not accepting the fact that the said expenditure has enduring benefit for the assessee which is squarely within the meaning of capital expenditure.
Brief facts qua the issue are that the company had incurred an expenditure of Rs. 23,58,959/- towards relining of kiln at its Mehsana Unit. Vide letter dated 02- 01-2013, the assessee was asked to explain the nature of such expenditure and explain why it shouldn’t be capitalized. In response to the same, the assessee filed reply dated 12-03-2013 which is as under: “In the instant assessment year, the company has incurred an expenditure of Rs. 23,58,959/- towards relining of kiln at its Mehsana unit. The aforesaid expenditure has been incurred to protect and preserve the insulation layer of the kiln which gets damaged and worn out on account of high temperature and constant wear and tear, the aforesaid expenditure is allowable as revenue expenditure.” The submission made by the assessee was duly examined by AO. On examination of the computation of total income, it was noted that the assessee has separately claimed deduction in respect of their lining expenses. It clearly shows that the assessee has capitalized the same in the books of accounts. Assessee itself admitted that the aforesaid expenditure has been incurred to protect and preserve the insulation layer of the kiln which gets damaged and worn out on account of high temperature and constant wear and tear. Further it is clear that aforesaid
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
expenditure provides long lasting benefit to the assessee by preventing the kiln from wear and tear thereby increasing its life substantially. Hence, there lining expenditure cannot be treated as expenditure on repair but the same should be capitalized as done in its books of account. Thus, claim of the assessee on account of relining expenditure of Rs. 23,58,959/- is disallowed and added back in the computation.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer observing the following: “1. I have considered the findings of the ld. A.O. and the written submission and case laws / judicial precedents filed by the ld. A.R.s for the appellant. 2. In my considered view of the matter, normally initial investment on machines and their parts are in the nature of capital expenditure but replacement of parts of existing machinery in the course of their working will be a revenue expenditure. The expenditure incurred on relining of kilns does not substantially change the identity of the plant nor it effects any improvement in the efficiency of the plant, so the same can be said to an expenditure on current repairs. The said view has been upheld by Hon’ble Delhi High Court in the case of Addl. CIT vs. Dyer’s Stone Lime Co. P Ltd. (1982) 136 ITR 8 (Del) and CIT vs. Bharat Aluminum Co. Ltd. (2007) 292 ITR 600 (Del). Further, it is a well settled proposition of law that accounting entries are sine-qua-non for taxation purposes. Moreover, the capitalization of the said expenditure in the books of account cannot be a determinative factor regarding the allowability of the said expenditure which is to be decided only as per provisions of the I.T. Act. 3. Further, expenses incurred on relining of kiln which did not bring into existence any asset or secured any distinct advantage to the appellant or resulted in any structural change and hence, relining of kiln is revenue expenditure. This ground of appeal is accordingly allowed.”
Aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us.
The ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand the ld. Counsel for the assessee has defended the order of the ld. CIT(A).
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the assessee is engaged in the manufacture of refractories which are material that can withstand very high temperatures 3000Cor more without degrading or softening. Refractories require special heat-up techniques to ensure that they perform as intended, and avoid damage due to drying stresses (spalling) and thermal shock until the operational status is achieved. The manufacturing procedure requires a number of steps to be followed which includes grinding, mixing, moulding, drying, firing etc. The 'Firing' procedure requires temperature which is usually higher than their usage temperature. This 'Firing' procedure is carried out in kilns. Further, on account of such high temperature, the kiln is subject to continuous withering and damage. In order to ensure operational efficiency of kiln it is imperative to ensure regular relining of the walls of the kiln. This relining is required to maintain the functioning of the kiln. Thus, this is in the nature of current repairs. Further, it is humbly stated that expenditure on account of current repairs is an allowable expenditure as per Sec. 31(i) or u/s 37(1) as incurred wholly and exclusively for the purpose of business. "Current repairs" means repairs necessary for preserving or maintaining an already existing asset which does not bring a new asset into existence or does not give to the assessee a new or different advantage. They are such repairs as are attended to as and when the need for them arises. As iterated above, the said expenditure has been incurred to protect and preserve the insulation layer of the Kiln which gets damaged and worn out on account of high temperature and constant wear and tear. The relining was done to preserve and maintain the existing asset and no new asset or advantage has accrued to the appellant. Such expenditure is allowable as revenue expenditure. Reliance in this regard is placed on the decision in the case of Addl. CIT -vs.- Dyer's Stone Lime Co. (P) Ltd. (1982) 136 ITR 8 (Del. ) wherein it has been held that the expenditure incurred on relining of kilns does not substantially change the identity of the plant nor it effects any improvement in the efficiency of the plant,
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
so the same is an expenditure on current repairs and hence allowable as revenue expenditure. Further, reliance in this regard could also placed in the decision of CIT -vs.- Bharat Aluminum Co. Ltd. (2007) 292 ITR 600 (Del.) wherein it has been held that relining of smelter pots undertaken by the assessee was only meant to take care of wear and tear and it does not create any new asset or advantage, so the same is a revenue expenditure in the nature of current repairs. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and the ground no. 1 raised by the revenue is dismissed.
Now we shall take ground no. 2 raised by the Revenue in ITA No. 206/Kol/2018 for AY 2009-10 which reads as under:
The ld. CIT(A) has erred in treating the LAN cabling, which is only a network of wire for transmission of data, as computer peripheral and deleting the addition on the said ground.
Brief facts qua the issue are that this ground relates to disallowance made by the ld. A.O. of an amount of Rs. 6,80,264/- on account of claim of Depreciation @ 60% on LAN cabling’. The impugned disallowance has been made by the ld. Assessing Officer in the assessment order by observing as follows:
“8.1 The company also claimed depreciation @ 60% on LAN cabling in computers shown at Rs. 27,21,055/-. On examination of the same, it is seen that LAN cabling cannot be treated as computer peripherals rather the same will be considered as electrical fittings eligible for depreciation @ 10%. Hence, the claim of depreciation on the LAN cabling is restricted to 10%. The amount of depreciation to be disallowed is (60% -10%) i.e. 50% for half year on Rs. 27,21,055/- i.e. Rs. 6,80,264/-.”
Aggrieved by the order of the Assessing Officer/ TPO, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer observing the following:
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
“1. I have considered the findings of the ld. Assessing Officer and the written submission and case laws / judicial precedents filed by the ld. A.R.s for the appellant. The ld. A.O. in the assessment order has disallowed the depreciation @ 60% on LAN cabling holding that the same cannot be treated as computer or computer peripherals rather shall be considered as electrical fittings. The ld. A.Rs in the written submission have brought on record that the LAN components being network cables, network adapter, routers, network connector like Ethernet port etc have been classified under the head ‘computers’ since the computer peripherals from integral part of the computer system and they cannot be used without computer. Hence they are to be treated as computer for the purpose of allowing higher rate of depreciation. 2. I find that LAN cablings used for interconnecting computer. In Oriental Bank of Commerce- vs- Addl. CIT (ITA No. 1937/Del/2011 dated 04-11-2015) and Nokia India Pvt. Ltd. vs. Asst. CIT (2012) 20 ITR (Trib) 198 (Del) (ITAT) it has been held that computer accessories and peripherals are part of computers. Accordingly, in my considered view the same would be eligible for depreciation @ 60% being part of computers. Respectfully, following the aforesaid judgments, this ground of appeal is allowed.”
Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.
The ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel of the assessee has defended the order of the ld. CIT(A).
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that in this regard, a local area network (LAN) connects computers to exchange data. The essential components of LAN (in TAR reported as LAN cabling) are network cables, network connector like Ethernet port etc. The LAN (hereinafter referred to as “computer peripherals”) have been classified under the head “computers” since the computer peripherals form integral part of the computer system and they cannot be used without computer. Hence, they are to be treated as computer for the purpose of allowing higher rate of depreciation. Reliance in this regard is placed on the
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
decision of Special bench of Hon’ble Mumbai ITAT in the case of DCIT vs. Datacraft India Ltd. (2010) 40 SOT 295 (Mumbai) (SB) wherein it has been that the computer, in common sense and as a popularly understood, refers to any electronic or other high speed data processing device which performs ‘logical, arithmetic and memory functions on data’ and includes all input and output devices which are connected to or related to it. In order to determine whether a particular machine can be classified as a computer or not, the predominant function, usage and common parlance understanding, would have to be taken into account. In order to be called as computer, it is sine-qua-non that the principal output/object/function of such machine should be achievable only through ‘computer functions’. Accordingly, it has been held that Router and Switchers canbe classified as computer hardware when they are used along with a computer and when their functions are integrated with a computer. In such a situation, routers and switchers are to be included in block of ‘computer’ for purpose of determining rate of depreciation applicable to them i.e. 60%. Reliance is also placed on the decisions in the case of Expeditors International (India) Pvt. Ltd. vs. Addl. CIT (2008) 118 TTJ 652 (Del) wherein the Hon’ble Tribunal has held that peripherals such as NT Server etc. form integral part of computer and the same, therefore, are eligible for depreciation at the rate of 60% as applicable to computer. Reliance in this regard is also placed in the case of CIT vs. BSES Yamuna Power Limited (2010-TIOL-636-HC-DEL-IT) wherein the Delhi High Court following the decision of the Expeditors International (India) (P) Ltd. (supra) has held that:
“We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%.” [Emphasis added]
M/s Vesuvius India Ltd. ITA Nos.1333&1289/Kol/2017 ITA Nos.206 & 207/Kol/2018 Assessment Years: 2008-09, 2009-10 & 2010-11
That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and the ground of appeal raised by the Revenue is dismissed.
In the result, the appeals of the revenue are dismissed and the appeals of the assessee are allowed.
Order pronounced in the Court on 26.02.2020
Sd/- Sd/- (S.S.GODARA) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER
�दनांक/ Date: 26/02/2020 (SB, Sr.PS) Copy of the order forwarded to: 1. i) ACIT, Circle-10(2), Kolkata ii) ACIT, Range-10, Kolkata 2. M/s Vesuvius India Ltd. 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), KolkataBenches, Kolkata. 6. Guard File.