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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI A.T.VARKEY, JM &DR. A.L.SAINI, AM
आदेश / O R DE R Per Dr. A. L. Saini:
The captioned four crossappeals filed by the Assessee as well as Revenue,pertaining to assessment years2011-12 and 2012-13, are directed against separate orders passed by the learned Commissioner of Income Tax (Appeals)-4,
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 Kolkata (in short the ld. ‘CIT(A)’], which in turn arise out of separate assessment orders passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the ‘Act’).
First we shall take assessee’s appeals in & 1345/Kol/2015, for assessment year 2011-12 and 2012-13. In these two appeals, common issue is that whether on the facts and in the circumstances of the case, the ld. CIT(A) erred in confirming the disallowance made by the Assessing Officer on account of provision for leave encashment, for A.Y. 2011-12 at Rs. 70,06,297/- and for A.Y 2012-13 at Rs. 1,73,21,918/-.
Since the issue involved in these two appeals are common and identical, therefore, these appeals have been heard together and a consolidated order is being passed for the sake of convenience and brevity. The assessee’s appeal in for assessment year 2011-12, is taken as a lead case.
At the outset itself, Ld Counsel for the assessee submitted before us that the issue involved in these two appeals relate to disallowance on account of provision of leave encashment of Rs. 70,06,297/- for assessment year 2011-12 and Rs. 1,73,21,918/- for assessment year 2012-13. The issue under consideration, i.e. provision for leave encashment, which is pending before the Hon’ble Supreme Court for adjudication and there is no finality on this issue. The ld Counsel submitted that the main grievance of the assessee is that the Ld. CIT(A) was erred in not appreciating that Clause (f) of section 43B of the Act, providing for allowance of leave encashment on payment basis is arbitrary and de horse the Supreme Court decision in the case of Bharat Earth Movers, as held by the Hon’ble jurisdictional High Court in the case of Exide Industries Ltd. 292 ITR 470 (Cal).
4.On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer. Page | 2
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13
5. We have heard both the parties and perused the material available on record. We note that the similar issue had come up before this Tribunal in the case of M/s. S. R. Batliboi & Co. vs. DCIT, 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 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.
Learned Departmental Representative did not raise any objection.
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 above and respectfully following the same, we set aside the orders of the authorities below and restore the matter back to the file of Assessing
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 Officer for adjudication as per the decision of Hon’ble Apex Court in the case of M/s. Exide Industries Ltd. (Supra). This Common ground of appeal of assessee (for both assessment years 2011-12 and 2012-13), is allowed for statistical purposes.
Now we shall take revenue’s appeal in &1372/Kol/2015, for assessment year 2011-12 and 2012-13. Since the issue involved in these two appeals of Revenue, are common and identical, therefore, these appeals have been heard together and a consolidated order is being passed for the sake of convenience and brevity. The Revenue`s appeal in I.T.A. No. 1371/Kol/2015, for assessment year 2011-12 is taken as lead case.
The grounds of appeal
raised by the Revenue as per lead case in for assessment year 2011-12, are as follows:
1. That on the facts and the circumstances of the case ld. CIT(A) has erred in deleting the disallowance of Rs. 83,67,730/- on account of Software Expenses being capital in nature.
2. That on the facts and circumstances of the case, ld. CIT(A) has erred in deleting the disallowance of commission expenses of Rs.1,10,58,743/-.
3. That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the disallowance of warranty expenses of Rs. 82,02,019/-.
4. That the assessee craves for leave to add, delete or modify any of the grounds of appeal before or all the time of hearing.
We shall take the above grounds raised by Revenue, one by one, as follows:
Ground No.1relates to disallowance of Rs. 83,67,730/- on account of software expenses being capital in nature.
The brief facts are that during the year under consideration, the assessee has entered into a Software Maintenance and Support Agreement with Accenture to Page | 4
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 use the software and avail ongoing support and maintenance services for an annual fees of Rs. 36,87,594/-. The assessee company has also separately entered into a Service Agreement and a Hoisting Service Schedule for availing Hosting Services, Production Services and Business Recovery Services for an annual fee of Rs. 74,68,900/-. The assessee during the course of assessment proceedings vide its submissions explained to the AO and claimed that the expenditures were not made for acquiring the right of intangible assets but was actually in the nature of technical services. However, the contention of the assessee was not accepted by the AO and the amount of Rs. 1,11,56,494/- was added back to the computation of total income of the assessee. Out of the total sum, depreciation @ 25% was allowed to the assessee, therefore, net disallowance made by AO was to the tune of Rs. 83,67,730 (Rs. 1,11,56,494 – 25% of Rs. 1,11,56,494).
Aggrieved by the stand so taken by 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. 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 stands 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 theld CIT(A).
12.We have heard both the parties and perused the material available on record. We note that the assessee is a dealer of Caterpillar Inc., USA (Caterpillar). Caterpillar Inc. maintains a common web based interface which provides a common platform to all its dealers (including the assessee) to record business transactions. In connection to the above, Accenture LLP (Accenture) and Caterpillar have entered into a Service Agreement dated 1stJune, 2009, vide which Accenture has been granted an exclusive right to license Caterpillar's DBS / DBSi integrated software package (Software) to Caterpillar's dealers on global basis to allow Caterpillar's dealer to access and benefit out of the licensed software. Page | 5
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 Pursuant to such global agreement, the assessee company (being a dealer of Caterpillar) entered into a Software Maintenance & Support Agreement dated 1st July, 2009 with Accenture vide which the assessee company has been granted a non-exclusive and non-transferable license to use the Software free of cost and avail ongoing support and maintenance services from Accenture required to access the said system for an annual fees of Rs. 36,87,594/-. Under the said agreement, Accenture interalia provides the assessee company with available improvements to DBS / DBSi Software including updates, enhancements, improvements to correct any malfunctions, deficiencies, incompatibilities, defects, errors or bug and any new releases relating to the software along with support services in the nature of telephone, email or other customer support. We note that the said agreement does not grant any right, title or interest in the Software and the right of the assessee is limited to using the software in connection with its dealership business with Caterpillar.Apart from above, the assessee company has also separately entered into a Service Agreement and a Hosting Service Schedule dated 1stApril 2009 with Accenture for availing Hosting services, Production Services and Business Recovery Services with Accenture.
After going through the details/agreements filed before us, we are of the view that the payments made by the assessee were not for securing any right in software or for purchase of copyright in software but for availing maintenance and support services. It is observed that the payment was made for maintenance/hosting services and there was no acquisition of right in software as spelt out in Para 7(a) of Software Maintenance & Support Agreement dated 1stJuly, 2009. We find that the AO has misunderstood the facts of the case. The payment made by the assessee has not resulted in any enduring benefit and are only for annual maintenance and support services. The same services has been availed by the assessee in future years also which suggests that the same were availed on annual basis and was not a one-time payment. Hence, we do not find any possible reason to treat the expense as capital expenditure since the payment is made only for maintenance and support services, necessary for using the application efficiently. That being so, we decline to interfere in the order passed by the Ld. CIT(A), his order, on this Page | 6
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 issue is hereby upheld and the grounds of appeal raised by the Revenue is dismissed.
14. Ground No. 2 raised by the Revenue relates to disallowance of commission expenses of Rs. 1,10,58,743/-.
Brief facts qua the issue are that the assessee is a dealer of Caterpillar Inc. USA. During the year, the assessee has made commission payment amounting to Rs.1,10,58,743/- to TRS Enterprises, SAS Enterprises and Chhundu Enterprises. During the year under consideration, the assessee company paid an amount of Rs. 1,10,58,743/- on account of commission on sales to following parties:
Sl. No. Name of party Amount (INR) 1. TRS Enterprises 61,82,528 2. SAS Enterprises 43,13,072 3. Chhundu Enterprises 5,62,463 Total 1,10,58,743/- The assessee company being a dealer of Caterpillar and desirous of increasing its sales had entered into separate agreements with the aforesaid parties to engage them to find and/or secure new buyers/customers for it. The aforesaid parties acting as an independent consultant agreed to undertake reasonable endeavors to find and secure buyers for the equipments sold by the assessee company. Further, the parties also agreed to inform the assessee about the customer's requirements and to forward the enquiries for assessee company's equipment. For rendering the aforementioned services, the assessee company pays commission/brokerage on the value of sales order secured by the aforesaid parties. In other words, the commission paid to the aforesaid parties is determined on the basis of sales secured by them. The assessee produced the copy of the agreements entered with SAS and TRS before the assessing officer. Assessee stated that without appreciating the facts correctly and disregarding the submissions made by the assessee, in the impugned order passed under section Page | 7
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 143(3), the Assessing Officer has disallowed an amount of Rs. 1,10,58,743/- on the following contention:- i. The assessee has claimed that it has paid the said amount for expansion of its business i.e. to increase its sales whereas the copy of invoices submitted by the assessee show that the same has been paid for consultancy services. ii. The nature of consultancy actually offered for which the commission was paid has not been explained by the assessee company. iii. The onus lies on the assessee to substantiate the claim made by it, and the assessee company has failed to substantiate and explain the services rendered by those parties to consider this expenditure as genuine business expenditure.
Thus, the A.O. added back the whole amount of Rs.1,10,58,743/-, on the contention that nature of consultancy actually offered by the said parties was not explained by the assessee and the assessee has failed to prove the genuineness of business expenditure.
16. Aggrieved by the stand so taken by 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. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us.
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 ld CIT(A).
We have heard both the parties and perused the material available on record. We note that ld Assessing Officer has failed to appreciate the facts of the case that the payment made to three parties represents commission for securing sales order for the company. This payment is made as per clause 1 and 2 of the agreement entered into with SAS Enterprises, which states as under:-
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 “i. That TIPL and SAS hereby agree that SAS, acting as an independent consultant, shall use reasonable endeavor to find and/or secure buyers/customers for the Equipment for TIPL ii. SAS shall use reasonable endeavors for keeping TIPL fully informed about buyers'/customers' requirements, forwarding enquiries for Equipment. " Further Clause 7(a) and (b) of the agreement deals with consideration payable to the SAS and the same provides as under: "7. a) That a brokerage/commission will be paid to SAS by TIPL and it would be paid on the case to case basis and determined on the value of the order received by TIPL from buyers/customers for the sale of the Equipment. b) That the said commission shall be paid to SAS against receipt of an invoice by TIPL from SAS payable on a pro rata basis of the Equipment by TIPL from the buyer/customer, wherein the said invoice shall state the following details: i. TIPL invoice Number, Date & Order Value ii. Order Reference Number, Buyer/Customer Name & Date iii. Consultancy amount and or commission Value iv. Service Tax As Applicable [Service Tax Regd. No. of SAS to be specified in the invoicer]“
On perusal of the above clauses of agreement it is apparent that the aforesaid party SAS Enterprises was engaged by the assessee in the capacity of commission agent to secure sales order for the assessee for which the commission was payable on the value of sales order. Other parties viz. TRS enterprises has also engaged on similar terms which can be evident from the agreement. Assessee produced sample copy of bill raised by SAS Enterprise. Similar payments were also made to TRS Enterprises and Chhundu Enterprises. Invoice copies from these parties were also submitted by the assessee. Hence, it is abundantly clear that the payment made to three parties represents commission for securing sales order for the company.
17.We note that ld Assessing Officer has disputed the genuineness of commission payment. As submitted by Counsel for the assessee, that the assessee had submitted copies of invoices during the course of assessment proceedings to the A.O. in support of its claim. Based on the same, the A.O. only took cognizance of the action of the DIT(Investigation) who summoned the two parties and took their statements on oath. The same could not be considered by the A.O. and hence his comments were sought by remanding the matter back during the appellate proceedings. It is observed that A.O. has made various allegations and the assessee has submitted rebuttal to each such allegation during the appellate proceedings. It is observed that the A.O. has not brought any corroborative evidence in support of Page | 9
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 his allegation except making only such allegation. On perusal of statement by third parties no adverse inference could be drawn. Based on facts placed on record, in absence of any evidence of payments being not genuine, we do not find any justification in the action of the A.O. in treating the impugned commission payments as not being expended wholly and exclusively for the purpose of business. In view of the facts narrated above, we note that the addition made on account of commission payments amounting to Rs.1,10,58,743/- has been rightly deleted by ld CIT(A).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. 2 raised by the revenue is dismissed.
Ground No. 3 raised by the Revenue relates to addition of warranty expenses of Rs. 82,02,019/- .
Brief facts qua the issue are that the assessee company debited in profit and loss account a sum of Rs.82,02,019/- as warranty expenses. It claims reimbursement of warranty expenses from Caterpillar for goods supplied on warranty to its customers. During the year under consideration, the assessee incurred total warranty cost of Rs.15,99,76,159/- claimed as reimbursement from Caterpillar. However, Caterpillar accepted warranty claim of Rs.15,17,74,140/-. The assessee debited the unrecovered warranty cost of Rs. 82,02,019/- (Rs.15,99,76,159-Rs. 15,17,74,140) to the Profit and Loss account as business expense. The AO disallowed the expenses on the contention that the assessee has not credited any or at least equal amount of expenditure which is reimbursable by Caterpillar and thereby the assessee had violated the principle of accounting. Hence, AO disallowed the amount of Rs. 82,02,019/-.
Aggrieved by the stand so taken by 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. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us.
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 21. 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 passed by the ld CIT(A).
22.We have heard both the parties and perused the material available on record. We note that the assessee company is a dealer of Caterpillar and sells equipment manufactured by it. The sales and service agreement entered between the assessee company and Caterpillar provides that the assessee company is liable to incur warranty cost in respect of equipment sold by it which can be claimed as re- imbursement from Caterpillar. Assessee submitted a copy of the sales and service agreement. We note that during the year under consideration, the assessee incurred total warranty cost of Rs.15,99,76,159/-, which was back to back claimed as reimbursement from Caterpillar. However, out of the total claim made by the assessee of Rs.15,99,76,159/-, Caterpillar accepted warranty claim of Rs. 15,17,74, 140/- and denied balance claim for reimbursement of Rs. 82,02,019/- as not liable to be covered under warranty.
We note that pursuant to the agreement entered into between the Caterpillar and the assessee, the assessee is entitled to claim reimbursement of warranty expenses from Caterpillar claimed by its customer. At the cost of repetition, we state that during the year under consideration, the assessee incurred total warranty cost of Rs.15,99,76,159/- claimed as reimbursement from Caterpillar out of which warrant only claim of Rs. 15,17,74,140/- was accepted by the Caterpillar. Balance warranty claim of Rs. 82,02,019/- was denied by the Caterpillar and was not reimbursed to the assessee. The assessee in its books of accounts has not debited the full amount of warranty expenses but what has been debited is only the unrecovered warranty cost of Rs. 82,02,019/-. In this regard, we find no merits in the contention of the AO that the assessee has violated the principle of accounting by only recording the expense without any credit. Since warranty claim of Rs.82,02,019/- is the net amount debited to profit and loss account, hence, there is no question of crediting in the profit and loss account. Page | 11
GainwellCommosales Pvt. Ltd. (formerly Tractors India Pvt. Ltd.) ITA Nos.1371&1372/Kol/2015 Assessment Years:2011-12 & 2012-13 Since the unrecovered warranty cost represented business expense of the assessee, the same was debited to Profit and Loss Account and in view of the above, since the expenditure is incurred for business purpose, warranty expenses should be allowed.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 No.3 raised by the revenue is dismissed.
In the result, the both appeals of the assessee are allowed for statistical purposes and both appeals of the Revenue are dismissed.
Order pronounced in the Court on 04.06.2019