DCIT, NEW DELHI vs. M/S. PHI SEEDS (P) LTD., HYDERABAD

Assessee by : Shri Ajay Vohra, Sr. Adv Smt. Kavita Jha, Adv Shri Aditya Vohra, Adv Revenue by : Smt. Paramita Tripathy, CIT-DR ORDER PER BENCH:- This is a bunch of 8 appeals – one filed by the revenue and remaining 7 filed by the assessee, pertaining to same assessee for assessment years 2002-03, 2003-04, 2005-06, 2007-08 to 2010-11. Since identical issues are involved in all these appeals and were heard together, these are being disposed of by this common order for the sake of convenience and brevity. First of all we take up the appeal for assessment year 2002-03 and since the issue is identical in all other years, our decision for assessment year 2002-03 shall be identically applicable in all other years.

ITA No. 1988/DEL/2006 [AY 2002-03]

a) Land Lease Rent b) Fertilizers & Chemicals c) Labour & Service Charges The case of the assessee was selected for scrutiny assessment under section 143(2) of the Act. The AO show caused the assessee to explain as to why the claim of agricultural income not be disallowed. The assessee submitted that its claim of business activities being agricultural in nature, is entitled for exemption under section 10 (1) of the Act. The AO rejected the contention raised by the assessee and held that the charges for supervision and guidance cannot be said to be agricultural activities within the meaning of the Act. It was further held that the assessee does not indulge in agricultural operations in accordance with tests laid in the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy. It was observed in the assessment order that the case of the assessee is similar to the methodology adopted by National Seeds Corporation Ltd. as the assessee also pays advance to farmer who approaches the company with its crop. In view of the above, the claim of exemption under section 10 (1) of the Act was denied to be assessee. The total income of the assessee was assessed at Rs.3,27,75,246/-.

(i) Parent seed sown, which is the most expensive and vital input continues to be owned by the company and loss on this account resulting from low production by the job workers is borne by the company.

(ii) The standardized cost of expenditure on fertilizer and chemicals is normally reimbursed by the company.

(iii) The job workers does not have the right to retain any seeds or plants with himself except with the approval or permission of the company as the property in such speeds and plants belongs to the company.

(iv)Parent seeds sown as well as hybrids grown are always the property of the company. The company either destroys substandard seeds or commingles and seeds them as ordinary grain. The Assessment Orders for A.Y. 1996-97 to 2001 -02 and the Audit Reports are factually incorrect in stating that defective or substandard seeds are returned to the farmers. However, as a matter of goodwill and established practice the sales proceeds of the grain are credited to the job –workers. (v) Male chopping charges (debited under Labour and Service Charges) are paid out on per acre basis in the case of all crops except mustard.

(vi) As against the small number of cases where balances were negative the company has incurred far greater loss by way of its inputs in terms of parent weed costs and the expenditure towards field production staff. (vii) For F.Y. 2000-01 the company ploughed down 442 acres of land where the seeds sown did not sprout within a few days of sowing. As a result the lease got frustrated and the land was returned to the farmer under mutual agreement. This clearly shows that the company had possession of leased lands and also the property in the seeds belonged to it. (viii) Consideration for purchase of goods can never be a negative figure Yet, it has happened. This is so, because in a job- contract the contractor becomes liable to pay damages for loss caused to the party who has given this goods for processing. Had it been a transaction of sale -purchase of hybrid seeds, as alleged by the A.O., there would have been no question of the farmer paying to the company.

(ix) Had it been a case of purchase of seeds, there would have been no question of paying male chopping charges to the farmers on per acre basis (a fact completely and conveniently ignored by the Auditors and by your honour) over and above the general labour charges paid on the basis of the yield.

(x) It is wrong to call organizers, middlemen or commission agent. They are paid for services like identifying the farm hands arranging for the possession and guiding the farmers in implementing the agricultural protocol prescribed by the company.

(xi) The company itself gets the crops harvested and transports the produce of raw seeds from field to Depot, account and expense.

Without prejudice, for the sake of argument even if it be held that farmer shares some risk, a greater risk is shared by the assessee and thus the assessee carries the risk in the cultivation activity. Even on this basis the assessee’s activities are agricultural activities and its income there from is agricultural income. Reliance is placed upon the decision of the case of Associated Metals Co. (117 ITR 428 and ITAT No. 3137/Del/1985)(copies of the reported decision and ITAT order are attached). It is submitted that these decisions have been accepted by the Department and favourably considered in the appeal proceedings of seed companies similar to the assessee.

7. The Ld. AR submitted that the report given by the DI, Hyderabad which contains adverse findings against the assessee was prepared behind the back of the assessee in a surprise field visit. The enquiry report dated 21.02.2004 revealed the following:-

i) All the lands referred to in the Annexure have been taken on lease by PHI Seeds Ltd. Delhi, for the F.Y. 2000-01 on an annual rent of Rs. 1500/- per acre. ii) M/s PHI Seeds Ltd. in turn, handed over the lands back to the farmers themselves to cultivate maize. iii) M/s PHI Seeds Ltd. supplied the male and female seeds in the farmers at free at free of cost and given the technical assistance through their employees and finally collected Rs.200/- per acre towards supervision charges. iv) All the Agricultural expenses were borne by the farmers only. v) After harvesting M/s PHI Seeds Ltd. purchased the maize from the farmers at fixed rate per Quintal as mentioned in lease agreement and paid Rs. 1500 per acre as lease rent and the balance as bonus.

It is further submitted that the aforesaid report has not been considered in the right perspective by the AO and the CIT(A) and the confirmations, statements u/s 131 of the farmers were ignored.

ii) The assessee, being in lawful possession of the impugned lands taken on lease for the cropping season for raising crops has derivative interest in the land. There is no contrary finding by AO/CIT)(A). iii) The lease rent per acre, agreed to between the assessee and the owner of land is always payable by the assessee company regardless whether the production of seed is higher or below than the standard production of seed per acre, which forms the agreed basis or measure of payment or consideration for labour. iv) The agreement with the same farmers for providing labour is a sound business policy. Almost all of them are small or marginal farmers owing 1-5 acres; in order to supplementary income these farmers want to put in labour in addition to lease rent. This is sound business strategy for getting willing labour and avoiding friction if any outsides are engaged. v) The attachment of a farmer to his land is well known. vi) The payment of compensation on the basis of the quantity of seed produced by the farmer instead of paying fixed wages is a business decision, which is agreed to by every farmer. The company adopted this strategy for managing production by more than 5000 farmers with their fields spread across several districts and for maximizing efficiency of the contract-labour. vii) The contract is between two independent and unrelated parties and it is not permissible for the revenue cannot be allowed to take business decision on assessee’s behalf. The revenue has clearly confused “measure of payment” with the quality and character of payment. (Ref. Senniram Dongarmal 42 ITR 392, SC at Pg. 1/dPB-1) vii In any event, the mode and basis of payment of compensation for labour is a matter between the company and the farmer. If the farmer is satisfied with such an arrangement, which he enters into year after year, it is not for the revenue to contend that the assessee should have adopted some other business model, and state that for this reason the income is not agricultural. As lon as it shown that the assessee had derived income from agri- land in which it has interest, the income is exempt u/s 10(1) of the Act. viii) The company, being artificial person, cannot cultivate land itself. It can either ‘employ’ labour on wages or engage contract labour. The company has contracted with farmer also for providing labour on as many as 5000-6000 plots of lands aggregating 15,000-16,000 across Andhra Pradesh, and also some in Rajasthan, Karnataka & Gujarat. The present arrangement was found to be most feasible for managing the production on so many plots of land scattered so far and wide. ix) All aspects of dealings with the farmers like lease rent, price per-quintal of output; additional labour charges for male-chopping, uniform compensation for pesticide & fertilizer; agronomies for weeding and irrigation are settled and agreed to with the farmers in village meetings prior to showing. Thus, both farmer and the company share the cost of production. The assessee pays lease rent, agreed cost of fertilizer & Chemicals, labour & additional labour charges and above all, cost of basic and most expensive input parent seed, (about Rs.5000-6000 per acre). It also employs several technicians to provide field assistance to farmers on day-to –day basis.

04 & 2004-05 and decided the issue in favour of the assessee. In for A.Y. 2004-05 the Tribunal held as under:- “3. The learned counsel for the assessee contended before us that the issue is covered in favour of the assessee by the decision of the Tribunal in the assessee’s own case for the assessment year 1993-94 to 2003-04, copies of the relevant orders have been placed on record. The issue has extensively been considered by the Tribunal in ITA Nos. 286 & 287 /Bang/03, 307 to 309/Bang/02 and 1070, 1895 & 1896/Bang/04 vide order dated 26.11.2007. The relevant facts are contained in para 4 to 4.1 of the order. We reproduce para nos.4, 4.1 and 10 to 18 of the order as under:- “4. Briefly stated, the facts are that the assessee company was incorporated in the year 1988 for production of high yielding hybrid seeds. In terms of the approval of the Foreign Investment Promotion Board (FIPB) dated 24.6.84, the company is engaged in the business of production and marketing of hybrid seeds. The company with the help of farmers carries out the production of hybrid seeds. According to the assessee, growing of hybrid seeds involves carrying out agricultural operations jointly with the land owners. The assessee company enters into agreement with the land owners for using their land. The land owners remain the legal owners of the agricultural land and they allow the usage of land exclusively for the growing of hybrid seeds. The farmers (land owners) agreed to assist the assessee company in its agricultural activities under the supervision of company’s supervisors. Before selecting farmers who own the agricultural land, the assessee company takes into consideration factors such as quality of land, quality of soil, location of village track records of farmers and climatic conditions etc. 4.1 After selecting the farmers, the company enters into seed production agreement with the farmers to jointly carry out the agricultural operations under control and supervision of the company. The salient features of the agreement are as under: (a) The farmer is the sole and absolute owner of the agricultural land. (b) The company having the technical know – how necessary for the production of hybrid seeds enters into an agreement with the farmers for utilizing the agricultural land belonging to the farmer. (c) The farmer agrees that the land would be allowed to be used exclusively for the production of the company’s hybrid seeds. In other words, the agreement gives beneficial ownership of lands to the company to carry out its agricultural activities. (d) The farmer shall provide manpower in carrying out its agricultural operations such as land preparation, planting, irrigation, fungicide, pesticide and harvesting on the land under the supervision of the company. (e) The company shall be entitled to carry out or direct the farmer to carry out all such activities, such as use of fertilizer, pesticides etc., which are considered necessary by it for the better production of the produce. (f) Further, the farmer shall at all times be ready and willing to carry out specific tasks assigned by the company from time to time should be called to do. The failure of the farmer to carry out the tasks assigned by the company with entitle the company to carry out the same at the cost of the farmer which also includes the contribution of labour. (g) The agreement categorically states that all produce from the land during the production period shall exclusively belong only to the company. The landowner cum farmer shall have no right and shall have no lien over the produce. (h) The company shall have total access to the land at any time to supervise agricultural activities, inspect and testing. The farmers shall not obstruct the servants, agents and the officers of the company to have access to the land. These facts are enumerated in the order of the CIT (A) at pages 2 to 4, 10 We have heard rival submissions and considered them carefully. After examining the order of the Assessing Officer and CIT (A), we do not find any infirmity in the findings of the Id CIT (A) . These are undisputed facts that the assessee has shown agricultural income on the same activity for AY 90-91 onwards. During the assessment proceedings for AY 90-91, the claim of the assessee was negated by the Assessing Officer. The assessee filed appeal before the CIT (A), who after discussing the issue in detail allowed the claim of the assessee of doing agriculture activity and the Assessing Officer was directed to accept the agricultural income shown by the assessee. The assessments for AY 91-92 and 92-93 were passed u/s 143 (3) and the Assessing Officer has accepted the agricultural income as shown by the assessee himself. However, thereafter the Assessing Officer negated the claim of the assessee. The assessments for AY 96-97 and 97-98 were reopened u/s 147/148. The assessee filed a letter dated 24.12.2000 requesting the AO to treat the return as return filed in response to notice u/s 148. As discussed above that the Assessing Officer was not satisfied with the explanation that the activity done by the assessee are of agricultural activity as in his view, these are commercial activities, therefore, the Assessing Officer passed assessment by holding that the receipts are of business receipts against agricultural receipts shown by the assessee. 11 Similarly for other years i.e. AY 93094 to 2000-01, The Assessing Officer treated all the receipts as business receipts against the claim of agricultural income. The CIT (A) allowed the claim of the assessee by holding that the facts in both the AYs i.e. AY 96- 97 and 97- 98 are identical to the facts of earlier year when the Assessing Officer allowed the claim of the assessee himself. Further reliance was placed on the decision of Allahabad High Court in 197 ITR 428 (supra) wherein identical facts were involved as involved in the case of the assessee. The CIT (A) has also observed that the appeals of the assessee have been allowed by his predecessor for AY 93-94 to 95-96. Accordingly, the claim of the assessee was allowed by the CIT (A) for these two years also. 12 We further noted that Bangalore ‘B’ Bench in the case of Indo American Exports in for AY 98-99 and in the case of Namdhari Seeds Pvt Ltd in ITA No. 3102/Bang/2004 for AY 2001-02 has decided identical issues in favour of the assessee. In these cases also the assesses have entered into identical contract with agriculturists and provide them with hybrid vegetable seeds. The land holdings of the agriculturist extend from 0.75 acres to a maximum of 2 acres. The agriculturists are required to undertake cultivation of the seeds in their land in order to multiply them. The contract period was also mentioned. The assessee company supplies the parents of the hybrid viz the male and female seeds or seedling to the contract grower. The receipts shown by the assessee were shown as agricultural receipts. The Assessing Officer negated the claim of these assesses by observing that the land belonging to the farmer in their own right as owner/term lessee and was in the possession and cultivation. By further observing that the contract entered contrary to the provisions of Karnataka Land Reforms Act, 1961 (KLRA) and such conditions prevailed under KLRA prescribed in the contract will not prevail over the provisions of the Act. The Assessing Officer while negating the claim of the assessee also observed certain further objections. The assessee preferred appeal before the CIT (A), who allowed the claim of these assesses by observing that the receipts shown by these assesses are agricultural receipts. On appeal before the Tribunal, the Tribunal held that the receipts shown by the assessee are agricultural receipts. The Tribunal has discussed the issue in detail. The meaning of agricultural income has also been discussed and by placing reliance on the decision of Madras High Court in the case of Maddi Venkatasubbayya in 20 ITR 151 and in the case of Associated Metal Co in 177 ITR 428 (Alld) where the facts were identical decided the issue in favour of the assessee. The decision of the Supreme Court in the case of Raja Benoy Kumar Sahas Roy in – (2002- TIOL-150-SC-IT)=32 ITR 466 was also taken into consideration by the Tribunal. While discussing the ratio of these decisions in details, the Tribunal came to the conclusion that on entering into an agreement with farmers the receipts shown by the assessee are agricultural receipts. We further noted that the CIT (A), who allowed the appeal in the case of Indo American Exports and Namdhari Seeds Pvt. Ltd. (supra) has also taken into consideration the decision of the CIT (A) in the case of the assessee. It was noted by the CIT (A) that the facts in the case in hand and the facts in the case of Monsanto India Ltd (the assessee) are identical. These facts have been noted by the Tribunal while deciding the appeal in the case of Indo American Exports and Namdhari Seeds Pvt. Ltd (supra) at page 7 of its order. This order was passed on 14.7.2006 at Bangalore. 12.1 The ld DR has raised a contention that by entering into an agreement with the farmers, the assessee has created value based additions in its capital, therefore, should not be treated as agricultural income in the hands of the assessee, in our view, these contention of the ld DR cannot be accepted because there is no dispute that the assessee entered into agreement with various farmers, who cultivated the land as per the terms and conditions of agreement. The seeds supplied by the assessee company were used for cultivating the land and whatever the product produced, the same was shown as sold in the market by the assessee as per terms and conditions of agreement. Whatever the share of the farmer was there that was given to them as per the clauses of agreement. Therefore, we hold that whatever the receipts were there they were on account of agricultural activities and have to be treated as agricultural receipts. 13 The Allahabad High Court in the case of Associated Metal (supra) has decided identical issue in favour of the assessee. In that case also the land was cultivated by the farmers as per agreement clauses and whatever the produces were there that were treated in the hands of the lessor. 14 All other cases relied upon by the ld AR have already taken into consideration by the Tribunal while deciding the appeal in case of M/s Namdhari Seeds (supra), therefore, without going into detail further, we hold that the receipts shown by the assessee are agricultural receipts and the ld CIT (A) was justified in allowing the claim of the assessee. 15 In view of rule of consistency also the assessee deserves to succeed as for AY 1990-91 to 92-93 the department has accepted the claim of the assessee itself. There is no change in facts or in circumstances; therefore, rule of consistency will be applicable on the facts of the present case. 16 The Hon’ble Supreme Court in the case of Radhaswamy in – (2002-TIOL-745- SC-IT)= 193ITR 325 has held that if there is no change in facts then rule of consistency will prevail upon. Many High Courts have also held so. 17 Respectfully following the decision of the Supreme Court and other High Courts, we hold that even in view of consistency there is no infirmity in the findings of the ld CIT(A), who has also taken into consideration the past history of the case. Accordingly, we confirm the order of the ld CIT (A) for these two years. 18 The facts in the remaining years are identical, therefore, in view of the reasoning discussed above, we confirm the orders of the ld CIT (A) for the remaining years also. “4. Since the decision of the CIT (A) is in accord with the order of the Tribunal in the assessee’s own case for earlier years (supra), we find no justification to interfere.

5. The appeal of the Revenue is accordingly dismissed. Respectfully following the decisions of the Coordinate Benches in earlier years, we reject the ground of the Revenue.”

“3. Perusal of the order of the ITAT shows that the Tribunal has confirmed the order of CIT (A) by recording finding of fact that the assessee in fact carried on agricultural operations and that the orders passed to that effect in assessment years 1990-91 to 1992-93 have been accepted by the revenue . For earning agricultural income, it is not necessary that the assessee must own the land and it is enough if it is established that the agricultural operations have been actually carried on by the assessee. I view of the finding of fact recorded by the ITAT that even in the past the assessee has been carrying agricultural operations, in the absence of any material to the contrary, the decision of the ITAT cannot be faulted.”

“The primary sense in which the term agriculture is understood is agar-field and cultra-cultivation, i.e., the cultivation of the field, and if the term is understood only in that sense agriculture would be restricted only to cultivation of the land in the strict sense of the term meaning thereby, tilling of the land, sowing of the seeds, planting and similar operations on the land. They would be the basic operations and would require the expenditure of human skill and labour upon the land itself. There are however other operations which have got to be resorted to by the agriculturist and which are absolutely necessary for the purpose of effectively raising the produce from the land. They are operations to be performed after the produce sprouts from the land, e.g., weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting, and rendering the produce fit for the market. The latter would all be agricultural operations when taken in conjunction with the basic operations above described, and it would be futile to urge that they are not agricultural operations at all……….. …….We are of opinion that the mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations which we have described above would not be enough to characterize them as agricultural operations. In order to invest them with the character of agricultural operations, these subsequent operations must necessarily be in conjunction with and a continuation of the basic operations which are the effective cause of the products being raised from the land. It is only if the products are raised from the land by the performance of these basic operations that the subsequent operations attach themselves to the products of the land and acquire the characteristic of agricultural operations. The cultivation of the land does not comprise merely of raising the products of land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting, and similar work done on the land but also includes the subsequent operations set out above all of which operations, basic as well as subsequent, from one integrated activity of the agriculturist and the term “ agriculture” has got to be understood as connoting this integrated activity of the agriculturist. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent operations, even though they are divorced from the basic operations can constitute agricultural operations by themselves. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for “agricultural purposes” and the income derived there from can be said to be “agricultural income” derived from the land by agriculture. If the term “agriculture” is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and the raising on the land of products which have some utility either for consumption or for trade and commerce, it will be seen that the term “agriculture” receives a wider interpretation both in regard to its operations as well as the results of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of it cultivation of land in the sense of tilling of the land, sowing of the seeds, planting, and similar work done on the land itself. This basic conception is the essential sine qua non of any operation performed on the land constituting agricultural operation. If the basic operations are there, the rest of the operations found themselves upon the same. But if these basic operations are wanting the subsequent operations do not acquire the characteristic of agricultural operations. All these operations no doubt require the expenditure of human labour and skill but the human labour and skill spent upon the land. The human labour and skill spent in the performance of subsequent operations cannot be said to have been spent on the land itself, though it may have the effect of preserving, fostering and regenerating the products of the land.”

“54. From different terms and conditions of arrangement, what we notice is except supplying the foundation seeds and giving scientific advice from time to time, either at the time of sowing or pollination or harvesting, none of th6e normal activities of agriculture are undertaken by the assessee company. Except sowing the foundation seeds belonging to the assessee, farmer is not entitled to grow any other seeds in the land earmarked for the purpose of growing hybrid seeds and is not allowed to part with the seeds supplied to him to anyone else and so far as unused seeds, he had to give back the same to the company. Farmer conducts the cultivation and assessee-company only allots machinery and personnel for the purpose of achievement of better results in producing the quality hybrid seeds. Preparation of bed, sowing of the seeds, cultivation and harvesting of hybrid seeds is done by the farmer. He is entitled for the price fixed by the assessee per quintal for all such seeds which would qualify the specification indicated by the assessee. The seeds which do not qualify the specification” are also not sold by the farmer, but by the company and the sale consideration, if any is given to the farmer. The farmer while multiplying foundation seeds, uses his land and labour. The input given by the assessee is only technical supervision of the company. Whatever seeds grown by the farmer whether qualifies the specification indicated by the assessee or not has to be given to the assessee and the assessee will pay a fixed price so far as the seeds which quality the specification and other seeds will be sold in the open market by the assessee and there is no fixation of any price for the seeds which do not meet the specification. The farmer has to ensure fertility of the land, suitability of the land, cultivation of the land, watering of the land, use of the seeds supplied by the assessee and also had to sell the hybrid seeds at a price fixed by the assessee……

….If the farmer has to arrange the labour and pay the labour charges and also spend money for other operations either basic or subsequent operations, he can only take advance amount from the assessee and such amount paid by the assessee would be deducted from the so called compensation to be paid for the qualified foundation seeds at the end by the assessee. The entire terms of agreement would only indicate that the foundation seeds grown by the farmer would be purchased by the assessee at the end for a certain price provided seeds qualify the specifications as per the agreement. It is nothing short of a fertile womb being offered by a surrogate mother for the growth of child of someone else. The assessee supervises and oversees the sowing cultivation right from the process of sowing till the end in order to get the qualified foundation seeds as per the specifications so as to carry on his trade in selling certified seeds. The main interest of the assessee is to see that good an d healthy seeds are produced by the farmer meeting the requirement specified by it. Such input or scientific method in giving advice to the farmer cannot be termed as either basic agricultural operation or subsequent operations ordinarily employed by the farmer or agriculturist. If the basic operations of agriculture are not carried on by the assessee–company, then the harvested foundation seeds purchased by him and converting them to certification seeds cannot be termed as integrated part of the foundation activity of agriculture. Therefore even if we agree that the mechanical process of agricultural operations either basic operations or subsequent operations would not be an impediment to make such operations as agricultural operations, the question is whether such operations are conducted by the assessee or the farmer or someone else. The entire reading of the terms of the agreement would only indicate that assessee-company was interested only to have healthy foundation seeds grown for the process of converting the same as certified seeds.

ITA No. 4383 of 2006 AY 2003-04

26. Rest of the grounds raised are not pressed, hence they are dismissed as not pressed.

ITA No. 443/DEL/2010 [AY 2005-06] and [AY 2009-10]

Even before us, the assessee has failed to show that the advances were related to or incidental to the business or profession of the assessee. We find no reason to interfere with the findings of the CIT(A). The aforesaid ground is dismissed.

ITA No. 5285/DEL/2012 [AY 2007-08], [AY 2008-09] and ITA No. 4269/2014 [AY 2010-11].

The order is pronounced in the open court on 18.12.2017.