D.C.I.T., CIRCLE-11 KOLKATA, KOLKATA vs. M/S EPCOS INDIA PVT. LTD., KALYANI

The first issue raised by Revenue in grounds no. 1 and 2 are inter- related and therefore being taken up together that the Ld. CIT(A) erred in deleting the addition made by the AO for Rs.1,00,66,944/- on account of non- deduction of TDS u/s 194H read with section 40(a)(ia) of the Act.

Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of manufacturing and sale of soft ferrite components, DC and AC capacitors, metalized films etc. The assessee in the year under consideration has claimed expenses under the head “trade discount and cash discount” of Rs.45,71,944/- and Rs.54,95,000/- respectively. The assessee during the assessment proceedings explained that impugned discounts were given to its customers on account of bulk quantity purchased by them. There was a contract between the assessee and its customers which was based on principal to principal basis. As such, there was no agreement of principal and agency between the assessee and its customers therefore the discount offered to the customers cannot partake the character of commission as envisaged u/s 194H of the Act. , 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 4 6. However, the AO during the assessment proceedings observed certain facts as detailed under: i) The amount of discount offered to the customers was subject to various terms and conditions therefore it partake the character of commission; ii) The amount of discount was settled by the assessee by issuing credit note to the customers. These credit notices were issued to the customers only on the happening of the particular event/ activity such as receipt of payments made by the customers. Thus, the discount offered by the assessee is in the nature of commission. iii) The discount was also offered to the customers on account of prompt payment made by dealers to the assessee. This again reflects that the discount is related to providing some services like prompt payment. iv) The amount of commission offered by the assessee is directly linked/related to its liquidity which proves that these are not normal discount offered by the assessee but represents the amount of commission. v) The terms and condition between the assessee and its customers is of principal and agent.

Aggrieved, the assessee preferred an appeal to Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that the contract of sale between , 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 5 the assessee and its customers / dealers is based on principal-to-principal basis. Therefore, the transaction between the assessee and its customers represents the sale purchase activities. Thus, the discount offered cannot be terms as commission u/s 194H of the Act. The assessee in support of his claim has also relied on the judgment of Hon’ble Supreme Court in the case of CIT vs. Ahmadabad Stamp Future Association reported in 348 ITR 378 (SC). The Ld. CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under: “I have carefully considered the submission put forth on behalf of the appellant along with supporting documents & case laws relied upon and perused the facts of the case including the contention of the AO in the assessment order. It is seen that the appellant has claimed deduction for cash discount and trade discount allowed to the customers for purchasing the product of the appellant in bulk quantities under section 37(1) of the Act while computing the total taxable income. The AO in his order passed u/s 143(3) of the Act has disallowed the deduction claimed on the alleged ground that similar disallowance was made in the immediately preceding year and the appeal for that year is still pending for disposal. From the perusal of the details filed by the appellant, it is observed that in the immediately preceding assessment year the disallowance of cash and trade discount was made on the alleged ground that the same being in nature of commission paid to different parties and as no tax was deducted as per the provision of TDS before making the payment under section 40(a)(ia) of the Act. My attention was invited to the fact that the appellant has offered discounts to the customers as per the contract of sale entered into between the appellant and the customers taken place on a principal to principal basis. Further, my attention is also drawn to the decision of the Hon'ble Supreme Court in the case of CIT vs. Ahmedabad Stamp Vendors Association reported in 348 ITR 378 (S C) wherein the Hon’ble Court has held that offering of discount for purchase in bulk would partake the character of discount on transaction of sale and as such the provision of Section 194H of the Act has no application. My attention was further invited to the fact that both the cash/trade discounts were claimed as allowable deduction and the same was also allowed in all the previous years up to assessment year 2007-08. In the light of the above discussion and findings, perusing the facts of the case and respectfully following the principles enunciated by the Hon'ble Supreme Court (supra). I am of the considered opinion that the offering of discount for purchasing the quantity in bulk by the customers , 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 6 cannot be treated as payment of commission to the customers specially when the sale is happening on a principal to principal basis. Hence, I am inclined to agree with the appellant and direct the AO to allow deduction claimed for cash/trade discount amounting to INR 54,95,000/- and INR 45,71,944/- respectively while computing the total taxable income and this ground of appeal

We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. The issue, in the instant case, relates to whether the amount of commission offered by the assessee is in the nature of commission as envisaged u/s 194H of the Act. At this juncture, we find important to refer to the meaning of commission or brokerage as provided in explanation to section 194H of the Act which reads as under: Explanation.—For the purposes of this section,— (i) “commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities; From the above provision, it is clear that some services should be provided by the person or any other services in the course of buying and selling of goods. In the instant case, the assessee has been supplying goods to its dealers on principal to principal basis as evident from the agreement as discussed above. Therefore, we find that there was no relationship between the assessee and its customers as of principal and agents. Therefore, the amount of discount 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 9 offered by the assessee cannot be termed as commission u/s 194H of the Act. Moreover, the issue of discount offered by the assessee has been duly settled by the Hon’ble Supreme Court in the case Ahmadabad Stamp Vendors Association (supra) wherein it was held as under : “We are satisfied that 0.50% to 4% discount given to the Stamp Vendors is for purchasing the stamps in bulk quantity and the said discount is in the nature of cash discount. In the circumstances, we concur with the impugned judgement that the impugned transaction is a sale. Consequently, section 194H of the Income-tax Act, 1961, has no application.”

We have heard the rival contentions and perused the material available on record. In the instant case, the assessee has incurred cost of Rs.87,35,561/- under the head damages. As per the assessee, the goods which were returned back by the customers on account of low quality to the factory. The cost incurred on the repairs of such goods was classified as damages. The cost of damages was inclusive of freight custom duty, octroi, excise duty, sales tax etc. The cost incurred by the assessee is placed on pages 40 to 60 of the paper book. The Ld. AR also drew our attention on the sample documents in support of expenses incurred on damages which are placed on pages 46 to 60 of the paper book. After perusal of the papers filed by the assessee we note that these documents have not been doubted by the lower authorities. , 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 13 16. Indeed the assessee has not produced details of the sales which were returned back by the parties but in our considered view this cannot be the sole basis for making disallowance of damage expenses claimed by the assessee. The AO has not pointed out any defect in the submission made by the assessee before rejecting the claim made by it. In view of the above, we hold that the AO cannot just brush aside the details filed by the assessee and draw a conclusion that the expenses are not incurred in connection with the business of the assessee. We note that sufficient details were duly filed by the assessee at the time of assessment proceedings in support of the cost incurred on the damages and no defect of whatever has been pointed out by the AO. The Ld. DR has also not brought anything on record contrary to the finding of Ld. CIT(A). Thus, we hold that the cost incurred for the damage of goods is directly connected with the business activities of the assessee and accordingly eligible for deduction u/s 37(1) of the Act. Thus, the ground of appeal raised by the Revenue is dismissed and the ground of appeal raised by the assessee is allowed.

Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that it has created provision in the earlier years which was duly offered to tax under the provision of bad debts. The following details was furnished by the assessee to the Ld. CIT(A).: Provision for doubtful debt added back in computation under MAT: Assessment Year Amount(INR) 1997-98 File not traceable 1998-99 13,99,000 1999-2000 NIL 2000-2001 File not traceable 2001-02 18,18,000 2002-03 96,000 2003-04 NIL 2004-05 NIL 2005-06 NIL 2006-07 NIL 2007-08 19,70,000 2008-09 25,77,000 2009-10 14,86,000 TOTAL 93,46,000 In view of the above, the assessee submitted that the amount of provision return back during the year should be allowed as deduction as per clause (i) of explanation 1 to section 115JB of the Act. The Ld. CIT(A) after considering the submission of the assessee deleted the addition in part made by the AO by observing as under:- “DECISIONS: I have carefully considered the submission put forth on behalf of the appellant along with supporting documents/details furnished and perused the facts of the case including the contention of the AO in the assessment order. It is seen that while calculating the book profit under the provisions of section115JB of the Act, the appellant has claimed deduction of an amount of INR 1,16,27,000/- under the head ‘provision for doubtful debts written back.’ The in his order passed under section 143(3) of the Act had disallowed the deduction claimed on the alleged ground that it was an actual bad debt written off through the provision account an further contended that no details of bad debt written off and , 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 15 added back while determining the computation of total income in all the pat years were made available to him during the assessment. In support of this issue of appeal, my attention was drawn to the accounting treatment followed by the appellant while writing off the bad debt through the provision for bad debt account created earlier. From the said treatment, it is apparent that at the time of writing off actual bad debt through provision account, the provision for bad debt created earlier is to be reversed an credited to profit and loss account. However, du9e to cancellation of contra entries, the said amount are not being reflected on the fact of the profit and loss account. Thus, whenever the bad debt I written off through the provision for Bad Debt Account an equal amount is credited to the profit and loss account on account of release of provision for bad debt. Further, was stated before me that the provision for bad debt has been added back while computing the book profit in earlier years. A list of the amounts added back under the head provision for doubtful debt in all the past year were made available before me. On account of perusal of the same, I find that the appellant in the past years has added back an amount of INR 93,46,000/- while computing the book profit. In the instant case of the appellant, it is observed that the appellant has added back an amount of INR 93,46,000/- in the past years under the head provision for bad debt but the appellant has credited the amount of provision for bad debt written back amounting to INR 1,16,27,000/- in the year under consideration the profit and loss account. Hence, I restrict the claim of the app under the provision of clause (i) of the Explanation 1 appended below section 115JB of the Act to INR 93,46,000/- as against the total claim of INR 1,16,27,000/- i.e. actual amount of additions made by the appellant in past years. In the light of the above discussion & findings and taking into account the factual and legal position, I direct the AO to allow the appellant an amount of IINR 93,46,000/- while computing the book profit under the provisions of section115eJB of the Act. Thus, this ground of appeal is partly allowed.”

The Ld. DR before us submitted that no details whatsoever were furnished by the assessee during the assessment proceedings. The details filed by the assessee before the Ld. CIT(A) were admitted in contravention to the provision of Rule 46A of the Income Tax Rules. Thus, the Ld. DR prayed 1325,1718, 1895/K/13 & 2553 & 2758/K/13 AYs 08-09 10-11 EPCOS India Pvt. Ltd. Vs. ITO Wd-11(1)/DIT, Cir-11 Kol. Page 16 before the Bench to restore the impugned issue to the file of AO for fresh adjudication in accordance with law. On the other hand, the Ld. AR raised no objection if the matter is remanded back to the file of AO for fresh adjudication.

We have heard the rival contentions and perused the material available on record. In the instant case, we note that the Ld. CIT(A) has admitted the fresh evidences in contravention to the provision of Rule 46A of Income tax Rules. We note that the necessary details of the provision created by the assessee in earlier years were not supplied by the assessee to the AO at the time of assessment proceedings. In view of the above, we are of the view that the issue of provisions for doubtful debts written back by the assessee for Rs.1,16,27,000/- needs to be examined by the AO. In respect of issue it was agreed by both the parties that the issue must be restored back to the file of AO for fresh examination. Accordingly, we remit back the issue to the file of AO to examine afresh and to decide the issue in accordance with law. AO must give reasonable opportunity to the assessee before passing order on this point. Consequently, the ground of appeal

Same ground of the appeal of Revenue has already dealt in the respective issues by us in or above stated order in in para 15 & 16 of this order and no need for separate adjudication. Hence, this ground of Revenue’s appeal is dismissed.

Next issue raised by Revenue in ground No.4 is that Ld. CIT(A) erred in restricting the provision of doubtful debts for computing income u/s. 115JBB of the Act to Rs.70,39,025/-.

We have already dealt this issue elaborately in Revenue’s appeal in ITA No.2758/Kol/2013 while adjudicating the ground of appeal