ACIT 4(2), MUMBAI vs. FIRMENICH AROMATICS (I) P. TLD, MUMBAI

These all bunch of appeals filed by the assessee and the department from AY 2005-06, 2006-07, 2007-08 and 2008-09. All these appeals relate to the same assessee therefore, disposed off this common order.

These all appeals are arising out of order of CIT (A)-10, Mumbai dated 23-02-2011 for Assessment Year 2005-06, 2006-07, 2007-08 and 2008-09 respectively.

Now, we will deal with the assessee’s appeal for AY 2005-06. The following grounds are raised in AY 2005-06 which are as under:

The short facts of the case which reads as under:

The assessee has opening worth of Rs. 35,72,24,000/- and closing stock of Rs. 37,32,35,000/- The purchases were shown at Rs. 132,64,67,000/- and sale of Rs. 157,85,09,000/-. The assessee was asked to produce the stock register for relevant financial year, a technical note of production process giving the details of proportion of raw material mixed, finished product produced wastage generated, yield % achieved and gross profit rate for the last three years. The assessee had in reply to show cause notice has submitted the general detail of production process but not produce the correct figures of raw material which were used for manufacture if particular product. Moreover, the assessee did not produce stock register containing day to day recording of consumption or production but only produce monthly detail of 4 M/s Firmenich Aromatics stock raw material and finish product. The assessee has given the chart of finished product however no delivery challan were produced. Therefore, the AO, who was not able to verify the requirement of particular orange flavour by production unit, the assessee finished detail of sale but stock register was not complete and day to day production records have not been available. Therefore, the assessee was given show cause notice and the assessee replied that the required detail cannot be produced to AO on the ground that it is a secrete Intellectual Property Rights. Therefore, after considering the reply as no bills vouchers were produced, therefore, correctness of the income of the assessee could not be ascertained. Therefore, relying upon the various judgements the AO has rejected the book result by invoking Section 145(3) of the IT Act. The matter carried to CIT(A) and CIT(A) has dismissed the appeal of the Assessee.

Ld. AR submitted that the assessee has submitted the detail of raw material used for production process that the assessee has maintained stock register on production-wise. The assessee’s production process is based on the formulation which is a closely guarded secret as it is a proprietary product and also has intellectual property rights. The assessee has submitted stock register the assessee’s books of accounts are audited by independent Statutory Auditors, Internal Auditors and Tax Auditors from time to time. The assessee’s books of account including stock register have been approved by Government Authorities such as Excise Department, Sales Tax etc. Therefore, there is no reason for rejection of books of accounts. The Ld. AR submitted that the production process is based on formulation which is closely guarded secret as it is a proprietary product and it has intellectual property rights which is developed by huge investment and research and development and also by investment in the efforts of Perfumers, for a few more application laboratories,

We have heard the rival contention of both the parties looking to the facts and circumstances of the case we find that the stock record of raw materials and finish goods were prepared on day to day basis. Apart from that as per the Excise Rules the assessee made has maintained RG-I for Finished Goods, RG- 23A part one for raw material and the same were provided to the Ld. AO on monthly basis and product wise prepared from day to day register. The assessee has not given the technical detail as the assessee’s production process is based on formulation which is closely guarded secret and as it is proprietary product and also intellectual property rights. We find that in favour and flavour Fragrance Industry, formulation is a intellectual property of the organization, which is developed by huge investments for Research and Development and also by investment in the efforts of Perfumers, Application laboratories, Fragrance Development managers, Market Research etc. Thus it is a most valuable asset of the company. We find that the assessee makes a product which is unique in the eyes of our customers. Therefore, this formulation was completely guarded and kept secret. This formulae known to 6 M/s Firmenich Aromatics very few and select group of people who are bound by confidentiality agreement. Therefore, use in manufacturing product. The assessee has submitted all the bills and entire income were submitted to AO. Therefore, in our opinion the AO and CIT(A) is not justified in rejecting the book result of the assessee. The Assessing Officer has relied upon the decision of Punjab Trading Company vs. CIT (1964) 53 ITR 335 (Punj) in that case stock was not maintained hence the books result was rejected whereas in the case of the assessee stock register is maintain but also submitted to AO for verification. In the case of Kishan Chand Chellaram vs. CIT (1978) 114 ITR 671 (Bom) in absence of stock tallies and sales were not recorded with identifiable details. Therefore, books were rejected in the case of the assessee no defect was found by the AO stock register. Similarly in the case of Ratanlal Omprakash v/s CIT(1981) 132 ITR 640 (Ori). The stock register was not maintained whereas in the case of the assessee the stock register maintain. Similarly in case of Narbada Steel Ltd v/s ACIT (2007) 108 TTJ 741 (Asr). Wherein, in that case the tax auditors had not given the detail of about yield finished products, percentage of yield. Therefore, the books were rejected in the assessee’s case tax auditor has specifically note that in view of various raw material used it at different stages and in different mix it is impracticable to work out yield finished goods. In case of Jagan Nath Gurbachan Singh v/s ITO (2001) 73 TTJ 878 (Asr). The AO has relied upon the data of Cotton Corporation of India while in assessee’s case no such data has been considered. Our view is supported by the decision of Delhi High Court in case of CIT vs. Gasjak Elegance Export 324 ITR 95 Delhi wherein it is held that no provision either in the Act in the Rules regarding assessee carrying business of this nature to maintain Stock Register, as part of its accounts has been brought to our notice. As regards non-production of Stock Register, the assessee has given an explanation which has been accepted not 7 M/s Firmenich Aromatics only by the Commissioner of Income Tax (Appeals) but also by the Tribunal and both of them have given a concurrent finding of fact that maintain Stock Register was not feasible considering the nature of the business being run by the assessee which was engaged in the business of manufacturing readymade garments by purchasing fabric which was then subjected to embroidery, dying and finishing and then converted into readymade garments by stitching. Section 145(3) of the Act therefore, could not have been applied by the Assessing officer to the present case. We respectfully following the decision we found that in the assessee’s case assessee has maintain all the books of account but assessee has not produce the stock register containing day to day recording of consumption and production but only produce the monthly detail of raw material and finished goods the reason for not giving the detail that assessee production based on formula which is closely guarded secret as it proprietary product and also intellectual property rights. Therefore, we are of the view that assessee has given the reason for not giving the Stock Register for day to day consumption. Therefore, we are of the view that Revenue Authorities are not justified in rejecting the book result. We also get the supports from decision of CIT vs. Poonam Rani 326 ITR 223 Delhi, Ashoka Refractories vs. CIT 279 ITR 547, CIT vs. Bhavani Industries 65 Taxmann Rajasthan and ACIT vs. Cementation of India 146 ITD 59 Mumbai. Therefore, considering the facts of this case we are of the view that the AO and the CIT(A) is not justified in rejecting the same and we reverse the finding of the CIT(A) and we allow the appeal of the assessee on this ground. In the result appeal is allowed.

We have heard the rival contention of both the parties looking to the facts and circumstances of the case we find that the assessee has paid interest of long term unsecured loan from parties covered u/s 40A(2)(b). Namely, Firmenich Aromatics P. Ltd. @14.5% from the date of acceptance. The assessee has taken the loan from this party on the ground that if the assessee take unsecured loan from bank that to against provide securities, hypothecation some of stock and debtors who were etc. who were above mental pressure of stringent bank norms and regulations apart from hidden cost involved by the bank finance. The assessee has taken the nominal @ 14.5%. We find that the assessee has taken the loan have paid the interest @ 14.5% which is as per Citi bank PLR rate at the time of acceptance therefore, in our opinion the AO and CIT(A) is not justified disallowing the same our view is supported by the decision of Chandigarh Bench in case of Gopal Kishan v/s ITO (111 Taxman 42). Our view is supported by the decision of Hon’ble Punjab and Haryana High Court. In case of Shri Yash Pal Gupta vs. Commissioner of Income Tax Punjab and Haryana High Court. Similarly we also get the support from decision of Manisha dying and printing work vs. CIT in wherein 18% @ held to be reasonable. In the result the appeal of the assessee is allowed.

The ground is relating to confirming the capitalization of repairs and maintain of Rs. 1,54,417/- being a renovation list hold premises at Mumbai. The short facts of the case that the AO noted that the assessee has debated sum of Rs. 3,61,200/- in support of various repairs and maintenance expenses under the head which are capital in nature. The AO found that 1,54,470/- was capital in nature and same was disallowed and on which depreciation was allowed as per applicable rates.

We have heard the rival contention of both the parties the assessee’s contention that the assessee has carried out various work done at Mumbai office like demolition of existing plaster repairing of strome water drain, repairing of exiting compound wall, which are revenue in nature but we do not agree on the ground that the assessee has incurred the expenditure which are capital in nature pertaining to manager repairing work. The expenditure incurred was enduring nature hence it was capital nature. It was held that replacement of old machine with a new one amounts to brining in to a new asset and it also gives enduring benefit to the assessee, hence such expenditure cannot be considered as revenue expenditure. So the expenditure is incurred for preserving and cost of replacement of part therefore, it is a capital expenditure. Therefore, we confirmed the same in the result the assessee’s appeal is dismissed on this ground.

In department’s appeal is first ground is deleting the disallowance of Rs. 1,51,58,000/- on account of low gross profit.

The AO found that the assessee for AY 2005-06 the GP was 17.04% whereas in AY 2003-04 it was 19.3%. Therefore, the assessee was asked to give the reason for declaring GP the assessee contended that the rate of margin rate for flavours was 58.31% whereas in the same for fragrance was 13.49%

I have considered the facts. It is an admitted fact that G.P. for the year under consideration at 17.04% whereas it was 14.99% in the immediately preceding year i.e. AY 2004-05 and 19.30% for AY 2003-04. Thus, the G.P. rate is higher than the immediately preceding year but it is lower as compared to AY 2003-04. The AR has contended that there has been drastic fall in volume of Flavour sales from 26% to 6% due to discontinuation of the order of some of their products. It is also established that Flavour products are more profitable as compared to Fragrance products as can be observed from the working given by the appellant in its written submission from which it is ascertainable that gross margin in Flavour is 58.31% whereas gross margin in Fragrance is 13.49%. Therefore, this contention of the AR has some fore in his submission that the G.P. rate is low on account of change in the composition of sales in terms of flavours/fragrances sales to total sales as compares to AY 2003-04. However, at the same time as discussed in the ground no. 1 above, the books of accounts produced before the AO cannot be treated as fully authentic and reliable for the reasons discussed in the above ground. Therefore, the G.P. rate shown at 17.04% in the assessment year under consideration cannot be accepted as fully reflected the profitability of the appellant. However, on the other hand the comparison of G.P. rate with AY 2003-04 as done by the AO cannot be fully considered as correct and reasonable. In the case of G.P. addition one has to compare the G.P. rate for the last years or the average G.P. rate for the period of last three years i.e. AY 2003-04 to 2005-06 which comes to 17.11% as 11 M/s Firmenich Aromatics against the G.P. rate of 17.04% disclosed by the appellant. In view of these facts and considering the fact that there is change in ration of production of the profit margin in flavour is 58.31% as compared to 13.49% which led to reduction in G.P. rate, it would therefore be reasonable and appropriate to apply the average G.P. rate for the last three years which comes to 17.11%. The total sales of the appellant during the year are Rs. 157,85,09,000/- on which applying G.P. rate of 17.11% estimated G.P. comes Rs. 27,00,82,889/- as against the declared G.P. of Rs. 26,90,53,000/-. Accordingly, the total G.P. addition is worked out to Rs. 10,29,890/- as against the G.P. addition of Rs. 1,51,58,000/- made by the AO. Therefore, the addition of Rs. 1,41,28,110/- i.e. (1,51,58,000 – 10,29,890) is deleted and addition of Rs. 10,29,890/- is confirmed. This ground of appeal is therefore partly allowed.

We have heard the rival contention of both the parties during the course of hearing Ld. DR submitted that the CIT(A) has granted the relief on the ground that he has applied the average GP rate for three years but the GP for three years cannot be based because in AY 2004-05 the GP was 19.30% . The Ld. AR supports the view of Commissioner on the ground that he was fair and reasonable to applied the GP @ 17.11% therefore, we are of the view that the CIT(A) is justified. For the sake of gravity we reproduce the GP rate for three years :

In the result department appeal is dismissed on this ground.

The second ground in the department appeal is disallowing of Foreign Exchange loss of Rs. 3,87,110/-.

The AO has found that the assessee has debited net exchange loss of Rs. 45,37,000/-. The AO observed that foreign fluctuation on the last date of accounting year is only contingent and notional liability, hence not allowable as deduction. The matter carried to CIT(A) and CIT(A) is allowed the claim by observing as under:

We have heard the rival contention of both the parties we are of the view that issue is controversy is covered by the decision of Delhi High Court in the case of CIT(A) v/s Woodward Governor India Pvt. Ltd. (294 ITR 451). We respectfully following the same we dismiss the department appeal.

The ground relates to deleting the addition made u/s 80IB of the Act Rs. 32,31,533/-. This deduction was allowed by CIT (A) in AY 2005-06, ITA No. 549/M/2011, AY 2006-07 and ITA NO. 6531/M/2012, AY 2008-09. Therefore, we dispose of this grounds by common order.

The assessee has claimed a deduction of Rs. 3,23,15,333/- u/s 80IB. However, it was seen from assessment order or A.Y. 2000-2001 that Assessing Officer held that AY 00-01 was the sixth year for the purpose of 80IB and not the fifth year as claimed by the assessee. The issue is under litigation. In view of assessment year 00/01 10 year was completed in AY 2004-05 and no deduction u/s 80IB is allowable to the assessee in the AY 05-06. Therefore, the claim deduction of Rs. 3,23,15,333 u/s 80IB was disallowed.

Matter carried to CIT (A) and CIT (A) has allowed the claim by observing as under:

The Ld. AR submitted that in AY 2000-01 and 2003-04 presume that the AY 2000-01 was the six year claim of the deduction. In AY 2003-04 it was disputed that AY 2003-04 is the six year claim of deduction under 80IB and not 17 M/s Firmenich Aromatics the fifth year and this issued is settled by Commissioner in his order and in the AY 2005-06 assessee is eligible for 30% deduction u/s 80IB and he relied upon the following chart:-

We have gone through the chart submitted by the DR and the chart submitted by the AR. It is admitted fact on record that assessee was entitled for deduction u/s 80IB for Assessment Year from 2005-06 to 2008-09. As regarding unit No. 1 the assessee was entitled for deduction @ 30% and as per

In the result the all the Departmental appeal is partly allowed as indicated above.

Ground No. 1 relates to disallowance of excess interest of Rs. 21,76,555/- u/s 40A (2) (b) of the Act.

This issue has been already allowed by us in ITA No. 2910/M/2011. Therefore, respectfully following the same we allow the appeal on this ground.

Ground No. 2 relates to capitalization of repairs and maintenance expenses of Rs. 25,47,746/-.

This issue has been already allowed by us in ITA No. 2910/M/2011. Therefore, respectfully following the same we dismiss the appeal on this ground.

In the result appeal of the assessee is allowed.

Ground No. 3 regarding disallowance of bad debt.

The Assessing Officer has verified the detail of records and it was found that assessee has claimed bad debt of Rs. 24,54,942/- in respect of firmenich and CIA. The assessee was asked to prove the identity of the party and genuineness of the transaction and the reason for claim of bed depth. Assessee submitted that this bad debt is in respect of amount not recoverable since Central Bank of USA has denied permission to Firmenich to remit this amount to India due to the assessee. In view of the facts the amount is not recoverable, however, the Assessing Officer denied to treat at debt as bad. The Commissioner has dismissed the appeal of the assessee.

The Ld. AR submitted that the issue and controversy is covered by the decision of Supreme Court in case of TRF Ltd. Vs. CIT and the decision of Special Bench in case of Dy. Commissioner of Income Tax Vs. Oman International Bank 100 ITD 285.

We have heard the rival contention of both the parties looking to the facts and circumstances of the case we find that the issue and controversy is covered by the decision of Hon’ble Supreme Court in case of TRF Ltd. Vs. CIT. The Supreme Court has held that it is not necessary for the assessee to establish that the debt in fact has become irrevocable. It is enough if the bad death is a written off as irrevocable as the account of the assessee. We find that as per the amended provisions of Section 36 (1) (vii) provides that a claim of bed depth is to be allowed in the year in which such bad debt has been written off as irrevocable as the account of the assessee. Therefore, we restore this issue back to the file of AO to decide the issue as per the decision of TRF Ltd. Vs. CIT 323 ITR 397 Supreme Court.

In the result, appeal is allowed for statistical purpose.

Ground No. 1 relates to disallowance of excess interest of Rs. 4,36,490/- u/s 40A (2) (b) of the Act.

This issue has been already allowed by us in ITA No. 2910/M/2011. Therefore, respectfully following the same we allow the appeal on this ground.

In the result appeal of the assessee is allowed.

Ground No. 1 relates to disallowance of excess interest of Rs. 19,72,445/- u/s 40A (2) (b) of the Act.

This issue has been already allowed by us in ITA No. 2910/M/2011. Therefore, respectfully following the same we allow the appeal on this ground.

In the result appeal of the assessee is allowed.

The first issue relating to allowing expenses allowances of capital nature as revenue expenditure. The short facts of the case are as under:

The Assessing Officer has verified the P&L Account and found that assessee has debited a sum of Rs. 1,70,53,000/- in respect of repairs and maintenance under the various heads of accounts. The scrutiny of the details from the books of accounts reveal that certain expenses which are of capital nature has been debited under this head. The assessee has taken the contention that all these expenses for repairs therefore they are revenue in nature but assessing officer was of a view that 10% of such expenditure is 21 M/s Firmenich Aromatics capital in nature. He has made the addition and allowed the depreciation. Matter carried to CIT (A) and CIT (A) has allowed the appeal.

We have heard the rival contention both the parties we find that the similar issue had come up in AY 2005-06, wherein we have dealt this issue in detail and we have confirmed the Revenue authorities therefore respectfully following the same we allow the appeal of the Department in AY 2008-09.

In the result, departmental ground no. 1 is allowed.

This ground relates to withdrawal of deduction of 80IB of Rs. 44485345/- of the Income Tax Act.

The Assessing Officer has disallowed the deduction under 80IB on the ground that AY 1998-99 was the first year for the purpose of 80IB therefore 10th year was completed in AY 2007-08 and not in AY 2008-09 therefore withdrew the claim of 80IB.

Matter carried to CIT (A) has allowed the claim.

We have gone through the chart submitted by the DR and the chart submitted by the AR. It is admitted fact on record that assessee was entitled for deduction u/s 80IB for Assessment Year from 2005-06 to 2008-09. As regarding unit No. 1 the assessee was entitled for deduction @ 30% and as per the AO it was 11th year but CIT(A) has corrected that 11th year was for unit No. I while it was 7th year for unit No. 2 in AY 2005-06. Therefore, this all requires clarification at the end of AO level. The assessee has also submitted the chart. Therefore, we restore this issue back to the file of AO only for limited purpose that is assessee is entitled for deduction u/s 80IB was 10th year or 11th year.

In the result the all the Departmental appeal is partly allowed to verify the year of liability from the assessment record and decide the matter accordingly.

In the result, the appeal is allowed for statistical purpose.