D.C.I.T CIR - 11,KOLKATA, KOLKATA vs. M/S NALCO WATER INDIA LTD, KOLKATA

That on the facts and circumstances of the case, Ld. CIT(Appeal) was not justified in allowing depreciation on plant machinery amounting Rs. 82,20,338/- without considering the facts of the case as well as the information brought on record by the A.O. in the course of assessment proceeding as well as in the remand proceedings.”

The Assessee is a company. It is engaged in the business of manufacturing and dealing with water treatment chemicals, industrial additives, oilfield chemicals and trading of equipments. In the course of assessment proceedings for A.Y.2008-09, the AO noticed that the assessee had purchased new plant and machinery worth Rs.4.18 crores on which the assessee had claimed depreciation. The AO called upon the Assessee to explain as to whether the plant and machinery were installed in the factory -M/s.Nalco Water India Ltd. A.Y.2008-09 1 premises of the assessee and whether they are actually used for the purpose of assessee’s business. The assessee in reply pointed out that machineries worth Rs.2.46 crores which were additions to the plant and machinery during the relevant previous year were basically installed at various customer’s site. The assessee further explained justification for installation of the plant and machinery at customer’s site as owing to the nature of business of the Assessee. The Assessee provides water treatment, process-focused programs and emissions reduction across a broad range of end users in various industries. For the above purpose the Assessee supplies chemicals. The effect of the chemicals on the purpose for water treatment or emission reduction etc., requires constant monitoring for which the Assessee also installs equipments at the premises of the client where the chemicals are used. It was further explained that the chemicals warrant specificity in dosing. Under or over does of products can lead to system damages of vary high proportion including questions on customer equipment integrity. It is with this very intent that the Assessee provides customers equipments which can deliver precise quantity either by way of electro-mechanical (dosing pumps) or precise dye based technology like 3D, trasar equipment which are designed to deliver chemicals based on system demand on a 24X7 dynamic 'basis. Having the chemical dosed in the system processes also demand constant monitoring of other parameters which are system linked in terms of corrosion and deposit control along with microbiological growth monitoring which are directly related to our chemical performance. This monitoring calls for very own designed equipment, which give an online measurement of system behaviour at customer site either during out chemical dosing or any other pre-monitoring etc. Since those are expensive and critical equipments, most of it come under a capital deployment for which the Assessee has to take depreciation on a percentage basis for a term period. These are deployed at customers site either free by or an annuity basis only to ensure system stability, reliability and consequential repeat business. As far as customers wherein the Assessee’s equipments are deployed without any charge, the Assessee ensures that the equipment price is upcharged in the selling price of chemicals to those customers.

The AO however rejected the Assessee's explanation. According to the AO, the Assessee was selling goods to most of its old and regular customers. The claim of the Assessee that it has enhanced the sale price to cover cost of the machinery installed at the customer’s premises was disbelieved by the AO. In this regard the AO examined the sale price of the two main products (a) Water treatment chemicals and (b) Industrial Adhesives and Oil field chemicals, sold by the Assessee and found that the sale price of Water treatment chemicals was shown at Rs.1 ,46.360 per MT and Industrial adhesives and oil field chemicals was shown at Rs.2,1 0,675 per MT. The AO also found that in the financial year 2006-07 the assessee sold water treatment chemicals @ Rs.1,49,769 per MT and Industrial adhesives and oil field chemicals @ RS.2,18,244 per M.T. This according to the AO showed that the sale price of both the finished products have reduced from that of the last year. Therefore, the AO came to the conclusion that the Assessee's explanation regarding free installation of plant and machinery at the customer’s site at increased sale value was not correct. The AO further concluded that there was no justification for installing those plant and machineries at customers site at free of cost. According to the AO, the assessee did not charge any rent for those machineries nor enhanced its sale prices. The AO thereafter concluded that the Assessee was not entitled to depreciation or additional depreciation since the machineries were not installed at the assessee's factory premises and not used for the purpose of the assessee's business. The quantum of depreciation on plant and machinery installed at customers site disallowed was worked as under:- 1.Plant and machineries installed for more than 180 days amounting to Rs2,22,86,680/-. Depreciation and additional depreciation 15% + 20% =35% on Rs.2,22,86,680/- …. Rs.7800338/-

On appeal by the assessee CIT(A) deleted the disallowance on depreciation. Before CIT(A) the assessee reiterated submissions as were made before the AO. It was submitted that without the equipments which were deployed at customers' sites it -M/s.Nalco Water India Ltd. A.Y.2008-09 3 was not possible to monitor the complicated process and use latest technology in the field of manufacturing of chemical business. It was submitted the equipments were critical and expensive, and were deployed to ensure system stability, reliability and thus to satisfy the customers to get repeat business.

The assessee submitted that it is not necessary that the assets may be under the control of the assessee and so long as the asset is used for the purpose of business of the assessee depreciation should be allowed. In this regard the Assessee relied on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Eastern Spinning Mills & Industries Ltd. 74 Taxman 318 (cal) and the decision of the Hon’ble Supreme Court in the case of ICDS vs CIT in Civil Appeal Nos. 3282 & 3286 to 3290 of 2008 dated 14.01.2013 wherein it was held that the Asset given on lease and not in control of the Assessee was also entitled to depreciation. 7. The CIT(A) agreed with the submissions of the assessee and held as follows :- “I have considered the finding of the AO. in his assessment order dt. 30-12-2011 and the written submission filed by the AR. during the appellate proceeding. Appeal on ground no., 1 is against the disallowance of depreciation of Rs. 82,20,338/-. The AO, in his assessment order has given his finding that the plant and machinery were installed by the assessee at the customer's premises and. therefore. it would not be correct to say that the same were used for the business purposes of the assessee. The AO. has further pointed out ·that the sole prices of water treatment chemicals as well as industrial adhesives and (oilfield chemicals were reduced compared to last year. Therefore, the deployment of new assets to enhance the sale price was not' justified. Thus. the AO. made an addition of Rs. 82.20.338/- disallowing the depreciation claimed by the assessee on the plant and machinery. The' AR. In his written submission has submitted that ----

Aggrieved by the order of CIT(A) the revenue has raised ground no.1 and 2 before the Tribunal. The ld. DR reiterated the stand of the AO as reflected in the order of assessment. According to him the terms of the agreement between the assessee and the customers with regard to the ownership of the equipments which were allowed to be installed in the premises of the assessee’s client has not been produced. It was also submitted by him that the assessee has not correlated each of the items which were installed in the customer’s premises and as to how installation in the customer’s site was necessary for the purpose of performing the obligation of the assessee to its customers. The ld. Counsel for the assessee reiterated the submissions as were made before CIT(A) and relied on the order of CIT(A).

We have given a very careful consideration to the rival submissions. The details of the addition to fixed assets which were installed in the customer’s premises is given at pages 20 to 26 of the assessee’s paper book. The assessee has also brought to our notice by filing sample copies of some of the agreements whereby the assessee had agreed that monitoring equipments and pumps would be installed at the clients premises. Thus it becomes clear that the installation of equipments in the client’s premises of assessee’s equipments was necessary and part and parcel of nature of business carried on by the assessee. It cannot therefore be said that the equipments in question had not been used for the purpose of the business of the assessee. The fact that the equipments were used in the business premises of the clients cannot be the basis to disallow the claim of the assessee for deduction on account of depreciation. The decision of the Hon’ble Supreme Court in the case of ICDS Ltd. vs CIT clearly supports the claim of the assessee in this regard. It is clear from the perusal of the order of AO that the AO’s objection was that since the equipments in question had not been installed at the assessee’s factory premises, it cannot be said that the equipments were used for the purpose of assessee’s business. This reason given by the AO for disallowing the claim of the assessee for depreciation cannot be sustained in view of the factual and legal position discussed as above. We therefore are of the view that CIT(A) was fully justified in deleting the addition made by the AO in this regard. Order of CIT(A) does not call for any interference. Consequently ground no.1 and 2 f -M/s.Nalco Water India Ltd. A.Y.2008-09 5

Ground No.3 raised by the revenue reads as follows :- “3. That on the facts and circumstances of the case Ld. CIT(A) erred in restricting the disallowance of Travelling and Conveyance to 5% of total disallowance Rs. 3,15,17493/- i.e. Rs. 15,75,874/- without considering the facts of the case as well as the information brought on record by the AO. in the course of assessment proceeding as well as in the remand proceedings. “

The assessee claimed a sum of Rs.5,90,92,000/- on account of travelling and conveyance. The details of such expenses showed that a sum of Rs.3,15,17,493/- was reimbursed to the employees for local travelling. The AO called upon the Assessee to furnish details of such travelling made by the employees, places of visit, amount incurred from their pockets and how it was reimbursed. The Assessee in reply furnished a list of 122 persons to whom reimbursement was made. According to the AO, the Assessee did not file any other details. According to the AO, the Assessee also failed to prove the business exigencies in support of such huge reimbursement of travelling expenses. The AO therefore held that genuineness of such reimbursement of expenses on account of travelling was not established by the assessee. Regarding the balance expenditure of Rs 2,75,74,507/- the AO observed that the assessee has given a brief description of party wise payments made for local travelling expenses and also the payments made to the travel agents. According to the AO therefore, it was not understood why a sum of Rs.3.15 crores was paid by the employees from their pocket and subsequently reimbursed by the assessee. The AO therefore held that the assessee failed to substantiate its claim with supporting documents, the reimbursement made to the employees on account of travelling and conveyance. Hence, such reimbursement of travelling expenses amounting to Rs.3,15,17 ,493/- was disallowed in absence of supporting evidences.

Before CIT(A) the assessee filed complete details and confirmation from employees who has spent Rs.5 lakhs and above. These details were forwarded to the AO and in the remand report the AO had taken a stand that some more details were called for which the assessee had not furnished. The assessee had also submitted before CIT(A) its travelling reimbursement expenses policy.

The CIT(A) after considering all the evidence before him held as follows :- “I have considered the finding of the A.O. in the assessment order and his comments in the remand report. I have also considered the written submission and rejoinder filed by the AR. during the appellate proceeding. I find that the AR. has submitted a complete details and confirmation from employees who have spent Rs. 5 lakhs and above to the AO. . The traveling policy of the company also shows that there are various checks to stop the abuse of reimbursement under this head. Therefore, the disallowance of the entire reimbursed amount of Rs. 31517493/- by the AO is not justified. However, there is no denying that the AR. might have not 'filed all details required by the AO. in the assessment / remand proceeding. Hence, disallowance is restricted to 5% of Rs. 31517493/- i.e. Rs. 15,75,874/-. Thus, assessee's appeal on ground no. 2 is partly allowed. “

Aggrieved by the order of CIT(A) the revenue has raised ground no.3 before the Tribunal.

We have heard the rival submissions. The ld. DR relied on the order of AO and reiterated the stand of the revenue as contained in ground no.3 raised before the Tribunal. The ld. Counsel for the assessee relied on the order of CIT(A) and submissions made before CIT(A). 16. We have considered the rival submissions. The assessee had filed complete details of reimbursement of travelling expenses in the present case before CIT(A) and these details are annexed at pages 63 and 64 of the assessee’s paper book. When these details were forwarded to the AO the AO did not find any fault. He however, has stated in his remand report that the assessee could not produce certain other details called for as to what were the other details called for is not spelt out in the remand report. It is therefore clear that there is no valid basis for sustaining the disallowance made by the AO. The CIT(A) has however has taken a conservative approach and disallowed 5% of the reimbursement of travelling expenses. We are of the view that no fault could be found with the approach adopted by CIT(A). Ground no.3 raised by the revenue is dismissed. 17. Ground No.4 raised by the revenue reads as follows :- “4. That on the facts and circumstances of the case Ld. CIT(A) erred in restricting the disallowance of Labour Supply Expenses to 5% of total disallowance Rs. 1,06,11,230/- i.e. Rs. 5,30,560/- without considering the facts of -M/s.Nalco Water India Ltd. A.Y.2008-09 7

The AO disallowed 5% of the labour supply expenses of Rs.1,06,11,230/- for want of details as to the list of charges in connection with which these expenses were incurred. The following were the relevant observations of the AO in this regard :- “5. The assessee has claimed labour supply expenses of Rs.5,33,16,000/- which includes site expenses reimbursed of Rs.1,06,11,230-. Ne details of such expenses has been furnished by the A/R. Generally the labour are supplied by the outside agencies to whom these payments are made after deducting tax at source. Detailed list of the parties to whom this labour supply expenses have been paid has been furnished by the A/R. So, it is not understood why the site expenses have been reimbursed to the employees of Rs.1,06,11,230/-. The employees are not supposed to supply labour at any site. So, there was no justification of making payment by reimbursement to the employees when the payments made to the other suppliers were evident. In view of the above, the site expenses reimbursed to the employees of Rs.1,06,11,230/- are fully disallowed and added back to the total income.”

Before CIT(A) the assessee filed all the details which were forwarded to the AO and the remand report was also obtained. The AO in the remand report has taken a stand that some of the details as called for were furnished. The remand report is silent as to what were the details that were not furnished. The CIT(A) after considering the evidence before him and the remand report of the AO restricted the disallowance to 5% of the labour supply expenses observing as follows :- “I have considered the finding of, the A.O. and ·the written submission and rejoinder by the A.R. I find that the A.R. has submitted various details of expenditure incurred under this head that A.O. has also accepted. But there is a possibility that some details might have not been filed by the A.R. in such a situation the disallowance of the entire amount of Rs.10611230/- by the AO is not justified. I restrict the disallowance under this head to 5% of rs.10611230/- i.e. Rs.5,30,560/-. Thus, assessee’s appeal on ground no.3 is partly allowed. “

Aggrieved by the order of CIT(A)the revenue has raised ground no.4 before the Tribunal. The ld. DR relied on the order of AO. The ld. Counsel for the assessee relied on the order of CIT(A).

After considering the rival submissions we are of the view that the order of CIT(A) on this issue does not call for any interference. As already observed despite filing of all the details, the AO has given a vague remand report that some of the details called for were not furnished. In the given facts and circumstances the CIT(A) with a conservative approach sustained the disallowance of 5% of the labour supply expenses. We do not find any fault with the approach of CIT(A). Consequently we dismiss ground no.4 raised by the revenue.

Ground No.5 raised buy the revenue reads as follows :- “5. That on the facts and circumstances of the case Ld. CIT(A) erred in allowing the 'Misc. Expenses" of Rs. 51,98,275/- without considering the facts of the case as well as the information brought on record by the AO. in the course of assessment proceeding as well as in the remand proceedings.”

The assessee claimed a sum of Rs.3,54,58,000/- on account of miscellaneous expenses. According to the AO the details of such expenses showed that an amount of Rs.1,03,96,550/- was on account of sundry expenses. According to the AO no details of such sundry expenses was produced by the Assessee and therefore the genuineness of such claim was not properly established. Accordingly, 50% of such expenses i.e. Rs.51,98,275/- was disallowed in absence of proper bills and vouchers.

Before CIT(A), the Assessee submitted details of all such sundry expenses. The details were forwarded to the AO for his comments. In his remand report the AO reiterated his stand as reflected in the Assessment order. The Assessee pointed out before CIT(A) that all the details asked by the A.O. were filed during the assessment proceeding as well as during the remand proceeding but without bringing out any mistake or short coming, the AO has reiterated his stand that 50% of sundry expenses i.e. Rs. 51,98,275/- was rightly disallowed on adhoc basis. 25. The CIT(A) after considering all the aspects came to the conclusion that the AO without pointing out any short coming or mistake with vouchers /details filed by the Assessee has disallowed 50% of sundry expenses on adhoc basis and doing so was not justified. The addition made by the AO was accordingly deleted by the CIT(A).

Aggrieved by the order of CIT(A) the revenue has raised ground no.5 before the Tribunal. The ld. DR relied on the order of AO. The ld. Counsel for the assessee relied on the order of CIT(A).

After considering the rival submissions we are of the view that the order of CIT(A) on this issue does not call for any interference. In the light of the admitted factual position that all details were furnished by the Assessee in the proceedings before CIT(A) and in the light of the remand report of the AO wherein no defects have been pointed out in the details furnished by the Assessee, the very basis of disallowance made by the AO did not survive. In these circumstances, the addition made by the AO was rightly deleted by the CIT(A). We find no grounds to interfere with the order of the CIT(A). Accordingly, ground No.5 raised by the Assessee is also dismissed. 28. In the result appeal by the Assessee is dismissed. Order pronounced in the Court on 05.04.2017.