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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri C.N. Prasad (JM)
O R D E R Per Bench :-
2 M/s. Dow Agrosciences India Pvt. Ltd.
The assessee has filed appeals for A.Y. 2005-06, 2006-07 & 2008-09 and the Revenue has filed appeal for A.Y. 2005-06 challenging the orders passed by learned CIT(A)-15, Mumbai. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
The assessee company is engaged in the business of manufacturing and trading in pesticides, agrochemicals and seeds. Assessments of three years under consideration were completed by the Assessing Officer by making various types of additions. The assessee has filed these appeals challenging the additions confirmed by learned CIT(A) and the revenue has filed the appeal challenging the relief granted by Ld CIT(A). Certain issues in all the appeals filed by the assessee are identical in nature and they are being considered together.
The first common issue urged by the assessee relates to disallowance of lease rental paid to IBM for taking computers on lease. The assessee had treated lease as “financial lease” in its books of account and accordingly claimed interest portion as expenditure. However, in the income tax computation, the assessee treated the same as “operating lease” and accordingly claimed entire lease rentals (principal+ interest portion) paid by it as revenue expenditure. The Assessing Officer, however, treated the nature of lease as “financial lease” and accordingly disallowance claim for deduction of principal portion of the lease rental. Learned CIT(A) also confirmed the same.
Learned AR submitted that identical issue was considered by the Coordinate Bench of the Tribunal in the case of Dow Chemical International Private Limited (a group company) in relating to A.Y. 2006-07 dated 10.3.2015 and the said issue was set aside to the file of the Assessing Officer for determination of nature of lease by examination of lease agreement.
On the contrary, learned Departmental Representative submitted that computers are normally returned back to the supplier after completion of lease
3 M/s. Dow Agrosciences India Pvt. Ltd. period for refurbishing /upgrading them in order to suit the requirement of the assessee in order to reduce the investment cost in computers. Accordingly he submitted that the lease can only be financial lease as opined by the AO.
We have heard the rival contentions and perused the record. As submitted by learned AR, the coordinate Bench of the Tribunal has considered the issue and restored the same to the file of the Assessing Officer with the direction to examine the lease agreement in order to ascertain as to whether lease agreement entered by the assessee is in the nature of financial lease or operating lease. In the instant case also the lease agreement was not examined by the tax authorities. Proper examination will throw light about the nature of lease, which would decide the manner of treatment of lease rental. Accordingly, consistent with the view taken in the case of Dow Chemical International Pvt. Ltd. (supra), we set aside the order passed by learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with the direction to examine the lease agreement in order to ascertain the nature of lease and take appropriate decision in accordance with law, after affording adequate opportunity of being heard to the assessee.
The next common issue urged by the assessee relates to treatment of advances received from the customers as unexplained cash credit u/s. 68 of the Act.
The Learned AR submitted that the assessee has been receiving advances from its customers towards supply of products. Such advances are normally adjusted against subsequent sales made to the customers. At the time of hearing learned Assessing Officer asked the assessee to file confirmation letters from the customers along with their permanent account numbers. Since numbers of customer were high as much as 700, the assessee could not obtain the confirmation letters from all the customers. However, the assessee has obtained confirmation letters from majority of the customers and in respect of remaining parties, the assessee has furnished ledger account
4 M/s. Dow Agrosciences India Pvt. Ltd. copies to prove that advances were adjusted against subsequent sales. Learned AR submitted that learned CIT(A) has given partial relief in A.Y. 2005- 06, i.e., he has deleted the addition wherever the confirmation letters were filed along with the PAN. In respect of other two years, the Ld DRP had directed the AO to delete the disallowance, if the advances have been adjusted against the subsequent sales. Learned AR pleaded that the impugned additions need to be deleted since they have been received from regular customers during the course of regular business operations.
On the contrary, learned Departmental Representative submitted that the assessee has failed to prove the genuineness of the advances by filing confirmation letters including PAN of person from whom advances were received. Further the AO has already granted relief in respect of advances, which have been adjusted against the subsequent sales.
We have heard the parties on this issue. It is the contention of the assessee that the advances have been received from its regular customers through banking channels and the same has been adjusted against subsequent sales made to those customers in most of the cases. The assessee has also submitted that due to high volume of customers, it could not obtain confirmation letters from all the parties. Further Ld A.R submitted that the assessee cannot also enforce the customers to furnish their PAN. We notice that learned DRP has directed the Assessing Officer to delete the addition , if the advances have been adjusted against subsequent sales made to the parties. We are of the view that the direction given by learned DRP is reasonable one. At the same time, there is merit in the contention of the assessee that the assessee cannot enforce its customers to furnish their PAN. However, if advances have been adjusted against subsequent sales, it would be reasonable to accept the genuineness of the advances since they have been received from regular customers who were not related parties of the assessee. Accordingly we direct the AO to delete the addition, if the advances have been adjusted against the subsequent sales. For that purpose, the assessee is 5 M/s. Dow Agrosciences India Pvt. Ltd.
directed to furnish a chart showing adjustment of deposits against subsequent sales. We notice from the orders passed for AY 2006-07 and 2008-09, the AO has sustained a portion of advances, presumably on the reasoning that they have not been adjusted against the subsequent sales. We notice that the assessee had shown before the DRP that a sum of Rs.10.00 lakhs received as advance was returned back and hence the DRP has directed the AO to delete the same. Hence, in case the advances have not been adjusted against subsequent sales, we are of the view that the assessee should be provided with an opportunity to explain the reasons, which shall be examined by the Assessing Officer in accordance with the law. Accordingly we set aside the additions confirmed by Ld CIT(A) in AY 2005-06 and the orders passed by the AO in other two years and restore them to the file of the AO for examining them afresh in the light of discussions made supra.
Next common issue contested relates to transfer pricing adjustment made on payment of royalty. The assessee has paid royalty @ 5% on domestic sales and 8% on export sales to its Associate Enterprise named M/s. Dow, Netherland. The Assessing Officer noticed that M/s. Dow, UK has paid royalty to Dow, Netherland @ 3% on domestic sales and 5% on export sales. Hence the Assessing Officer made transfer pricing adjustment by adopting rate of 3% and 5% as given by DOW UK. Learned AR submitted that an identical issue was considered by the coordinate Bench of the Tribunal in assessee’s own case in relating to A.Y. 2004-05 and the Tribunal, vide its order dated 10.8.2016, has deleted the transfer pricing adjustment. Accordingly, learned AR pleaded that the order of the ITAT passed for A.Y. 2004-05 may be followed in these three years also.
Learned DR did not dispute the factual aspect submitted by learned AR.
We have heard the parties on this issue. We notice that the identical issue was considered by the Coordinate Bench in assessee’s own case for A.Y. 2004-05 (supra) and the same has been decided in favour of the assessee. For 6 M/s. Dow Agrosciences India Pvt. Ltd.
the sake of convenience we extract below relevant observations made by the coordinate Bench for A.Y. 2004-05:
“7.1 In order to appreciate the aforesaid, the following discussion is relevant. The royalty paid by the assessee to its associated enterprise i.e. Dow Netherlands has been approved by the Secretariat of Industrial Approval (SIA), Ministry of Industry(Government of India) vide communication dated 07/09/1996 and also by the Reserve Bank of India dated 11/03/1997. Before us, a reference has also been made to Paper Book, wherein the aforesaid communications have been placed as also a communication SIA dated 22/1/1997, which is in continuation to its earlier approval dated 17/09/1996. In terms of such approvals, assessee is permitted to pay its foreign collaborator i.e. Dow Netherlands, royalty @ 5% on domestic sales and 8% on export sales. In this background, before the TPO assessee asserted that since royalty was paid in terms of the approvals by the Central Government, the payment of royalty was at arm's length rate. In other words, the rate of royalty approved by the Central Government was used as a reliable data for benchmarking the transaction of payment of royalty. In this manner, assessee adopted the Comparable Uncontrolled Price (CUP) method as the most appropriate method to benchmark its international transaction of royalty and the rate approved by the Central Government was used as a reliable CUP data. Similar was the position taken by the assessee in assessment year 2003-04. Apart there-from, assessee had also canvassed that even after application of the Transactional Net Margin Method (TNMM) to test the arm's length nature of its transaction of payment of royalty, no adjustment was necessitated. Be that as it may, the TPO noted that another associate enterprise of the assessee namely, UK King Lynns Plant (in short 'Dow UK') was also paying royalty to Dow Netherlands, which was at lower rates. Based on the above, the TPO determined that the royalty paid by Dow UK was a comparable transaction and accordingly determined the arm's length royalty payment at 3% for domestic as well as 5% for gross export sale, which were the rates at which royalty was paid by DOW UK to DOW Netherlands. In assessment year 2003-04 as also in the instant assessment year, assessee had challenged the aforesaid action of the Transfer Pricing Officer. Firstly, it was canvassed that the rate of royalty payments having been approved by the Government of India, such rates constitute a valid CUP data and no further adjustment was required to the stated value of the royalties paid. Secondly, Ld. Representative for the assessee also pointed out that the comparable transaction adopted by the Transfer Pricing Officer i.e. payment of royalty by Dow UK to Dow Netherlands was a wrong approach inasmuch as comparison could be made only with an uncontrolled transaction, whereas in the case of Dow UK and Dow Netherlands, both were associate enterprises
7 M/s. Dow Agrosciences India Pvt. Ltd. and, therefore, payment of royalty by DOW UK to DOW Netherlands was a controlled transaction and accordingly, the same could not be considered as a valid CUP data. In so far as the latter plea of adoption of controlled transaction was concerned, the CIT(A) in assessment year 2002-03 has accepted the plea of the assessee. However, with regard to the plea of the assessee based on the rate of royalty approved by the Central Government is concerned, the CIT(A) rejected the same as according to him, such rates could not be considered as valid CUP data. The CIT(A) had however, allowed relief by benchmarking royalty payment under the TNMM whereby, the margins from the manufacturing activities of the assessee were found to be favourable vis-à-vis those of the comparables concerns. The Tribunal in assessment year 2003-04 upheld the ultimate conclusion of the CIT(A) to delete the addition on the ground that the basis on which the royalty was paid by the Dow UK to Dow Netherlands was different than that was paid by assessee to Dow Netherlands in as much as Dow UK was paying royalty as a percentage of gross sales, whereas assessee was paying royalty at net sales, in accordance with Foreign Exchange Control Regulations. The Tribunal found that if the royalty payable was calculated by adopting the same basis, then the royalty being paid by Dow UK was higher than what has been paid by assessee company to Dow Netherlands and, thus, the royalty paid by the assessee was at an arm's length rate, and no adjustment was required. On this basis, the Tribunal affirmed the order of the CIT(A) deleting the addition in assessment year 2003-04. 7.2 Now in the present year, the case of the assessee is that the plea that rate of royalty' approved by the Central Government as also by the Reserve Bank of India constitutes a valid CUP data has been affirmed by the Hon’ble Bombay High Court in the case of CIT vs. SGS India Pvt. Ltd., of 2013 dated 18/11/2015. In this context, the Ld. Representative for the assessee pointed out that before the Hon'ble High Court, the Revenue had relied upon Press Note No.9 (2000 series) issued by Central Government f or adop ting the rates of royalty prescribed therein for benchmarking royalty payable. In this context, reference was made to para 8 of the order of the Hon'ble High Court, wherein clause(IV) of the Press Note was specifically noted, which provided for payment of royalty upto 8% on export sales and 5% on domestic sales. The Ld. Representative for the assessee explained that though clause (IV) of Press Note No.9 (2000 series) considered by the Hon'ble High Court related to payment of royalty by a wholly owned subsidiary to its offshore parent company, but similar treatment has been extended even to other entities also vide A.P.(DIR Series) Circular No.5 dated 21/7/2003 issued by Reserve Bank of India, Exchange Control Department, Central Office, Mumbai, a copy of 8 M/s. Dow Agrosciences India Pvt. Ltd. which has been placed on record. The Ld. Representative for the assessee pointed out that before the Hon'ble High Court, Revenue stated the Press Note No9 ( 2 0 0 0 s er i e s ) d a t ed 8 / 9 / 2 0 0 0 wa s a p p l i c a b l e t o e x a m i n e t h e reasonableness of the royalty paid while computing the arm's length price. 7.3 On the basis of aforesaid it is canvassed that the royalties paid by the assessee are in terms of the approval granted by SIA as also in terms of Circular No.5 dated 21/7/2003(supra) of the Reserve Bank of India and, therefore the royalty paid @ 8% on export sand 5% on domestic sales are to be considered at arm’s length rate. 7.4 Although the learned Departmental Representative did not dispute the factual matrix, but he has merely relied upon the order of the TPO in support of the case of the Revenue. 7.5 In our considered opinion, following the judgment of Hon'ble Bombay High Court in the case of SGS India Ltd. (supra), the payment of royalty by the assessee to its associated enterprises, Dow Netherlands @ 5% on domestic sales and 8% on export sales is liable to be considered as at an arm’s length rate in view of the Circular No. 5 dated 21/7/2003 (supra). Therefore, the addition made by the Assessing Officer on this count is unsustainable. In the ultimate analysis, we uphold the action of the CIT(A) in deleting the addition, albeit, on a different ground.
Consistent with the view taken in AY 2004-05, we direct the Assessing Officer to delete the addition made on account of transfer pricing adjustment.
Now, we shall take up other issues urged in appeal filed for A.Y. 2005- 06. The first issue relates to disallowance of leave encashment under section 43B of the Act. The learned AR submitted that the Hon'ble Calcutta High Court in the case of Exide Industries Limited vs. UOI (292 ITR 470) has held that the provision of section 43B(f) relating to disallowance of "provision for leave encashment" is arbitrary, un-conscionable. Ld. AR further submitted the same view was expressed by Hon'ble Kerala High Court in another decision.
9 M/s. Dow Agrosciences India Pvt. Ltd.
On the contrary, the ld. DR submitted that the decision rendered by Hon'ble Calcutta High Court in the case Exide Industries Ltd.(supra) has since been stayed by Hon'ble Supreme Court in the case of CIT vs. Exide Industries Ltd. in SLP No.CC 12060008 dated 08.09.2008. Subsequently Hon'ble Supreme Court in SLP CC No.22889/2008 dated 27.06.2007 in the case of CIT vs. Exide Industries Ltd has held that, during the pendency of appeal, the assessee has to pay tax as if section 43B (f) is on the statute book. Accordingly, the ld. DR submitted that the disallowance of provision for leave encashment is required to be made u/s 43B(f) of the Act.
We heard the parties on this issue and perused the record. As submitted by ld. DR, the Hon'ble Supreme Court, in the case of Exide Industries Ltd., (referred supra) has stayed the decision rendered by Hon'ble Calcutta High Court and further held that the disallowance should be made in terms of sec. 43B of the Act, during the pendency of appeal, as if section 43(B)(f) is in the statute book. Hence the provision for leave encashment is required to be disallowed in terms of section 43B(f) of the Act, if it has not been paid on or before the due date prescribed for furnished return of income u/s 139(1) of the Act. However, since the decision of Hon’ble Supreme court is pending, we set aside this issue to the file of the AO with the direction to modify the addition, if required, in accordance with the decision that shall be rendered by Hon’ble Supreme Court.
The next issue urged by the assessee in AY 2005-06 relates to disallowance made u/s. 43B of the Act in respect of outstanding bonus and excise duty liabilities. The assessee initially did not disallow bonus and excise duty payable, which were outstanding as at the year end, as per provisions of section 43B of the Act. When the Assessing Officer raised the queries in that respect, the assessee admitted that it is a mistake and filed revised computation of income. In the revised computation of income so filed, the assessee made additional claim in respect of expenditure which are allowable u/s. 43B of the Act during AY 2005-06 on payment basis. The said additional
10 M/s. Dow Agrosciences India Pvt. Ltd. claim was initially omitted to be made in the original return of income. The Assessing Officer refused to accept the additional claim made through revised computation of income. Learned CIT(A) also confirmed the same and hence the assessee has filed this appeal.
We have heard the parties on this issue. It is settled proposition of law that the Assessing Officer is required to compute correct total income and further deduction which is legally allowable to the assessee cannot also be denied. The Hon'ble Bombay High Court in the case of CIT Vs. Pruthvi Brokers & Shareholders (P) Ltd. (349 ITR 336) has held that the appellate authorities are entitled to consider new claim made subsequent to filing of return. Accordingly, we admit the additional claim put forth by the assessee and direct the Assessing Officer to consider the same in accordance with the provisions of sec. 43B of the Act.
20 The next issue urged in AY 2006-07 relates to the disallowance of sample expenses of Rs.11,30,424/-. In respect of the above said claim the AO asked the assessee following queries:-
(a) Whether samples issued from manufactured goods or trading goods ? (b) Whether expenditure already included in purchasing ?
However the assessee gave only break-up details of “sample expenses”. The AO noticed that the assessee did not answer the specific queries raised by him and further the assessee also did not substantiate claim with evidences. Accordingly he disallowed the claim of the assessee. Before Ld CIT(A), the assessee contended that the Sample expenses are allowable u/s 37(1) and also placed reliance on various case laws. The Ld CIT(A) observed that there is no dispute that the expenses incurred on distribution of free samples is allowable u/s 37(1) of the Act. He further observed as under:- “The AO disallowed such expenses on the ground that the queries asked have not been replied and further observing that for manufacturing the samples no separate purchases are made and raw material & other incidental expenses are common. Therefore, unless the expenditure
11 M/s. Dow Agrosciences India Pvt. Ltd. incurred in samples are separated and reduced from the total expenditure, the same cannot be claimed separately, otherwise, the expenditure would be allowed twice.”
We notice that the assessee has not answered specific queries raised by the AO and further no document was produced to show that the expenditure was not claimed twice. Hence, the Ld CIT(A) also confirmed the addition.
Before us, the Ld A.R submitted that it would be difficult under the accounting system to claim the expenditure twice. He submitted that the expenditure of Rs.11.30 lakhs includes expenditure of Rs.1.43 lakhs incurred towards sample clearing charges. Other samples have been distributed to various peoples and the assessee has also furnished the list.
On the other hand, the Ld D.R submitted that the Ld CIT(A) has confirmed the disallowance, since the assessee did not answer specific queries raised by the AO. He submitted that the assessee has not proved that the expenditure was not claimed twice and it has also failed to produce evidences.
We have heard the parties on this issue. We have noticed earlier, the AO has asked specific queries in order to ensure that no double claim was made. If the samples were purchased by the assessee, then the cost of samples should be reduced from the Purchases and if the samples were distributed from manufactured goods, then the corresponding expenditure should be reduced from the concerned expenses. We notice that the assessee did not answer the specific queries raised by the AO. Instead the assessee has proceeded to answer the queries under the impression that the AO is questioning about its allowability u/s 37(1) of the Act. The submissions made before Ld CIT(A) shows that the assessee was under wrong impression. We notice that the AO has also observed that the assessee has failed to produce evidences. Since the assessee did not appreciate the specific queries raised by the AO, in our view, the assessee should be provided with an opportunity to prove the claim. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore this matter to the file of the AO for examining the same
12 M/s. Dow Agrosciences India Pvt. Ltd. afresh. The assessee is directed to answer the specific queries raised by the AO and also produce other information and explanations that may be called for by the AO to substantiate the claim.
The next issue relates to claim of set off of brought forward unabsorbed depreciation. Since this issue requires verification at the end of the Assessing Officer, we restore the same to his file with the direction to compute and allow correct amount of brought forward unabsorbed depreciation.
In A.Y. 2006-07, the assessee has raised grounds relating to charging of interest u/s. 234C & 234D and also relating to non-granting of correct amount of interest u/s. 244A of the Act. The Learned AR submitted that interest u/s. 234C of the Act is required to be computed on the returned income. With regard to other interest chargeable u/s 234D and payable u/s 244A, the learned AR submitted that they are consequential in nature. Accordingly, we restore these issues to the file of the Assessing Officer with the direction to compute interest u/s. 234C on the returned income. We also direct the AO to compute interest chargeable u/s. 234D and payable u/s. 244A in accordance with law.
In A.Y. 2006-07, the assessee has also raised a ground with regard to initiation of penalty proceedings u/s. 271(1)(c) of the Act. We decline to adjudicate this ground as it is premature at this stage.
We shall now take up the appeal filed by the Revenue for A.Y. 2005-06. The first issue urged by the Revenue relates to disallowance of loss arising on revaluation of debtors and creditors balances on the basis of foreign exchange fluctuations. The AO disallowed the claim under the impression that the loss was incurred due to cancellation of forward contracts on foreign exchange entered with the banks and hence the same was speculation loss. The Ld CIT(A) examined the claim and noticed that the assessee has made both gains and loss on account of revaluation exercise and the loss of Rs.56.61 lakhs claimed by the assessee was net loss only. The details are given in page 10 of 13 M/s. Dow Agrosciences India Pvt. Ltd.
the order of Ld CIT(A). He has further given a finding that the net loss of Rs.56.61 lakhs represents loss occurred on account of re-statement of debtors and creditors balances and accordingly deleted the addition. Under these set of facts, the Ld A.R submitted that the impugned loss cannot be treated as notional/speculation loss and the same is allowable as per the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Woodward Governor India (P) Ltd (312 ITR 254).
We have heard Ld D.R on this issue and perused the record. Since the decision rendered by Ld CIT(A) on this issue is in accordance with the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Woodward Governor India (P) Ltd (supra), we do not find any reason to interfere with his order on this issue.
The next issue contested by the revenue relates to the disallowance of bad debts claim of Rs.9.62 crores. The AO disallowed the claim on the reasoning that the assessee has not established that the debts have become bad. Before the Ld CIT(A), the assessee has submitted that the debts written off by it pertains to sales of earlier years and further it has been written off in the books of accounts. Accordingly the assessee, by placing reliance on the decision rendered by Hon’ble Supreme Court in the case of TRF Ltd (2010- TIOL-15-SC-IT), contended that the bad debts claim should be allowed. Convinced with submissions made by the assessee, the Ld CIT(A) allowed the claim of the assessee. The revenue is aggrieved by the said decision.
We have heard the parties on this issue. The Ld D.R did not dispute the fact that the amount of Rs.9.62 crores represents sales made by the assessee in the earlier years, meaning thereby, the condition prescribed u/s 36(2) stands satisfied. There is also no dispute that the assessee has actually written off the debts as bad in its books of account. Hence, we are of the view that the Ld CIT(A) was justified in allowing the claim of the assessee by 14 M/s. Dow Agrosciences India Pvt. Ltd.
following the decision rendered by Hon’ble Supreme Court in the case of TRF Ltd (supra). Accordingly we confirm his order passed on this issue.
In the result, the appeal of the assessee is treated as allowed and the appeal of the revenue is dismissed.
Order has been pronounced in the Court on 20.9.2016