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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI SANJAY GARG & SHRI RAJESH KUMAR
Per Sanjay Garg, Judicial Member:
The above titled cross appeals one by the Revenue and the other by the assessee have been preferred against the order dated 21.01.2011 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)]
2 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. relevant to assessment year 2008-09. Since the facts and issues involved therein are common, hence the same were heard together and are being disposed of by this common order.
The brief facts of the case are that the assessee company is engaged in the business of providing technical knowhow for manufacture of chemical products required for pulp and paper industries. The assessee company filed its return of income declaring loss of Rs.1,18,38,710/-. The Assessing Officer (hereinafter referred to as the AO), however, made certain disallowances including disallowance of royalty expenditure amounting to Rs.23,66,000/- and adhoc disallowance travelling expenses amounting to Rs.29,74,525/-. The AO also made addition of Rs.6,28,700/- under section 69C of the Act on account of AIR information. The AO made certain other disallowances on account of professional fees etc. and thus assessed the total income of the assessee at Rs.61,71,950/- as against the returned loss of Rs.1,18,38,710/-.
In appeal, the Ld. CIT(A) deleted the disallowance of royalty expenditure. He, however, confirmed the disallowance of travelling expenses amounting to Rs.29,74,525/-. The Ld. CIT(A) also confirmed addition amounting to Rs.6,28,700/- under section 69C of the Act out of addition made of Rs.60,98,920/- made by the AO. The Revenue, thus, has come in appeal before us agitating the action of the Ld. CIT(A) in deleting the disallowance of royalty expenditure; whereas the assessee has come in appeal before us agitating the confirmation of disallowance of travelling expenses and also in respect of additions confirmed under section 69C of the Act.
First we take up the appeal of the Revenue i.e. ITA No.4380/M/2013.
The AO during the assessment proceedings noted that the assessee derived royalty income mainly on providing technology and knowhow purchased from M/s. Hercules INC, USA vide agreement dated 01.01.03 and 3 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. further sold to the Indian companies. The AO noted that during the year, the assessee had sold the said technical knowhow to only one party namely Connell Brothers Company (India) Pvt. Ltd. (hereinafter referred to as the CBC Ltd.) with which the assessee had entered into an agreement dated 13.01.03. As per the terms of the said agreement, the assessee would receive a royalty payment of 14% on net sales value of product sold, against which the assessee had to make a payment at the rate of 5% to its parent company M/s. Hercules INC, USA and hence the assessee was left with a net margin of 9% on sales value effected. The AO noted that the assessee had shown a royalty income of Rs.1,52,91,846/- according to which sales were worked out at Rs.10,92,27,470/-, considering 14% as royalty income. The AO further noted that the assessee, however, had debited Rs.78,27,373/- as royalty expenses which were worked out to Rs.7.16% of sales, whereas, as per the agreement the assessee was liable to pay only 5% of sales as royalty. The AO, therefore, disallowed the excess claim worked out at Rs.23,66,000/- and added the said amount to the returned income of the assessee. Being aggrieved by the above action of the AO, the assessee preferred appeal before the Ld. CIT(A).
In appeal, the assessee submitted before the Ld. CIT(A) that the AO while making disallowance on account of royalty expenses has computed the royalty on products sold at the rate of 14%. The AO, while doing so, ignored the fact that as per the amended agreement with CBC Ltd., royalty on certain products was receivable at the rate of 5% only and on certain other products at 14%. The assessee also agitated the disallowance of travelling expenses and additions confirmed on account of AIR information and further submitted certain details and evidences in this respect. The Ld. CIT(A) on the above submissions called remand report from the AO. In the remand report, the AO reported that on verification of details filed by the assessee during the remand proceedings, it was noticed that as per the terms of the agreement dated 13.01.03 entered with CBC Ltd., the assessee was entitled to receive royalty
4 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. payment @ 14% on net sales value of products against which the assessee had to make a payment @ 5% to its parent company M/s. Hercules INC, USA. However, as per the assessee there was an amended agreement dated 29.03.05 with CBC Ltd. as per which on product ‘Hercon and Impress’ the royalty payable was 5% and for other products it was settled at 14%. It was also submitted that the said agreement was produced before the AO during the assessment proceedings vide letter dated 29.11.10. It was therefore claimed that the royalty expenditure was correctly computed in the return of income. The AO, however, reported that the amended agreement dated 29.03.05 could not be relied upon as the original agreement and the amended agreement were respectively signed by different directors of the government. The AO further noted that since the assessee acquired technical knowhow at the rate of 5% from parent company and it was not probable that the assessee company would sale the same at the same rate of 5% without earning any profit. He accordingly reported that the disallowance on account of royalty expenditure was rightly made during the assessment proceedings.
The Ld. CIT(A), after going through the remand report and considering the submissions of the Ld. A.R. of the assessee, observed that the assessee had entered into original agreement in the year 2003 whereas the subsequent amendments were made in the agreement in the year 2005 which were duly placed on record during the assessment proceedings. The said amended agreement clearly stated that on product ‘Hercon and Impress’ royalty at the rate of 5% was payable and for other products at the rate of 14%. He observed that the registration of the aforesaid agreements was not necessary as per the law. He, considering the submissions of the assessee that the products ‘Hercon and Impress’ on which 5% royalty was charged were newly added in the list of products and in order to attract more customers the assessee company decided to recover only the cost on these products initially and that the same was a 5 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. business decision and the AO was not supposed to sit over it, deleted the addition made by the AO on account of disallowance of royalty expenditure.
Before us, the Ld. A.R. of the assessee submitted that since the above stated product ‘Hercon and Impress’ were newly added products and that it was a commercial decision of the assessee company to sell the said products on no profit basis so as to attract more customers. It has also been submitted that in the subsequent assessment year 2011-12, the parent company i.e. M/s. Hercules INC, USA has waived off the entire royalty payable by the assessee and that the assessee has not paid any royalty to the parent company and the entire amount has been offered to tax by the assessee company for A.Y. 2011- 12. It has, therefore, been contended that the disallowance made for the assessment year under consideration would result in double taxation of the same income.
Considering the above contentions, we do not find any infirmity in the order of the Ld. CIT(A) while deleting the disallowance of royalty expenditure. The appeal of the Revenue is therefore dismissed.
Now coming to the appeal of the assessee i.e. ITA No.4352/M/2013.
The assessee in its appeal has agitated the disallowance of Rs.29,74,525/- on account of travelling expenses made on adhoc basis at the rate of 15%. The assessee has also agitated the confirmation of addition of Rs.6,28,700/- under section 69C of the Act.
So far as the disallowance of travelling expenditure is concerned, the AO noted that the assessee had debited an amount of Rs.59,49,051/- under the head ‘Travelling Expenditure’. The AO observed that though the assessee had claimed the said expenditure was incurred on account of visits of its employees to the customers, however, the assessee had not furnished any details as to the 6 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. names and addresses of the customers and the details of business procured. He, further observed that as per the clause 9.3 of the agreement of the assessee with CBC Ltd., all the expenses relating to sale, distribution and other expenses were to be borne by the CBC Ltd. He accordingly disallowed the 50% of the travelling expenses claimed by the assessee.
In appeal, the assessee relied upon the clause 9.6 of the agreement which states that in an effort to assist the licensee (CBC Ltd.) with development of its business for the sale of products, the licensor (assessee) may from time to time send its own representatives to visit the customers and promote the licensee’s business with those customers. The assessee, therefore, claimed that the said expenditure was incurred on account of visits of its employees. The Ld. CIT(A), however, observed that the assessee could not fully substantiate the travelling expenses and further that even in the earlier assessment year, the disallowance at the rate of 50% of the expenses had been confirmed by his predecessor. He accordingly confirmed the disallowance made by the AO on this issue.
Before us, the Ld. A.R. of the assessee has brought our attention to the order of the Tribunal dated 30.04.13 passed in in the own case of the assessee for assessment year 2007-08. The identical issue regarding 50% of disallowance of travelling expenses has been considered by the Tribunal and the Tribunal after considering the submissions of the parties has deleted the adhoc disallowance of travelling expenses observing as under: “7. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the deduction on account of traveling expenses was claimed by the assessee relying on clause 9.6 of the agreement whereas the said claim of the assessee was disallowed by the authorities below relying on clause 9.3 of the said agreement. We therefore find it relevant to quote the said two clauses:
Clause 9.3
7 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. "Expenses - All expenses and all risks incurred by the Licensee in connection with the manufacture, distribution and sale of the Products will be for the account of and shall be borne and paid for by the licensee. Without prejudice to the generality of the foregoing, the Licensee will in all cases be responsible for the payment of all transportation, shipping, handling, insurance, brokerages, taxes, customs, storage and other governmental charges, however designated, imposed in the Territory".
Clause 9.6 "In an effort to assist the Licensee with development of its business for the Products, the Licensor may from time to time send its own representatives to visit with customers and promote the Licenseee's business with these customers. The Licensee shall cooperate fully with such representatives."
As is clearly evident from the aforesaid clauses of the relevant agreement, all the expenses and risks incurred by the licensee namely M/s Connell Bros. Co. (India) Pvt. Ltd. in connection with the manufacture, distribution and sale of the products were to be borne and paid for by M/s Connell Bros. Co. (India) Pvt. Ltd. The expenses in question on traveling however were incurred by the assessee as licensor and not by M/s Connell Bros. Co. (India) Pvt. Ltd. as licensee and the same, in our opinion, therefore were covered by clause 9.6 of the agreement which required the assessee as licensor to send from time to time its own representatives to visit the customers and promote the licensee's business with the said customers in an effort to assist the licensee with development of its business for the products. The said expenses therefore were to be borne and paid for by the assessee as per clause 9.6 of the agreement and the authorities below, in our opinion, were not justified in disallowing 50% of the traveling expenses of the assessee relying on clause 9.3 of the agreement which covered only expenses and risks incurred by the licensee. It is also observed that the traveling expenses claimed by the assessee were inclusive of foreign travel expenses which as stated specifically by the assessee in the written submissions filed before the Id. CIT(A) were incurred for the purpose of visits of its employees to Hercules Inc.'s offices and plants situated in USA, Korea, Singapore, Thailand etc. for obtaining on site training in order to enable them in assisting M/s M/s Connell Bros. Co. (India) Pvt. Ltd. with regard to technology and marketing of its products. The Id. CIT(A) presumed that the said expenses were incurred for the purposes of training to the employees of M/s Connell Bros. Co. (India) Pvt. Ltd. and proceeded on this wrong presumption to confirm the disallowance made by the A.O. on account of traveling expenses. Moreover vide letter dtd. 13-12-2010 filed by the assessee before the Id. CIT(A) as additional evidence, M/s Connell Bros. Co. (India) Pvt. Ltd. had clarified that traveling expenses incurred by the assessee were covered by clause 9.6 of the agreement and not by clause 9.3. Having regard to all these facts of the case, we are of the view that the entire traveling expenses of Rs. 30,31,107/- were incurred by the assessee for the purpose of its business and there was no justification in disallowing 50% of the said expenses on adhoc basis. In that view of the matter, we delete the disallowance made by the A.O., and confirmed by the Id.
8 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. CIT(A) on account of traveling expenses and allow this appeal of the assessee. In the result, appeal filed by the assessee is allowed.” 8.
The facts for the year under consideration are identical. The assessee had claimed the travelling expenses incurred for business purpose of the assessee which were covered by clause 9.6 of the agreement of the assessee with CBC Ltd. Respectively following the findings of the Tribunal given in the own case of the assessee in the earlier assessment year, we delete the adhoc disallowance made by the lower authorities on account of travelling expenses of the employees. This ground is accordingly decided in favour of the assessee.
So far as the confirmation of addition of Rs.6,28,700/- under section 69C is concerned, the relevant facts are that during the course of assessment proceedings, the AO directed the assessee to reconcile the receipts/expenditure as per AIR information with that of accounts of the assessee. In response, the assessee stated that with respect to payments made to American Express Bank of Rs.54,02,545/- and Rs.6,96,375/- both dated 31.03.08 as detailed in the AIR information, that no such payment was made by the assessee. The AO, however, observed that since there was a specific AIR information. He, therefore, treated the above expenditure aggregating to Rs.60,98,920/- as ‘unexplained’ under section 69C of the Act and added the same to the returned income of the assessee.
During the remand proceedings, the assessee furnished the confirmation from American Express Bank along with copies of the bank statement and stated that there was multiple payments amounting to Rs.54,70,621/- and that all these payments were made through American Express Credit Card and for the purpose of travelling expenses totaling to Rs.54,70,220/-. The AO, considering the above documents, reported in the remand report that the assessee had submitted the explanation regarding the expenditure of 9 & ITA No.4352/M/2013 M/s. Hercules Industrial Chemicals Pvt. Ltd. Rs.54,70,220/-. He, however, recommended the confirmation of disallowance of the remaining amount of Rs.6,28,700/-. The Ld. CIT(A) accordingly confirmed the disallowance of the amount of Rs.6,28,700/- under this head.
The Ld. A.R. of the assessee has brought our attention to page 69 of the paper book which is a confirmation given by the American Express Banking Corporation stating that they have not received any consolidated payment for an amount of Rs.54,70,621/- and Rs.6,96,375/- during the financial year 2007- 08. It has been further stated that total payment worth Rs.54,70,621/- have been received during the entire financial year 2007-08 through multiple remissions. The Ld. A.R. of the assessee has relied upon the decision of the co-ordinate bench of the Tribunal in the case of “Shreeballabh R. Lohiya vs. ITO” dated 08.08.12 wherein the Tribunal has observed that the additions cannot be made merely on the basis of AIR information and without bringing any evidence on record that assessee has actually received any such amount as alleged as per AIR information. The Ld. A.R. has further relied upon another decision of the co-ordinate bench of the Tribunal in the case of “Shri S. Ganesh vs. ACIT” ITA No.527/M/2010 08.12.10 wherein the Tribunal has observed that there may be so many reasons for non matching of the actual receipts with that of AIR information and that the additions solely on the basis of AIR information without any supporting evidence cannot upheld.
In the case in hand before us, the assessee has specifically pleaded that it has not made any payment except Rs.54,70,621/- through multiple payments to the American Express Bank, which fact has also been confirmed by the said bank. Under such circumstances, the burden shifts upon the AO to prove that the assessee has made payments in excess of what has been claimed by the assessee as the assessee is not supposed to prove the negative. Since there is no other evidence available of any such payments made by the assessee except the AIR information alone, hence, in our view, the additions solely on the basis