D.C.I.T. CIR - 8,KOLKATA, KOLKATA vs. M/S FIVES STEIN INDIA PROJECTS PVT LTD., KOLKATA

SHRI M.BALAGANESH, AM

This appeal of the revenue arises out of the order of the Learned CIT(A)-VIII, Kolkata in Appeal No. 180/CIT(A)-VIII/KOl/11-12 dated 17-10-2012 for the Asst Year 2009-10 against the order of assessment framed u/s 143(3) of the Income Tax Act 1961 (hereinafter referred to as the ‘Act’).

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2008-09 by correspondingly debiting the said party. During the Asst Year 2009-10, the assessee found that the chance of recovery of part of the bill to the tune of Rs. 13,60,091/- was remote and accordingly took a conscious decision to write off the relevant part of the debt in its books of accounts for the year ended 31.3.2009 relevant to Asst Year 2009-10 ( ie. the assessment year under appeal). These details were duly filed before the Learned AO. Before the Learned AO , it was also requested by the assessee that in the books of accounts, it had erroneously shown this transaction as ‘advances written off’ instead of ‘debt written off’. The Learned did not heed to this request of the assessee and proceeded to disallow the said sum of Rs. 13,60,091/- on the ground that the advances were not routed through profit and loss account of any earlier year and further on the ground that the said sum was not made in the course of business activity of the assessee. On first appeal, the Learned CITA deleted the addition on the ground that the assessee had fulfilled both the conditions stated in section 36(1)(vii) read with section 36(2) of the Act and the debt has been treated as irrecoverable and written off in the books of accounts of the assessee and accordingly held that the assessee is entitled to claim bad debts as deduction. Aggrieved, the revenue is in appeal before us on the following grounds:- “1(a) That the ld.CIT(A) has erred on facts and circumstances of the case and in law in holding that the AO has erred in disallowing the bad debt written of amounting to Rs.13,60,091/- (b) That the ld.CIT(A) has erred on facts and circumstances of the case and in law in holding that the AO has erred in disallowing the bad debt written off amounting to Rs.13,60,091/- on the alleged ground that the same is allowable under the provisions of Sec. 36(1)(vii) read with Sec. 36(2) of the Act.”

3.1. The Learned AR reiterated the submissions made by him before the Learned CIT(A). He further argued that name given to a transaction by the parties does not necessarily decide the nature of the transaction. He relied on the following case laws in support of his contentions:- a) TRF Ltd vs CIT reported in 323 ITR 397 (SC) b) Inland Revenue Commisisoner vs Weleyan General Assurance Society reported in 16 ITR (Suppl) 101 (HL) c) Mcdowell & Co Ltd vs CTO reported in 59 STC 277 (SC) d) CIT vs BM Kharwar reported in 72 ITR 603 (SC)

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e) Sir Kikabhai Premchand case reported in 24 ITR 506 (SC)

In response to this, the Learned DR vehemently supported the order of the Learned AO.

3.2. We have heard the rival submissions and perused the materials available on record. We are in agreement with the arguments of the Learned AR that the substance of the transaction is to be seen and that would always prevail over its form. Hence by the fact that the assessee had categorized as ‘advances written off’ in his books alone would not be the determinative factor for deciding the legitimate claim of deduction of the assessee. We find from the paper book of the assessee that the assessee duly offered the sum of Rs. 26,06,750/- as income in Asst Year 2008-09 while raising the debit note dated 15.1.2008 in favour of M/s Stein Heurtey Bilbao for the work carried out by the assessee on behalf of the said party. We also find that the said party had settled the dues other than this amount on 30.7.2009 and hence the subsequent conduct of the said party also justifies the conscious decision taken by the assessee to write off the part of the debit note amount in the sum of Rs. 13,60,091/- in Asst Year 2009-10 itself. We find that the assessee had duly complied with the requirements stipulated in section 36(1)(vii) read with section 36(2) of the Act in claiming the deduction towards bad debts to the tune of Rs. 13,60,091/- and accordingly is duly entitled for deduction. We find that the decision of the Hon’ble Supreme Court in the case of TRF Ltd vs CIT reported in 323 ITR 397 (SC) is directly in favour of the assessee on the impugned issue, wherein it was held that post 1.4.1989, it is not necessary for any assessee to establish that the debt in fact has become bad. The Hon’ble Court has further held that if the debt has been written off in the books of accounts then it would be enough to allow the deduction.

Further reliance is placed on the decision of CIT vs Y. Ramakrishna & Sons Ltd reported in 326 ITR 315 (Mad), wherein it was held that:-) “Held, dismissing the appeal, that the transaction of the asessee of financing the subsidiary company was genuine and bona fide. The assessee paid further advances in its own interest with a view to recover the amount given earlier, to sustain a share and to avoid the guarantee being invoked. The mere fact of payment of money after stoppage of interest from the

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subsidiary company by itself could not be a ground to hold that the transactions were not in the course of the business. There was no bar in law for financing the subsidiary company. The income received by the assessee from the subsidiary company by way of intrest was subjected to tax and the advance made by the assessee to that company was also subjected to tax. At the time of writing off the debt, the subsidiary company had accumulated huge losses. The assessee also suffered a loss while selling the shares of the subsidiary company which resulted in the subsidiary company ceasing to be the subsidiary of the assessee. Therefore, in the circumstances the money advanced by the assessee had become irrecoverable and was given during the course of the business. What was not paid by the subsidiary company was only the interest and there was no principal amount due at the time of advancing the amount thereafter. The advances made by the assessee were also utilized by the subsidiary company for the purpose for which they were obtained which was to run the foundry. This would also indicate that the amount had been given out of commercial expediency as well. Both the Commissioner (Appeals) as well as the Tribunal had considered the materials on record and came to the conclusion that the transactions involved were true and genuine. They had also held that the advances had been made during the course of the business and they had become irrecoverable as bad debts and hence the assessee was entitled to the benefit under section 36(1). The question as to whether a debt had become bad or not was a pure question of fact and, therefore, it could not be construed as a question of. Law.”

In view of the aforesaid facts and respectfully following the aforesaid judicial precedents on the impugned issue, we don’t find any reason to interfere with the order of the Learned CITA and accordingly, the ground no. 1 raised by the revenue is dismissed.

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comments on the fresh evidences or counter the same before deleting the disallowance u/s. 40(a)(ia) of Rs.46,56,333/-.”

4.1. The brief facts of this issue is that the assessee entered into an agreement with Sunshine Commotrade Pvt Ltd wherein the said party would render certain services to the asssessee in consideration of 2% commission on total value of contract. The assessee debited a sum of Rs. 87,39,272/- as expenditure incurred towards commission paid to Sunshine Commotrade Pvt Ltd by account payee cheques. According to Learned AO, the said party is a related concern of the assessee company and no details regarding the nature of services rendered by the said concern was produced before him. It was also seen by the Learned AO that assessee itself had disallowed a sum of Rs. 46,56,633/- u/s 40(a)(ia) of the Act in its return of income. According to Learned AO, since the commission payments were made to sister concern of the assessee and no details regarding nature of services rendered by the said concern was made available before him and whether the commission paid to sister concern is excessive or unreasonable or not could not be verified. Accordingly he sought to disallow the sum of Rs. 40,82,939/- towards commission payment.

4.2. On first appeal, the assessee placed the copy of the agreement entered into with Sunshine Commotrade Pvt Ltd and also elaborated the various services rendered by the said party to the assessee. The assessee pleaded that the services provided by Sunshine Commotrade Pvt Ltd inter alia included the following activities :- (i) entering into business relationships with customers in relation to sale of the products of the assessee. (ii) getting involved into the projects relating to the products of the assessee in various matters (iii) securing contracts from customers in relation to the products of the assessee.

It was also pleaded before the Learned CITA that Sunshine Commotrade Pvt Ltd assisted the assessee to bid for and negotiate contracts with various parties , and on the basis of such contracts the assessee company’s business was surviving. The said concern had the requisite knowledge, experience and expertise that enabled the assessee to promote its business. The assessee also filed before the Learned CIT(A) a declaration from its

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Managing Director that the said party Sunshine Commotrade Pvt Ltd is not a related concern of the assessee. The Learned CIT(A) sought for a remand report from the Learned AO. Before the Learned AO, the concerned party i.e Sunshine Commotrade Pvt Ltd also confirmed vide their letter dated 19.7.2012 that they are not related to the assessee. It was also pleaded before the Learned CITA that the assessee has been paying commission by virtue of duly executed agreement for a long time and in all the previous assessment years, the previous assessing officers have allowed the same as deduction. The Learned CIT(A) relying on all these submissions and evidences, deleted the addition.

4.3. The assessee raised additional ground before the Learned CIT(A) for seeking relief in respect of disallowance u/s 40(a)(ia) of the Act made by the assessee voluntarily in the return of income to the tune of Rs. 46,56,633/- towards commission paid during the period April 2008 to Feb 2009. It was pleaded before the Learned CIT(A) that the commission payment to the extent of Rs. 46,56,633/- was subjected to deduction of tax at source and the TDS thereon was duly remitted to the account of Central Government on 8.9.2009 which is before the due date of filing the return of income u/s 139(1) of the Act and accordingly prayed for allowing the same as deduction. The Learned CIT(A) after calling for a remand report in this regard sought to delete the addition in view of the provisions of section 40(a)(ia) of the Act in this regard. Aggrieved, the revenue is in appeal before us.

4.4. The Learned AR reiterated all the submissions made by him before the Learned CITA. In response to this, the Learned DR vehemently supported the order of the Learned AO.

4.5. We have heard the rival submissions and perused the materials available on record. We find from the paper book filed by the assessee that Sunshine Commotrade Pvt Ltd had been rendering various services to the assessee in consideration for receipt of commission at an agreed rate pursuant to a duly executed agreement entered into by the assessee for a long time. We find that the revenue before us has not controverted the findings given by

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the Learned CITA with regard to the nature of services rendered by the said party and the validity of the agreement entered into with them. We also find from the declaration filed by the Managing Director of the assessee and confirmation vide letter dated 19.7.2012 from Sunshine Commotrade Pvt Ltd that they are not related to the assessee within the meaning of section 40A(2) of the Act and hence disallowance made by the Learned AO on this wrong understanding of facts is not appreciated. We find that the assessee’s case is also covered by the decision of this tribunal in the case of IFB Agro Industries Ltd vs CIT in ITA No. 3756 (Cal.) 92 , 382 & 383 (cal.)/90 for Asst Years 1985-86 , 1984-85 & 1995-96 dated 9.4.1996 wherein it was held as follows:-

The payment of commission would be allowable even if the same has been paid to any related entity provided the following conditions are fulfilled:-

(i) there must be two separate corporate entities (ii) there must be an agreement entered in the normal course of business (iii) the amount paid for commission should not flow back to the coffers of the assessee. In the instant case, Sunshine Commotrade Pvt Ltd and the assessee were two independent unrelated corporate entities – one earning income by way of supply, erection and commissioning of industrial furnaces and the other party earning commission income. The agreement entered into between the said parties were in the normal course of business as Sunshine was rendering services against which the assessee was making payments at an agreed rate. There is no evidence on record to show that the amount of commission paid to Sunshine flowed back to the coffers of the assessee.

4.6. We also find that the commission payments were made by the assessee through account payee cheques to Sunshine Commotrade Pvt Ltd. We also find that this commission payment has been made by the assessee for a long time and deduction has been granted by the Learned AO in all the previous years. Though the res judicata does not apply to income tax proceedings, the principle of consistency cannot be given a go by.

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Reliance in this regard is placed on the decision of the Hon’ble Apex Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC), wherein it was held that :

As we are aware of the fact that, strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

4.7. We also find that the Learned AO had an opportunity in the remand proceedings to verify the entire veracity of the claim made by the assessee in the additional ground before the Learned CITA with regard to allowability of deduction of commission to the extent of Rs. 46,56,333/- . We find that the assessee had duly remitted the TDS on 8.9.2009 which is before the due date of filing the return of income u/s 139(1) of the Act and accordingly is entitled for deduction for the same in the previous year itself. No adverse remarks were rendered by the Learned AO in this regard in the remand report. Hence it has to be presumed that the Learned AO had accepted the same in the remand proceedings. Having done so, we hold that the revenue ought not to have come on appeal before us on the alleged ground of violation of Rule 46A of the Income Tax Rules. Accordingly, the ground no. 2 & 4 raised by the revenue are dismissed.

5.1. The brief facts of this issue is that the assesse claimed purchase of project materials of Rs. 60,85,03,187/- which includes a sum of Rs. 20,91,62,853/- incurred by the assessee towards upply of manufactured goods by the vendors as per assessee’s technical specifications and drawing. The Learned AO after going through the agreement entered

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into by the assessee in this regard came to a conclusion that the same is nothing but contract for work and hence would come under the ambit of TDS provisions u/s 194C of the Act and invoked section 40(a)(ia) disallowance for the same. The Learned AO observed as under :- • The goods manufactured by the vendor for the appellant company were tailor made according to the requirements of the appellant and hence the work assigned by the appellant to its vendor is not a ‘contract for sale’ instead the work is in nature ‘contract for work’. • The whole manufacturing process was carried out under the close supervision of the appellant and as such the work carried out by the vendor was in nature of ‘contract for work’. • Although the name of the agreement is ‘purchase order’ but in reality it is like any other contract for carrying out a work. At many places of the agreement, the word ‘work’is used. A perusal of the agreement establishes beyond doubt that the assessee company enters into a contract with the vendor for executing a contract for work. • The treatment of a transaction is Sales Tax Proceedings is not going to impact or influence the treatment of the same transactions in Income Tax proceedings because both the proceedings are guided by two difference Acts and Laws. Definition of the terms may not be same in both the Acts. Hence, it was alleged that the argument of the assessee that the transaction should be treated as ‘contract for sale’because the same view was held by Sales tax authority is not tenable. • Since the appellant is not falling within the scope of subsection (3) of section 194C of the Act, the provisions of subsection (1) of 194C of the Act would be applicable to the assessee.

The allegation of the AO that the products made by the vendor for the appellant company were tailor made according to the requirements of the appellant and hence the work assigned by the appellant to its vendor is not a ‘contract for sale’ instead the work is nature of ‘contract for work.’

5.2. On first appeal, the Learned CIT(A) appreciated the fact that the assessee’s case falls only under contract for sale and not contract for work. He also held that the definition of work as per Explanation (iv) (e) to section 194C which was introduced with effect from 1.10.2009 has been held to be retrospective in operation by the decision of Bombay High Court in the case of CIT vs Glenmark Pharmaceuticals Ltd reported in 324 ITR 199 (Bom) . He also held that the case before the Bombay High Court was the goods were manufactured by the vendor as per the specification of the assessee and it was

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alleged by the AO that the payment for the same should suffer TDS u/s 194C. While examining whether in these circumstances the provisions of section 194C would apply or not, the Hon’ble High Court concluded that such transactions would not be liable to TDS u/s 194C. Further, while arriving at this conclusion, the Hon’ble High Court referred to the amendment made in Finance (No.2) Act, 2009 and took cognizance of the fact that the definition of work has been amended. After referring to the Memorandum explaining the provisions, the Hon’ble High Court has opined that the amendment being clarificatory in nature would be applicable retrospectively.

5.3. The Learned CIT(A) also relied on the CBDT Circular No. 681 dated 8.3.1994 containing various situations in which the provisions of section 194C would apply / not apply. He also relied on the CBDT Circular No. 13/6 dated 13.12.2006 wherein it was categorically stated that the provisions of section 194C would not apply to contracts for sale of goods and further clarifies that where the property in the article or thing so fabricated passes from the fabricator contractor to the assessee only after such article or thing is delivered to the assessee, such contract would be a contract for sale and so outside the purview of section 194C. This circular further strengthened the old circular no. 681 dated 8.3.1994. The Learned CIT(A) found that the main objection of the Learned AO is that the goods are manufactured as per the specifications of the assessee herein. He held that the aforesaid circulars are also amply clear that the supply of articles as per the specifications of the customer would not attract TDS u/s 194C. The Learned CIT(A) also placed reliance on the decisions of this tribunal in assessee’s own case on the same issue for the Asst Years 2007-08 & 2008-09 which was decided in favour of the assessee and accordingly deleted the addition made by the Learned AO. Aggrieved, the revenue is in appeal before us on the following ground:-

“3. That the ld. CIT(A) has erred on facts and circumstances of the case and in law in holding that the work assigned by the assessee to its vendor is not a ‘contract for sale’and instead the work is in nature of ‘contract for work’.

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5.4. The Learned AR relied on the orders of this tribunal in assessee’s own case for the Asst Years 2007-08 & 2008-09 . In response to this, the Learned DR vehemently supported the order of the Learned AO.

5.5. We have heard the rival submissions and perused the materials available on record. We find that the impugned issue is squarely covered by the decision of this tribunal in assessee’s own case for the Asst Year 2008-09 in ITA No. 1143 / Kol / 2011 dated 18.5.2012, wherein the grounds raised before this tribunal and finding given thereon are reproduced herein below:- “1. That the ld.CIT(A) has erred on facts and circumstances of the case and in law by holding that supply of articles as per the specification of the customer would not attract TDS under section 194C and that the present case is one of sale per se and not a contract of work. 2. That the ld.CIT(A) has erred on facts and circumstances of the case and in law by not considering that the work assigned by the assessee to its vendor is not a ‘contract for sale’ and instead the work is in nature of ‘contract for work’ 3. That the ld.CIT(A) has erred on facts and circumstances of the case and in law by overlooking the fact that the case of assessee does not any of the exclusions given in 194C(3) of the Act”.

“4. In regard to ground nos. 1, 2 & 3, which are against the actions of the learned Commissioner in holding that the supply of articles as per the specification of the customer would not attract TDS under section 194C and that the present case is one of sale per se and not a contract of work, it was fairly agreed by both the sides that the issue is squarely covered in favour of the assessee by the decision of the co-ordinate bench of this tribunal in assessee’s own case in ITA No.349/Kol/2011 dated 30th day of March 2012 for the assessment year 2007-08, wherein the co-ordinate bench of this Tribunal vide para 4 held as follows:- 4. We find that the issue is square covered , in favour of the assessee, by a coordinate bench, decisions in Khadim’s case (supra) and by Hon’ble Bombay High Court, judgment in the case of CIT – vs- Glenmark Pharmaceuticals Ltd (324 ITR 199). As held by Hon’ble Bombay High Court in Glenmark’s case (supra), the amendment in section 194C which lays down that purchase of goods made as per the specifications of buyer will not attract, the provisions of section 194C is only clarificatory in nature and will hold filed for the earlier years as well. There is no contrary decision by the Hon’ble

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jurisdictional High Court, or, for that purpose by any other High Court. The esteemed views of Hon’ble Bombay High Court, therefore, bind us as well. That apart, as held by various coordinate benches, in the cases of Whirlpool (supra), Khadim (supra) and others, purchase of goods as per given specifications do not attract the tax deduction requirements u/s. 194C. In this view of the matter, in our considered opinion, the assessee did not have any obligation to deduct tax at source from payments in respect of purchases as per assessee’own designs and specification. Accordingly, as held by the CIT(A), the very foundation of impugned disallowance u/s. 40(a)(ia) ceases to be sustainable in law. We accordingly approve the ground of the CIT(A) and decline to interfere in the matter. 5. WE have considered the submissions. We have also perused the said order dated 30-03-2012 of the co-ordinate bench of this tribunal in assessee’s own case for the assessment year 2007-08 (refer to supra). As it is noticed that the issue is squarely covered by the said decision of the co- ordinate bench of this tribunal in assessee’s own case (refer to supra), respectfully following the said decision of the co-ordinate bench of the tribunal (refer to supra), the findings of the learned Commissioner of Income- tax (Appeals) on this issue stand confirmed. This issue of the revenue’s appeal is dismissed.”

Respectfully following the decision of this tribunal in assessee’s own case for the Asst Year 2008-09, we find no infirmity in the order of the Learned CIT(A) in this regard and accordingly, the ground no. 3 raised by the revenue is dismissed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 27 /11/2015

Sd/- Sd/- ( Mahavir Singh, Judicial Member ) (M. Balaganesh, Accountant Member) Dated 27 /11/2015

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Copy of the order forwarded to: The Appellant :DCIT, Cir-8 Aaykar Bhawan, 5th Fl., P-7 Chowringhee Sq, Kol-69. 1.. 2 The Respondent- M/s. Fives Stein India Projects Pvt. Ltd 41 Chowringhee Road, Kol-71. 3 The CIT,

The CIT(A) 4.. 5. DR, Kolkata Bench 6. Guard file. True Copy, By order, Asstt Registrar ** PRADIP SPS

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