Income Tax Appellate Tribunal - Ahmedabad
Eimco Elecon (India) Ltd.,, Anand vs Assessee on 7 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
" D " BENCH, AHMEDABAD
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.A. No.3254 / Ahd/2009
(Assessment Year 2006-07)
Eimco Elecon (India) Ltd., Vs. JCIT, Anand Circle,
Anand Sojitra Road, Ahand
Vallabh Vidyanagar,
Tal. & Dist. Anand
PAN/GIR No. : AAACE4645C
I.T.A.Nos. 36 & 37/Ahd/2010
(Assessment Years 2005-06 & 2006-07)
DCIT, Anand Circle, Vs. Eimco Elecon (India) Ltd.,
Anand Anand Sojitra Road,
Vallabh Vidyanagar,
Tal. & Dist. Anand
(APPELLANT) .. (RESPONDENT)
Appellant by: Shri Sunil Talati, AR
Respondent by: Shri B L Yadav, Sr. DR
Date of hearing: 07.05.2012
Date of pronouncement: 31.05.2012
ORDER
PER SHRI A. K. GARODIA, AM:-
Out of this bunch of three appeals, there is one appeal of the revenue for the assessment year 2005-06 in I.T.A.No. 36/Ahd/2010 which is directed against the order of Ld. CIT(A) IV, Baroda dated 30.10.2009 and the remaining two appeals are cross appeals filed by the assessee and the revenue which are directed against the order of Ld. CIT(A) IV, Baroda date d 30.10.2009 for the assessment year 2006-07.
2 I.T.A.No.3254/Ahd/2009I.T.A.No.36,37/Ahd/2010 All these appeals were heard together and are being disposed off by way of this common order for the sake of convenience.
2. First, we take up the appeal of the revenue for the assessment year 2005-06. There is only one effective ground raised by the revenue which is as under:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.48,61,158/- being disallowance of warranty provision debited to spares account, contrary to auditor's finding in the audit report that it was in the nature of contingent liability. On the facts and in the circumstances of the caser and in law, the CIT(A) ought to have upheld the order of the A.O. The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the A.O. be restored."
2.1 Ld. D.R. of the revenue supported the assessment order whereas Ld. A.R. supported the order of Ld. CIT(A). he also submitted that Ld. CIT(A) has followed the judgment of Hon'ble Apex Court rendered in the case of Rotork Controls (India) Ltd. Vs CIT as reported in 314 ITR
52. He submitted that in the first round, the Tribunal has restored back this matter to the file of Ld. CIT(A) for a first decision in I.T.A.No. 1380/Ahd/2009 dated 17.07.2009. He submitted a copy of this tribunal decision. He further pointed out that it was held by the Tribunal in this order in the first round that the decision of Hon'ble Madras High Court rendered in the case of Rotork Controls (India) Ltd. (supra) and the subsequent decision of Hon'ble Apex Court in the same case as reported in 23 CTR 425/314 ITR 62, was not available when the matter was decided by Ld. CIT(A). Hence, the matter was restored back to the file of Ld. CIT(A) to decide the issue afresh in the light of this decision of Hon'ble Apex Court. He further submitted that in the impugned order, Ld. CIT(A) had decided the issue in favour of the assessee by followings 3 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 this judgment of Hon'ble Apex Court after examining all the details and, therefore, the order of Ld. CIT(A) should be confirmed. 2.2 He also submitted a chart of year-wise sales, warranty provision and actual expenses regarding warranty. He pointed out that as per these details for the present year, the sale was of Rs.9722.32 lacs and the provisions made for warranty @ 0.5% was calculated at Rs.48,61,159/-. He further submitted that actual warranty expenses incurred by the assessee in the present year were Rs.177.17 lacs and in all the earlier years and in the preceding year also, the expenses incurred is much higher and, therefore, the provision made by the assessee for warranty is not excessive and unreasonable.
2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this issue is now covered in favour of the assessee by the judgment of Hon'ble Apex Court rendered in the case of Rotork Controls (India) Ltd. (supra). There is no dispute on this aspect also that the method of accounting adopted by the assessee for this year regarding making provision in respect of warranty expenses is consistently followed by the assessee in the subsequent years. Regarding the estimation of warranty provisions also, it is seen that the same is not excessive as compared to the actual expenditure on this account. Considering all these facts, we do not find any reason to interfere in the order of Ld. CIT(A). 2.4 In the result, appeal of the revenue is dismissed.
3. Now, we take up the appeal of the revenue for the assessment year 2006-07. In this year also, only one effective ground has been raised by the revenue which is as under:
"1 . On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 48,61, 158/- being disallowance of warranty provision debited to spares 4 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 account , contrary to auditor's finding in the Audit report that it was in the nature of contingent liability.
2. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer.
Relief claimed in appeal.
The order of the CIT(A) on the issues raised in the aforesaid Grounds be set aside and that of the Assessing Officer be restored."
3.1 It was agreed by both the sides that this issue is identical to the issue raised by the revenue in the appeal for the assessment year 2005-06 and the same can be decided on similar lines.
3.2 In that year, we have held as per para 2.3 above that no interference is called for in the order of Ld. CIT(A) and on the same lines, we hold in the present year also that no interference is called for in the order of Ld. CIT(A) on this issue.
3.3 In the result, the appeal of the revenue for this year also is dismissed.
4. Now, we take up the assessee's appeal for the assessment year 2006-07 in I.T.A.No. 3254/ahd/2009.
4.1 Ground No.1 is general.
4.2 Ground No.2 is as under:
"2. The Hon'ble CIT(A) has erred in confirming the disallowance of Rs.4,54,2207- u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Rules. It is submitted that the disallowance is uncalled for and be directed to be deleted."
4.2.1 It was submitted by the Ld. A.R. that as per the judgment of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Manufacturing Pvt. Ltd. Vs DCIT as reported in 328 ITR 81, Rule 8D is prospective and the same can be invoked in assessment year 2008-09 and afterwards. It was further submitted that in the present case, the A.O. has 5 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 invoked Rule 8D which is not justified. He further submitted that the assessee company had substantial own funds of Rs.83.89 crores whereas, investment in shares is amounting only to the tune of Rs.1.99 crores. He further submitted that in the preceding year also, there was substantial interest free fund of Rs.77.45 crores whereas, the investment in that year was Rs.1.02 crores only. He further submitted that new shares purchased during the present year have been acquired from internal accrual because the profits of the present year is of Rs.2.83 crores and Rs.2.55 crores in the preceding year. He submitted that in the light of these facts, no disallowance can be made in respect of interest expenditure in connection with making investment in shares. He submitted that the A.O. has made disallowance of Rs.3,51,407/- on account of interests disallowance, which should be deleted in full. Regarding the disallowance made by the A.O. in respect of administrative expenses, it was submitted that as per this judgment of Hon'ble Bombay High Court, only reasonable disallowance can be made.
4.2.2 Ld. D.R. supported the orders of authorities below. 4.2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgement cited by the Ld. A.R. Considering the facts of the present case, it has to be accepted that no interest bearing borrowed funds were used for investment in shares and, therefore, no disallowance is called for out of the interest expenditure. As per this judgment of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Manufacturing Pvt. Ltd. (supra), Rule 8D is not applicable in the present case because assessment year involved is assessment year 2006-07. Still some disallowance u/s 14A out of the administrative expenses is called for. Normally we restore such matters to the file of the A.O. for a fresh 6 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 decision but considering smallness of the amount of disallowance made by the A.O. regarding administrative expenses of Rs.1,02,484/- we feel that an estimated disallowance could be confirmed on reasonable basis and no effective purpose will be served by restoring this matter back to the file of the A.O. Considering the facts of the present case,. We feel that disallowance of Rs.50,000/- out of administrative expenses will meet the ends of justice. We hold accordingly. This ground is partly allowed.
4.3 Ground No.3 is as under:
"3. The Hon'ble CIT (A) has erred in confirming the disallowance of Rs.1,09,16,495/-being export commission paid to four parties. Your appellant submits that the same was paid for securing export orders through agents who assisted in bidding, technical evaluation, price negotiation, liaison with customers, collection of outstanding etc. Commission paid is wholly and exclusively for the purpose of, business, be directed to be allowed as claimed. It be held so now."
4.3.1 Brief facts till the assessment stage are noted by Ld. CIT(A) in para 4 of his order which is reproduced below:
"4. The next ground of appeal is regarding disallowance of export commission of Rs.1,09,16,495/-. During the year, appellant had debited commission expenses of Rs.1,09,16,495/- as under in respect of exports to Bangladesh :-
S. N o. Name of person Amount (Rs.)
1 Marfatia & Co 4416495
2 Soma Mukherjee 500000
3 Fatima S Broachwala 3000000
4 Saifuddin F Broachwala 3000000
Total 10916495
7 I.T.A.No.3254/Ahd/2009
I.T.A.No.36,37/Ahd/2010
On being asked to furnish details of export turnover, on which the said commission was claimed to have been paid, appellant submitted that during the year, it had made export sale of 13 RSL machines worth Rs.2,68,28,602/- and spares worth Rs.81,58,230/- to M/s. NAMNAM/MHMP, Dhaka, Bangladesh. On this export turnover of Rs.3,91,76,103/-, appellant had claimed that export commission of Rs.1,09,16,495/- was paid to above mentioned four persons. The Assessing Officer noted that appellant had claimed commission payment of about 30% of the total export turnover and the so called commission was without any written contract. In response to AO's proposal to disallow the commission, by referring to the fact that commission on a single order had been paid to four different persons without any basis and the appellant had failed to furnish any documentary evidence, appellant contended that export orders were secured through commission agents, who assisted it in bidding, technical evaluation, price negotiation and liaison with customers, since it did not have any office in Bangladesh. Appellant contended that the agents had relationship with Bangladesh customers and hence their services were helpful in securing the order. As per appellant, the agents also visited Bangladesh on its behalf and IDS was deducted by the appellant from the payments made. Details such as PAN No., address and confirmation from the agents were filed. Appellant contended that due to engaging the commission agents, it could fetch better price with much higher profitability than that realized in domestic sales. The Assessing Officer observed that the contention of appellant about agents assisting it in bidding, technical evaluation, price negotiations and liaison with customers was unsubstantiated and in spite of adequate opportunities to put forth documentary evidences in support of this contention, no evidences other than copy of handwritten debit note of M/s. Marfatia & Co. could be submitted. Assessing Officer further observed that the contention about agent visiting Bangladesh on its behalf also remained unsubstantiated. Assessing Officer further observed that in spite of being specifically asked, appellant failed to give any basis for bifurcation of the commission on a single order between four different agents and no details of specific services rendered by each of these agents were furnished. Also, no details of any qualification or past experience in similar line for Soma Mukherjee, Fatima S. Broachwala and Saifuddin F. Broachwala were furnished. Assessing Officer also observed that non collection of service tax 8 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 from payments made to three persons showed that no services were rendered by these persons and the payments were in the nature of gratuitous payments. Assessing Officer also observed that the fact that appellant was able to charge premium of 800 to 900% of the domestic sale value of spares indicated that the payments called 'export commission' were actually of the nature that attract provisions of Explanation to section 37(1). Assessing Officer disallowed export commission of Rs.1,09,16,495/-."
4.3.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
4.3.3 In the course of hearing before us, it was submitted by the Ld. A.R. that this disallowance was made by the A.O. and confirmed by CIT(A) mainly on this basis that the assessee could not bring on record correspondence with the Principal or the concerned agent or any confirmation from principal / customer regarding involvement of agent and the assessee could not produce any correspondence with the agent also. He submitted that during the course of assessment proceedings and during the course of appellate proceedings before ld. CIT(A), the correspondence of the assessee with the agent could not be brought on record because the same were lying with the Managing Director and he was sick and ultimately expired but now, some of these correspondence could be located while searching his cupboards etc and since it goes to the root of the matter, the same could be admitted as additional evidence. Ld. D.R. did not have any serious objection and since these additional evidences go to the root of the matter to decide as to whether any services were rendered by the agent or not, we admit these additional evidences. 4.3.4 It was further submitted by the Ld. A.R. that as per these correspondence of the assessee with the Agent M/s. Marfatia & Col, it can be seen that they were acting as the agents of the assessee company 9 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 for export to Bangladesh and the orders were procured by them and they were also monitoring, commissioning the equipment at the buyer's end and were taking up the matter with the assessee for solving out the problems of the buyer. Regarding the second objection of the revenue that the payments were made to four different persons, it was submitted that the payments were made to different persons as per the instructions of the agent M/s. Marfatia & Co. as per letter dated 30.06.2005 as per which, they have requested for payment of Rs.46,78,986/- to them and Rs.5 lacs to Soma Mukherjee and Rs.30 lacs each to Fatima S Broachwala and Saifuddin F Broachwala. He submitted that assessee is concerned with the services and payment for that. The services were rendered by M/s. Marfatia & Co and if he in turn has taken help form others and instead of making payment directly to them, he asked the assessee to make direct payments to those persons in part, then no adverse inference should be drawn against the assessee on the basis of such direct payments to other persons who had rendered services to the assessee through M/s. Marfatia & Co. (agent). It is submitted that this can be explained by a hypothetical example. Suppose, a person 'A' goes to a restaurant and order for some drinks, Chinese dishes, Indian dishes and some ice creams from that restaurant. This restaurant offers Indian dishes from own sources and out sources the balance items and for the same the restaurant presents four bills including one bill of the restaurant and three bills of the outsiders and ask 'A' to make payment of the entire amount, the same is equivalent to the present case and since those things in a restaurant is happening day in and day out, no adverse inference should be drawn against the us on this account that part payments were made to three different persons. As against this, it was submitted by the 10 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 Ld. D.R. that the assessee could not establish rendering of services, therefore, no interference is called for in the order of ld. CIT(A). 4.3.5 Ld. D.R. supported the orders of authorities below. Regarding additional evidences submitted by the Ld. A.R., it was submitted by him that these are self serving documents and hence, no interference is called for in the order of Ld. CIT(A) on this issue.
4.3.6 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that there is no dispute regarding this aspect that for the first time in this year, assessee has made export worth Rs.268.28 lacs to Bangladesh on account of sale of BRFL machine and also exported spares worth Rs.81.58 lacs to Bangladesh. In this manner there is export turnover of Rs.391.76 lacs. Against this export, the assessee has claimed deduction on account of commission payment of Rs.1,09,16,495/-. This claim of the assessee was rejected by the A.O. mainly on this basis that the assessee could not produce any evidence regarding actual rendering of any services by the agent. The 2nd objection of the A.O. is that the assessee has failed to give any basis for the bifurcation of the commission of a single order between four different agents. In the course of hearing before us, Ld. A.R. has submitted some additional evidences which were admitted by us in view of this fact that the same go to the root of the matter and, therefore, admitted. As per these additional evidences, it is seen that these are correspondence between the assessee and the agent M/s. Marfatia & Co. during July 2004 to June 2005. The agent has intimated the assessee that they are having very good contacts in Bangladesh and they are aware of the work contract awarded for underground mining project of Bangladesh to a Korean company and this company requires some mining machinery and for the same, the agent has 11 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 intimated the assessee company that if the assessee is interested, they can procure orders for the assessee from Korean company. In reply, the assessee company sent the required product literature and other details and thereafter, this agent intimated the assessee that product literature was forwarded by them to the Korean company. They also asked the assessee company to quote the payment terms and Despatch schedule etc. There are other letters in this connection between the assessee and the agent and as per letter dated 30.06.2005, the agent M/s. Marfatia & Co. made a request to the assessee that since they cannot alone handle the whole project, there were some other persons also involved in the execution of this contract and, therefore, they have requested the assessee company to make payment of Rs.65 lacs to three different persons and only the balance amount of Rs.46,78,986/- was to be paid to M/s. Marfatia & Co. The assessee made the payments accordingly. Considering all these facts, we are satisfied that the assessee have brought on record sufficient material in support of this contention that services were rendered by the agent. Regarding this aspect that on what basis the payment were made to four different persons in connection with single order, we are satisfied that for this also, the assessee has furnished a reasonable explanation that the entire project could not be handled by M/s. Marfatia & Co. and they have engaged services of three other persons and as per their terms between themselves, the payment was distributed by them among themselves. It makes no difference to the assessee as to whether the entire payment was made to M/s. Marfatia & Co. and thereafter, he distributes the amount to three different persons or whether the agent request the assessee to make separate payments to all the four persons. It has no bearing on the allowability of the commission expenses, once it is found that the services were rendered and 12 I.T.A.No.3254/Ahd/2009 I.T.A.No.36,37/Ahd/2010 commissions is paid, the same should be allowed as business expenses. Therefore, we delete this disallowance. This ground of the assessee is allowed.
4.5 In the result, appeal of the assessee is partly allowed.
5. In the combined result, both the appeals of the revenue in I.T.A.Nos. 36 & 37/Ahd/2010 are dismissed and the appeal of the assessee in I.T.A.No. 3254/Ahd/2009 is partly allowed.
6. Order pronounced in the open court on the date mentioned hereinabove.
Sd./- Sd./-
(KUL BHARAT) (A. K. GARODIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad By order
6. The Guard File
AR,ITAT,Ahmedabad
1. Date of dictation.........24/5
2. Date on which the typed draft is placed before the Dictating Member... 25/5....Other Member ............
3. Date on which the approved draft comes to the Sr. P.S./P.S. 28/5
4. Date on which the fair order is placed before the Dictating Member for pronouncement ......31/05/2012
5. Date on which the fair order comes back to the Sr. P.S./P.S.31/5
6. Date on which the file goes to the Bench Clerk ......04/06/2012
7. Date on which the file goes to the Head Clerk .......................
8. The date on which the file goes to the Assistant Registrar for signature on the order .........................
9. Date of Despatch of the order. ......................