Income Tax Appellate Tribunal - Bangalore
M/S. Fibres & Fabrics International ... vs Department Of Income Tax on 15 October, 2012
Page 1 of 58 1 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'B'
BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT
AND SHRI GEORGE GEORGE K, J.M
ITA Nos.1242 & 1243/Bang/2010
(Assessment years 2006-07 & 2007-08)
M/s Fibres & Fibres The Asst.
International Pvt. Ltd., No.21, Commissioner of
E-1, II Phase, Peenya vs Income Tax, Circle-
Industrial Area, 11(3), Bangalore.
Bangalore-560 058.
PA No.AAACR 6841 M
(Appellant) (Respondent)
ITA Nos.1269 & 1270/Bang/2010
(Assessment Years 2006-07 & 2007-08)
The Deputy M/s Fibres & Fibres
Commissioner of Income International Pvt. Ltd.,
Tax, Circle-11(3), vs No.21, E-1, II Phase,
Bangalore. Peenya Industrial Area,
Bangalore-560 058.
PA No.AAACR 6841 M
(Appellant) (Respondent)
ITA No. 141/Bang/2011
(Asst. Year 2006-07)
The Deputy M/s Fibres & Fibres
Commissioner of Income International Pvt. Ltd.,
Tax (International vs No.21, E-1, II Phase,
Taxation), Circle-1(1), Peenya Industrial Area,
Bangalore. Bangalore-560 058.
PA No.AAACR 6841 M
(Appellant) (Respondent)
Date of Hearing : 15.10.2012
Date of Pronouncement : 30.11.2012
Page 2 of 58 2 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
Assessee by : Shri Nageshwar Rao, Advocate
revenue by : Shri Farhad Hussai Qureshi, CIT-II &
Shri Jayaram Raipuria, ACIT
ORDER
PER BENCH :
These five appeals filed by the assessee company as well as the Revenue are directed against the orders of CIT (A)-I and CIT (A)-IV, Bangalore dated 11.8.2010 and 29.11.2010 respectively. The relevant assessment years are 2006-07 and 2007-08.
I. ITA Nos.1242 & 1243/B/10 - By the assessee:
A.Y 2006-07 - ITA NO.1242/B/10 - (assessee's appeal):
2. The assessee has raised twelve grounds in an illustrative and narrative manner. Ground Nos.1, 10, 11 and 12 are general in nature and since no specific issues involved, they have become inconsequential. Ground No.9 is not maintainable as charging of interest u/s 234B and 234C of the Act is mandatory and consequential in nature. The remaining grounds are relating to the various issues, namely:
(1) (Ground No.2) that the authorities below erred in disallowing Rs.10,68,71,384/- being 'Info & tracking of delivery schedules' paid to South Elegant Limited (SEL);
(2) (Ground Nos. 3,4 & 5) that the authorities below were not justified in disallowing Rs.18,35,79,000/- paid to SEL as 'termination fees;
(3) (ground Nos.6 & 7) that the authorities below erred in disallowing/restricting the claims under various heads, namely:Page 3 of 58 3 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
Under the head Disallowed by the AO Restricted to by CIT(A) Staff Welfare expenses Rs.16,80,270/- Rs.10,00,000/- Administration Exp. Others Rs.16,64,580/- Rs. 9,00,000/-
(4) (Ground No.8) that the order of the authority below was bad in law that during the course of assessment proceeding, no opportunity was given on the additions made.
A.Y 2007-08- ITA NO.1243/B/10- (assessee's appeal):
3. For this assessment year as well, the assessee has raised twelve grounds, in which ground Nos.1, 2, 10, 11 & 12 being general in nature, they do not survive for adjudication. The remaining grounds relate to the disallowances/restricting of the disallowance to 15% of various claims of the assessee under different heads, namely:
Under the head Disallowed by the AO Restricted to by CIT(A) at 15% Staff Welfare expenses Rs.70,38,859/- Rs.26,39,572/-
Others Rs. 8,33,587/- Rs. 5,00,152/- Water charges Rs, 5,19,993/- Rs. 2,59,996/- Travel & conveyance Rs.22,98,780/- Rs.11,49,390/- Sample Exp & business Promotion expenses Rs.10,00,000/- Rs. 5,00,000/- Repairs & maintenance Rs. 2,20,986/- Rs. 1,00,000/- II. ITA Nos.1269 & 1270/ B/10 & 141/11- By the Revenue:
A.Y 2006-07- ITA No.1269/B/10 - (Revenue's appeal):
4. The Revenue has raised ten grounds, out of which, ground Nos.1,2, 9 & 10 were general in nature and, therefore, they have not been addressed to. The remaining grounds relate to the following issues, namely:Page 4 of 58 4 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
(1) (Ground No.3) that the CIT (A) erred in giving relief of Rs.6,80,255/- under the head 'staff welfare expenses' as against the disallowance of Rs.16,80,270/-;
(2) (ground No.4) that the CIT (A) erred in giving relief of Rs.7,64,580/-
under the head 'Others' as against Rs.16,64,580/- disallowed by the AO;
(3) (ground No.5) that the CIT (A) also erred in allowing Rs.8,14,25,233/- being remuneration to the MD of the assessee as against the disallowance of the entire sum; & (4) (ground Nos.6,7 & 8) that the CIT (A) erred in directing the AO to adopt the municipal value of the rent, if it is in excess of the rent received.
ITA No.141/B/11 - AY 2006-07(Revenue's appeal):
5. In this appeal, the Revenue has raised four grounds, in which, ground No.1 is general in nature and, therefore, it doesn't survive for adjudication. The remaining grounds are as under:
(1) that the CIT (A) erred in holding that the amount was taxed in the proceedings u/s 143 (3) of the Act and, therefore, is not taxable u/s 201 of the Act. This is a separate proceedings altogether;
- that the CIT (A) erred in not appreciating that s. 37(1) and s 40(a)(i) are not mutually exclusive.
A.Y 2007-08- ITA NO.1270/B/10 - (Revenue's appeal):
6. As in last assessment year, the Revenue has raised ten grounds, out of which, ground Nos.1, 2, 9 & 10 do not qualify for adjudication as no specific issues have been raised. In the remaining grounds, the issues raised are reformulated as under:
Page 5 of 58 5 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
Under the head Disallowed by the AO Relief allowed by CIT(A) (gr.3) Staff Welfare Exp. Rs.7038859 restricted the addition to 15% (Gr.4) Others Rs. 833587 - do -
(Gr.5) Water charges Rs. 519993 - do -
(Gr.6) Travel & conveyance Rs.2298780 - do -
(Gr.7) Sample exp. & business
Promotion expenses Rs.1000000 Rs.5,00,000
(Gr.8) Customs duty on
Machinery Rs. 220986 Rs.1,00,000
7. As the issues raised in these appeals being inter-linked and pertaining to the same assessee, for the sake of convenience, they were heard, considered together and disposed off, in this common order.
8. Briefly stated, the assessee company ['the assessee' in short] is engaged in the business of manufacture and export of ready made garments.
For both the assessment years, the AO had, for the detailed reasons recorded in the assessment orders under dispute, made various additions/disallowances. Aggrieved by the impugned orders of the AO, the assessee took up the issues with the CIT (A) for relief. The CIT (A) had, in his consolidated order, confirmed some of the additions and also gave partial reliefs to the assessee under various heads. Agitated, the assessee has come up with the present appeals.
8.1. Likewise, the Revenue has also come up with the appeals against the findings of the CsIT (A) on certain issues for both the AYs under consideration.
Page 6 of 58 6 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
9. Before venturing to adjudicate the issues raised by both the parties, we would like to place it on record that the assessee's appeals for the AYs 2006-07 and 2007-08 have come up before the Hon'ble earlier Bench of this Tribunal for adjudication and the Hon'ble Bench in its findings dated 28.2.2011 had remitted back the issues to the desk of the AO with the following findings:
"3. As seen from the records and the grounds of appeal raised by the assessee, the disallowances are of expenditure towards termination fee, expenditure under the head 'handling and tracking of delivery schedule' 25% of the staff welfare expenses, 20% of expenses debited under the head 'others', difference in rent and disallowance of remuneration paid to managing director. At the time of hearing, Shri Srinivas Ashok Kamath, learned Counsel for the assessee, has filed additional evidence seeking admission of the same. On going through the said additional evidence, we find that it relates to transactions of the assessee with 477 parties which was not filed before the AO or the CIT (A). It was submitted by the learned counsel for the assessee that admission of this evidence is essential for proper adjudication of the issue. As this voluminous evidence needs verification by the AO, we deem it fit and proper to remand this issue to the file of the AO with a direction to the assessee to produce these additional evidences before him and the AO is directed to reconsider the issue in accordance with law........."
9.1. In the meanwhile, the assessee came up with a Misc. Application [M.P. No.50/B/11 dated 9.11.2011] wherein it has been claimed that in the order of the earlier Bench (supra), an inadvertent error had crept in, which according to the assessee, requires rectification. To justify its claim, the Page 7 of 58 7 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 assessee had submitted that the AO had disallowed the assessee's claim of expenditure of (i) handling and tracking of delivery schedule; and (ii) termination fee for the termination of such services etc. While presenting the assessee's case before the earlier Bench, the learned A R had filed additional evidence, certifying the genuineness of transaction entered into between the assessee and SEL. The additional evidence sought to be produced, according to the assessee, comprised of only two certificates from SEL. However, the earlier Bench, according to the assessee, had remitted back the issue to the file of the AO on the premise that the additional evidence submitted by the assessee of its transactions with 477 parties was voluminous and thereby required verification by the AO etc. However, according to the assessee, the confirmation was merely contained a list of 477 orders which was inadvertently misconstrued by the earlier Bench as being 477 transactions undertaken by the assessee. Thus, the earlier Bench had inadvertently misunderstood the nature of the additional evidence as voluminous, which requires to be examined by the AO etc., whereas such an additional evidence merely comprised of two certificates from SEL.
9.2. In conclusion, it was pointed out that the issue was remanded back to the file of the AO for verification by the earlier Bench inadvertently on the basis of incorrect interpretation. It was also submitted that order of the Tribunal dated 28.2.2011 in assessee's appeals were passed without noticing the appeals filed by the Revenue. Therefore, it was prayed that the order of the Hon'ble earlier Bench be recalled and the appeals may be posted for further hearing along with the Revenue's Page 8 of 58 8 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 appeals. The Tribunal vide its order dated 13.1.2012 in MP No.50(B)/2011 recalled its earlier order dated 28.2.12011. The relevant findings of the Tribunal in M.A No. 50(B)/2010 dated 13.1.12 read as follows:
"This Miscellaneous Application has been filed by the assessee to rectify certain mistakes which have crept into the order of the Tribunal dated 28.2.2011 in ITA Nos.1242 & 1243 (B)/2010 for the assessment years 2006-07 & 2007-08 respectively.
2. In addition to what is stated in the miscellaneous petition, the learned counsel for the assessee also brought to our notice that the revenue has also filed appeals for the very same assessment years, in which the common issues are involved and they are still pending before the Tribunal.
2.1. The learned counsel for the assessee also filed copied of the Form No.36, filed by the revenue. Taking note of these facts, we are inclined to recall the order of the Tribunal for both the assessment years as it has been held by the Hon'ble Supreme Court that both the assessee as well as the revenue's appeals have to be heard and disposed of together when the issues involved are common.
3. It is pertinent to mention here that the pendency of the revenue's appeal before the Tribunal for the very same assessment years were not brought to the notice of the Bench at the time of hearing of these appeals. However, taking note of the evidence filed by the learned counsel for the assessee before us, we are inclined to recall the order of the Tribunal dated 28.2.2011. The registry is directed to post the appeals in due course for hearing,"Page 9 of 58 9 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
9.3. Consequently, these appeals have come up before this Bench for adjudication. Let us now proceed to deal with the issues raised by the assessee, chronologically, as under:
A.Y 2006-07- ITA NO.1242/B/10 (assessee's appeal):
10. For the sake of clarity, both the issues, namely, disallowances of (i) Info & tracking schedules payment of Rs.10.68 crores to SEL; and (ii) termination charges of Rs.18.35 crores to SEL are taken up together for consideration.
10.1. In respect of the disallowance of termination fee of Rs.18.35 crores paid to SEL, it was the claim of the assessee that it had entered into an agreement dated 1.7.2002 with SEL for availing the services on information and tracking of delivery schedules and that at the time of entering into the said agreement, three points, namely, duration, fee and termination were discussed and agreed to by both the parties. Therefore, it was claimed, the said item of expenditure was incurred wholly and fully for the purposes of business and that there was no need for any disallowance under this head. With regard to the disallowance of expenditure of Rs.10.68 crores under the head 'Info and tracking and delivery schedule', it was contended by the assessee that major part of the amount was paid to SEL as the said SEL had necessary infrastructure and capacity to render services required by the assessee and that the services rendered by SEL were really warranting the payments as agreed upon.
Page 10 of 58 10 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-1110.2. However, the AO had, in his remand report to the first appellate authority, disputed that during the course of assessment proceedings, no claim was made by the assessee that it had entered into an agreement with SEL for availing the services on information and tracking of deliveries schedules. It was, further, asserted by the AO that even assuming that such an agreement existed; the assessee had not produced any original agreement for verification. It was, further, claimed by the AO that during the course of assessment proceedings, the assessee filed certain details and documents which included details of 'termination fees' paid and a copy of the relevant agreement, but, failed to produce the original service agreement dated 1.7.2002 for verification. 10.3. Giving detailed events after the assessee's premises was subjected to a survey action u/s 133A of the Act on 5.11.2009 in the remand report which has been extracted verbatim by the CIT (A) in his appellate order under dispute; the AO concluded that the transactions were sham and non-genuine. The AO, in his assessment order, held that the assessee had no other valid proof except the transfer of money through banking channels which did not render the payment being genuine. He had also concluded that the contract was not legal being executed on a plain paper and the authorized signatories and witnesses not being identifiable for examination, the claim of the assessee that the payment was on the basis of contract itself was doubtful. He had, further, pointed out that the relationship between the payer and the payees was not a live one because in spite of agreements between the parties, the payee - SEL never visited the premises of the assessee in India and such type of non-living, non-existent Page 11 of 58 11 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 relationship itself gives a hunch that the payment was not genuine and the contract was only a window dressing to cover up the non-genuine payment. It was, further, pointed out by the AO that even if the payment was through banking channel, it did not prove that the payment was for business purpose and cannot be allowed u/s 37(1) of the Act. It was also stressed that in any case the assessee while crediting the amount to the account of the non- resident SEL in May, 2006, had not filed any application u/s 195(2) of the Act and, therefore, the entire sum was to be added u/s 40(a)(i) of the Act. He had relied on the ruling of the Hon'ble jurisdictional High Court in the case of CIT v. M/s. Samsung Electronics reported in (2009) 320 ITR 209 (Kar).
10.4. The affirmation of the AO has been strongly denied by the assessee in its rejoinder to the remand report as recorded in the order of the CIT (A).
10.5. After due consideration of rival submissions, the CIT (A) had rejected the contentions of the assessee and upheld the additions made on twin issues, namely, (i) Info & tracking of delivery schedules paid to SEL; and
(ii) termination charges paid to SEL. The relevant portions of reasons recorded by the CIT (A) are extracted as below:
"5.5.1........ The fact is that such expenses have been claimed by the appellant in past i.e., in AY 2003-04, 2004-05 and 2005-06 and also allowed by the Department. The fact is also that survey u/s 133A(1) of I.T. Act was conducted in the business premises of the assessee on 5.11.2009 i.e., during the course of assessment proceeding, in which neither copy nor original Page 12 of 58 12 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 agreement dated 1.7.2002 nor the copy or the original of the scheme of arrangement dated 1.4.2005 or the copy / original of termination agreement could be found which itself could be held as an evidence that payments were for some other purpose (because payment is proved) and had not been on the basis of the alleged contract or scheme of arrangement. Secondly, such a belief is also corroborated if one looks into the statement recorded u/s 131 of I. T. Act from Mr. Kothari, CMD who expressed his ignorance about the existence of any such contract. Mr. Kothari is eulogized by the AR as an all knowing person having full control over the activities of the appellant even if sitting in Italy coming to India for a few days having the knowledge of all it bits of the company for which he is being paid a huge salary of 8.14 crores per annum. If such a person says in clear terms that he does not remember about any agreement between SEL and the appellant, it has to be held that no agreement existed and the payment is not for the purpose of business at all. Thirdly, even if it is agreed that there is payment, it is necessary to examine whether the payee was capable of doing such business so as to make it eligible to receive such payment. The AR's argument is that no proof was asked by the AO to provide the same and hence not provided. But I am not convinced with such an argument. During the course of assessment proceeding, as can be seen from assessment order, the AO since the post survey recording of statement of CMD u/s 131, had insisted for proofs of the existence of the company SEL and had also called to show proof that such companies own manpower, machineries and technology to provide the info and tracking of delivery schedules and therefore the AR is wrong in alleging that no specific proof was required by the AO. In fact, the AO in the assessment order speaks about some discreet enquiry conducted in respect of SEL which revealed that the SEL is likely to be non-existent. Such allegation itself would have roused the appellant at the Page 13 of 58 13 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 appellate stage to show sufficient proofs and provide satisfactory explanation that SEL exists and it is financially sound and stable and carried on activities in the nature of customer tacking in Europe scientifically. Such could have been done by providing copies of incorporation certificate, commencement of business certificates, Memorandum and Articles of Associations, exact location of the industry or place of business, the nature of its activity, the financial statement, the audit report, its manpower with qualification of each employee and so on & so forth which a prudent businessman would definitely ask and require before assigning any contract of huge amount of Rs.10 crores unless the other party is a dummy or / and the contract is non-existent. However, nothing of such sort had been done. Even at rejoinder stage, even if the AO alleged. SEL to be dummy one having no activity at all in the remand report, no additional evidence had been furnished by the AR to disprove such allegation. Instead, it has been alleged that the AO is biased. I see no such bias. I see AO has performed his duties of investigation impartially. He has shifted the burden of proof to the appellant to prove the capacity of SEL to perform the task of tracking the customers and delivery of goods of appellant to them. The onus, so shifted has not been attended to by the appellant at all. Thus, I wonder what prevented the appellant to file such proofs, viz., the Certificate of ROC, copy of Memorandum, some activity chart, some certificates of proof of manufacture or services rendered by the SEL from Hong Kong Government officials to at least show that such company existed at the relevant period and was really capable of delivering the goods and services for which purpose the alleged agreement was made with it by the appellant. In the absence of such relevant evidences, I have no other option but to treat such payment as not for the purpose of business and, hence, not allowable as revenue expenditure u/s 37(i) of I.T Act. I confirm the addition Page 14 of 58 14 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 and dismiss the ground of appeal. It may be mentioned that I have not entered upon the dispute whether the payment is allowable or disallowable u/s 40(a)(i) of I.T. Act or not.
5.5.2. For coming to such conclusion of confirming the addition, I also rely upon another point brought out by the AO. Admittedly the contract is in plain paper and produced at a much later stage of which the AR is of the opinion, does not debar it to be a valid contract i.e., an agreement enforceable in the court of law. It is also argued by the A R that since the stamp scam in Karnataka, it has become the practice here to make contracts in plain paper. However, I observe such is not truth. In fact, I find the appellant has belittled the value of stamp paper. Stamp paper is defined in Civil Procedure Code (5 of 1908) vide order VII Rule 11C as a paper containing an embossed or impressed mark to certify that the amount stated in it has been paid to Government. Since duty is paid via stamp paper to the government, the Government in turn recognizes the writings on such paper which may be on matters of transfer of property, shares, debentures, insurance policies and also execution of contract as evidence in the court of law since the paper bears an impression, an official mark or seal of Government vide section 82 of Indian Evidence Act, 1872 and section 10 of Indian Stamp Act, 1899. In banking parlance, stamp duty is a kind of legal/court fee payable by affixing stamps on the documents under the provisions of Stamp Act, 1899 and any document/instruments not stamped adequately and properly is not acceptable in a court of law. As per Taxation law, if a document dealing with such matters as transfer of property, shares, contract of high value or even any legal proceedings or private instrument of almost any nature whatsoever are written is unstamped, such document becomes invalid, vide commentaries on - The Laws of England, page 312 (1765) by William Page 15 of 58 15 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 Blackstone. Thus, what is being pointed out above is that a contract on stamp paper is suo moto recognized as evidence in a court of law whereas if it is on paper, it loses its enforceability and, therefore, cannot be held as a contract at all. In fact contract has been defined as an enforceable agreement. The agreement to become enforceable must possess certain characteristics viz.,
(i) It must be in writing because writing provides exact meaning to the terms of contract which need interpretation at the time of dispute;
(ii) It must be signed by the contracting parties who are competent to contract;
(iii) Two witnesses must also sign such document;
(iv) The terms of contract must not be opposed to law or public policy;
(v) The contract must conform to the legal
formalities;
In this case what the AO points out that the legal
formalities are not fulfilled. One of such formality as to immovable properties is of compulsory registration u/s 17A of Indian Registration Act. In respect of other transactions/documents and contract which involves high values / denomination, the minimum legal formality is that it should be on stamp paper either executed before a notary or a Executive Magistrate who would put his seal and stamp as well as reference no date, place etc., so that it gets the approval and seal of legality. Unless such is done, the contract / document have to be inferred as invalid or void. In this case, the contract is thus void and consequently the payments made thereon is also illegal and, hence, disallowable. While pondering over such high value plain paper void agreement between SEL & the appellant enlightenment dawned upon me that, it is not easy to get backdated stamp papers, that too when alleged different agreements having different dates viz., 01.07.2002, 01.04.2005 and at least the authorized Page 16 of 58 16 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 signatory has also to put his signature on the stamp vendors register in token of having purchased that paper with date that too in the year of 2009. Since such illegal task involved insurmountable problem, the invention (necessity being its mother) was made of plain paper agreement to substitute the agreement not available (non-existent) during the time of survey which probably a prudent businessman will not destroy if actually made because it involved payments above 28 crores unless it can be assumed that the appellant knew that the payment is not for the purpose of business and for some other purpose not worth remembering even if the sum paid is very high or the same payment is to ones oneself in the garb of a dummy of ones own self. Thus, considering from all possible angles, I conclude that the payment claimed as expenditure paid to SEL deserve to be disallowed. (confirmed Rs.18,35,79,000/- and Rs.10,68,71,384/-)."
10.6. During the course of hearing before us, the learned AR had reiterated more or less what has been represented before the first appellate authority. In furtherance, it was submitted that during the course of survey proceedings, the agreement dated 1.7.2002 and also the letter terminating services of SEL could not be produced for verification as they have been dislocated. However, he had asserted that those documents were available with the Department even before the survey operation. Thus, the learned AR argued, the conclusion of the learned CIT (A) was based only on assumption, presumption and contrary to the facts. He had, further, contradicted the presumption of the CIT (A) that the agreement was not genuine as it was executed on a plain paper instead of a stamp paper. He had also disowned the theory of the CIT (A) that the agreement was made on a plain paper as it would be a problem to obtain back dated stamp paper. The Page 17 of 58 17 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 learned AR had refused to buy the CIT (A)'s philosophy that the non- existence of the agreement came to light only during the survey proceedings and on demand a copy of the non-existent plain paper agreement was produced etc. Instead, he had categorically advocated that the copies of the agreement as well as the termination letter were with the Department much before the survey proceedings initiated. With regard to the CIT (A)'s allegation of (i)non-production of Certificate of ROC, (ii) Memorandum of Association, Articles of Association, (iii) Activity chart, (iv) proof of manufacture/service rendered to evidence that SEL was capable of rendering services to the assessee etc., the learned AR had furnished copies of the same for the perusal of the Bench.
10.7. With regard to the accusation of the CIT (A) that the agreement was on a plain paper which was neither stamped nor registered/notarized etc; it was argued by the learned AR that admissibility of a document as evidence in the court of law and proof of its genuineness were two entirely different issues. A genuine document may not be admissible in a Court of law if it does not comply with the requirement of the Evidence Act 1872. However, it was argued, non admissibility in the court of law would not result in the document being construed as not genuine. To strengthen his contentions, the learned A R had placed strong reliance on the following case laws, namely:
(i) Trimex International FZE Ltd v. Vedanta Aluminium Ltd - 2010 3 SCC 1;
(ii) Thiruvengada Pillai v. Navaneethammal & Anr. - Writ petition (Civil) 290 of 2001 dt.19/2/2008 SC Page 18 of 58 18 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 10.8. In respect of the CIT (A)'s findings that discreet enquiry undertaken by the AO revealed that SEL, Hong Kong was likely to be a non-
existent entity, it was argued by the learned AR that no material has been brought on record by the Revenue to substantiate this claim. Further, no information or material evidence relating to discreet enquiry has been provided to the assessee. It was also asserted by the learned AR that this fact has been mentioned before the first appellate authority in no ambiguous terms which has, however, not been considered by the CIT (A). It was, further submitted by the learned AR that no reasonable opportunity was given to the assessee to rebut the serious allegations made by the AO which, according to him, was violative of the principles of natural justice. The learned AR drew the attention of this Bench to the fact that the Hon'ble Bench, during the course of hearing, queried the learned DR/learned Addl. CIT present the out come of such purported enquiry for which the Addl. CIT pleaded his ignorance of any such enquiry, however, averred that some other enquiries were still underway and the result was still awaited etc. It was the contention of the learned A R that even after three years of the initial assessment concluded, the Revenue had not come up with any evidence and, thus, the disallowance made was solely on assumption. Thus, according to the learned AR, the assessment as well as appellate proceedings was concluded merely on suspicion, assumption and without any concrete evidence.
10.9. With regard to the allegation that no evidence was filed either during the course of assessment or appellate proceedings to prove that the amounts were paid and also availed the services rendered by SEL, it was Page 19 of 58 19 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 submitted by the learned AR that the following documents were furnished during the course of assessment proceedings, namely:
(i) Write up on the services rendered by SEL;
(ii) Agreement with SEL
(iii) copies of invoices raised by SEL and Gruyters Agenturen BV;
(iv) Ledger extract of the Info & tracking of delivery schedules;
(v) Details about payments through banking channels; &
(vi) Confirmation for receipt of the amount by SEL and Gruyters Agenturen BV.
10.10. Further, it was submitted that the confirmation received from one of the customers, namely, GSTAR has been filed as additional evidence before this Hon'ble Bench to suggest that the services were provided by SEL. In respect of the Revenue's charge that no correspondence between the assessee and the service provider was filed to prove that the services have been availed of etc., the learned AR averred that a submission dated 8.12.2009 was filed with the AO containing the e-mail correspondence between the assessee and the service provider i.e., these were part of the assessment proceedings.
10.11. With regard to (i) details of arriving at the compensation amount & payments made through banking channels; & (ii) the correspondence between the assessee and SEL in relation to termination of the service agreement has not been brought on record etc., the learned AR had vehemently denied the allegations. In fact, he had explained that - Page 20 of 58 20 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
(i) All the information sought was filed with-
(a) the DDIT in 2007 (during the proceedings u/s 201 of the
Act i.e., two years earlier to the survey proceedings and assessment proceedings u/s 143(3) of the Act; &
(b) the AO during the assessment proceedings vide submission dt: 28.10.2009.
(ii) also a list of following documents were filed during the assessment proceedings:
(a) calculation of quantum of termination fee;
(b) details of payment through banking channels;
(c) notice for termination of service agreement;
(d) consent letter from SEL Further, the above information was once again filed with the AO pursuant to the survey proceedings vide submission dt:
27.11.2009 10.12. With regard to the Revenue's allegation that the assessee's sister concern i.e., Jeans Knit Private Limited [JKPL] had paid commission to SEL which had same beneficiary as SEL during the AY 2006-07 under consideration, the learned AR submitted, without prejudice, that this is a new allegation raised by the Addl. CIT before this Bench which has no relevance or basis whatsoever. During the assessment year 2006-07 under consideration, no payment was made by JKPL to SEL. The information provided (in the tabulation) in the Addl. CIT's submission is incorrect.
Further, it was submitted that the nature of services provided by SEL to the assessee was different from those provided by SEL to JKPL i.e., SEL was assisting JKPL in procuring fabrics and accessories whereas SEL was assisting the assessee in procuring sales orders. In respect of the allegation Page 21 of 58 21 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 that the management of the assessee was not aware of the ownership/management details of SEL, it was submitted that on specific requirement was indicated in the appellate order, the assessee has now obtained the ownership details and furnished the same before this Bench and also to the revenue.
10.13. With regard to the Revenue's allegation that the assessee was not able to explain why the termination fees had to be paid to Hong Kong entity as per European regulation when the contract was enforceable in Hong Kong, the learned AR submitted that the AO had acknowledged the fact that the services were performed by an European national based in Netherlands. It was the prerogative of the service provider to plan his affairs. In this case, the contract was with Hong Kong entity does not alter the deductibility of expenditure in the hands of the assessee. It was, further, claimed that the fact that even the department had not disputed the providing of service has been rendered in Europe. The bona-fide understanding of the assessee about the termination amount being payable as per European law as well as express provision of the written agreement in good faith would be obvious even from the response to questions recorded during November, 2009. The contract envisages Hong Kong as the jurisdiction with respect to any dispute, given that the contract was entered into with a company incorporated and resident in Hong Kong. The amount paid was deductible as business expenditure and the counter claims of the revenue before this Hon'ble Bench without citing any valid basis was only on mere suspicion and, therefore, untenable.
Page 22 of 58 22 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-1110.14. In respect of the amount paid was deductible as business expenditure and the counter claims of the revenue before this Bench are without any valid basis and the Revenue's objection that the additional evidences furnished at this stage would affect jurisprudence, the learned AR countered by arguing that the additional evidence should be accepted for the following reasons, namely:
(i) these were the documents the CIT (A) had specified in his order which would aid in establishing the genuineness;
(ii) these documents were not available with the assessee during the course of appellate proceedings before the CIT (A);
(iii) these documents clearly demonstrate the existence of SEL and the transactions between the assessee and SEL and, accordingly, further support its genuineness;
Relies on case laws:
• Timken Engineering & Research India Pvt. Ltd. v. DCIT - ITA NO.974/Bang/2008 & ITA NO.983/Bang/2008; • Text Hundred India Pvt. Ltd - ITA No.2077/2010 and ITA No.2065/2010 - Del HC;
• CIT v. Suretech Hospital and Research Centre Ltd 293 ITR 53 (Bom);
• AM Mathur v. DCIT - 308 ITR 160 - ITAT, Indore;
• Rajpal Singh v. ITO - 97 ITD 79 (ITAT, Amritsar).
10.15. With regard to revenue's claim that the assessee had wound up its operations in the AY 2006-07 and JKPL took over the business of the assessee and JKPL continued to pay commission to another entity beneficially owned by Mr. Manfred Gruyters and, accordingly, there was no reason to terminate the service agreement etc., it was contradicted by the learned AR that JKPL and the assessee were independent entities catering Page 23 of 58 23 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 to very different segments. Accordingly, the presumption of JKPL taking over the business of the assessee was factually unfounded as the nature of services rendered by SEL was quite different. Notwithstanding the above, it was submitted that this was a fresh argument as no such argument has been made either during the assessment or appellate proceedings. It was, further, argued that in the assessment order, extracts of the survey conducted on JKPL has been produced, however, the AO had not cited this reason now advanced by the Addl. CIT for disallowance of these amounts.
Accordingly, the learned AR argued that neither the DR nor the Addl. CIT have the jurisdiction to go beyond the orders passed by the AO and the CIT (A) or raise any point different from that considered by the lower authorities. If the DR/ Addl. CIT were to be allowed to take this line of argument, it was claimed by the learned AR, that this would be setting up an altogether new and different case which is not permissible. 10.16. In respect of the Revenue's argument that if the additional evidence were to be accepted, the same should be sent to the AO to examine the issues arising from the evidence filed etc., the learned AR submitted that the CIT (A) had resorted to confirm the disallowance for the alleged two reasons, namely, (i) invalid plain paper agreement; and (ii) void agreement as legal formalities were not followed while entering into such agreement.
10.16.1. In this connection, it was submitted that all the relevant materials necessary for deciding the issues in appeal are now available on Page 24 of 58 24 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 record before this Hon'ble Bench and, therefore, it was pleaded that the revenue should not be allowed to set up a new case.
10.16.2. In the alternative, if the Hon'ble Bench considers it fit to validate the authenticity of the documents now submitted as additional evidence to further support and establish the fact that services have been rendered and the contract was genuine, it was submitted by the learned AR that the issue be restored to the file of the AO with a specific direction to verify the authenticity or otherwise of the additional evidence now produced as the disallowance was confirmed by the CIT (A) only on two grounds cited above.
10.16.3. In conclusion, it was submitted on behalf of the assessee that the documents like invoice copies, summary of invoices, details of payment through banking channel, e-mail correspondence which prove the genuineness of the contract were filed during the course of assessment proceedings and also the AO had the benefit of analyzing the said documents while sending a remand report to the CIT (A). It was, therefore, submitted that if the issue were to be restored back to the file of the AO, specific direction be issued to the AO to confine him to examine the authenticity of the additional evidence alone and arrive at a conclusion. In this connection, the assessee had relied on the ruling of the Hon'ble Bombay High Court in the case of Coca Cola reported in 290 ITR 464 (Bom). Page 25 of 58 25 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 10.17. On the other hand, the learned Addl. CIT/ Special DR had made an elaborate submission on the issue, the substance of which is summed up as under:
- that the AO had queried the veracity of commission payment and termination fee to SEL during the course of assessment and survey proceedings. However, the assessee had chosen not to provide any positive proof for claiming such deductions. The assessee could have given details of services rendered by the commission recipient by giving third party evidence to prove that the commission payment was genuine. However, this has not been precisely done by the assessee;
- that it was natural that the commission payment in international business was a normal business expenditure, however, in the present case, the assessee was not able to explain the reason and to whom the commission was paid;
- that when the alleged entire services were rendered in Holland, the assessee was not able to explain why the payments had to be made to a Hong Kong [HK] entity, whose directors were unknown; and that the assessee had not furnished any detail of ownership of SEL either at assessment or at appellate stage;
- that one Mr. Manfred Gruyters who owned M/s.Gruyters BV Netherlands had received commission in the name of his entity registered in Netherlands. If Mr. Manfred were to be the ultimate owner of SEL, the reason as to why he had to take the commission in Hong Kong instead of in Netherlands and why the assessee had to make the payments in Hong Kong for which, there was no explanation from the assessee;
- that the assessee's sister concern JKPL had started its business during the AY 2006-07 and it had also made commission payments; and that the said commission payment was made to SEL. The assessee has now come up with a theory that the ultimate beneficiary of both M/s.South Elegant Ltd, Page 26 of 58 26 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 Hong Kong and M/s Sharp Eagle Ltd, Hong Kong was Mr. Manfred Gruyters only;
- that during the year under dispute, the assessee had made a commission payment of Rs.10.68 crores to SEL and JKPL also made a payment of Rs.14.75 crores to Sharp Eagle Ltd, H K; and that the moot question is as to why the assessee had to pay a termination fee of Rs.18.5 crores to SEL when the sister concern of the assessee continues to do business with Mr. Manfred Gruyters through another company, M/s. Sharp Eagle Ltd
- that the assessee wound up its business sometime around the AY 2006-07 and JKPL took over the business; that by the AY 2007-08, the assessee wound up its business operations and had only continued to be an entity - leasing factory premises to JKPL and on the contrary JKPL took over the business of the assessee;
- that as per the statement of the M.D of the assessee on oath, they wanted to pay a one-time termination fee and service the market directly by themselves. However, it was noticed that the assessee did not do any direct sourcing; instead, it had routed the same nature of services through JKPL and M/s. Sharp Eagle Ltd. Thus, when the assessee was winding up its business, it did not have any reason to terminate the contract; and that the contract was getting terminated as the assessee wound up its business;
- that the statement of the M D of the assessee was also misleading in as much as the assessee group did not stop conducting business with Mr. Manfred. The entire business turnover was shifted from the assessee to JKPL and, thus, the service front of Mr. Manfred was shifted from SEL to M/s. Sharp Eagle Ltd. Both these concerns were based out of H K, operating from same address and had same people handling them and the ultimate beneficiary of both these entities was Mr. Manfred and, thus, the termination fee paid was proved to Page 27 of 58 27 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 be sham. The assessee had not been able to provide any evidence to the effect that the termination fee was required;
- that the assessee had not been able to explain on the termination fee which was paid to H K entity in accordance with European regulations; and, thus, by opting to set up companies in H K, Mr. Manfred had actually given up on the protection of European regulations which were very stringent. In a nutshell, the asssessee had failed to explain as to why the termination fee had to be paid to HK entity as per European regulations;
- that when the very nature of termination fee claimed was found to be sham, the other part in the nature of commission payment to SEL was also not above the board. The assessee had not been able to give any positive proof as regards services rendered by SEL and moreover, the ownership and the transactions with SEL had also not been explained by the assessee either during the course of assessment as well as appellate proceedings. The MD of the assessee had, on oath, feigned his ignorance about the directors and owners of SEL.
- That the assessee had claimed that the commission payment and the termination fees were in accordance with the agreement dated 1.7.2012 (sic) 1.7.2002 with SEL. The genuineness of this contract, considering it being on a plain paper not being notarized has also been brought on focal point. Though the alleged contract was enforceable in HK, the assessee had claimed that the payment of termination fee was in accordance with European regulations.
10.18. In conclusion, it was forcefully argued that since the claims of the assessee with regard to (i) payment of Rs.10.68 crores being info & tracking of delivery schedules paid to SEL; and (ii) termination fee of Rs.18.35 crores have not been properly explained coupled with documentary proofs and also the assessee has now come up with additional evidence before this Hon'ble Bench which have not been placed either before the Page 28 of 58 28 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 assessment or remand report proceedings or at the appellate stage. Thus, for the principles of natural justice and fairness, the twin issues are to be restored to the desk of the AO for comprehensive examination of the assessee's claim.
11. We have carefully considered the rival submissions, perused the relevant materials on records and also the voluminous paper book furnished by the learned AR during the course of hearing. On his part, the learned DR came up with an elaborate Note along with enclosures.
11.1. Briefly, the assessee had, according to the learned AR, entered into an agreement dated 1.7.2002 with SEL and in pursuance of such agreement made payments to SEL towards commission of Rs.10.68 crores being Info & tracking of delivery charges and also 'termination fee of Rs.18.35 crores. These payments, according to the assessee, were in pursuance of procurement of sales orders through SEL and that the payments were made through regular banking channels. The termination fee was also paid for termination of the said agreement.
11.2. After analyzing the assessee's contentions, the AO, for the reasons recorded in the assessment order under dispute, came to the conclusion that the major dealings of the assessee including the export of finished garments and import of fabric etc., were with Italian based companies though in a few cases the sales/purchases have been made from Netherland based companies also. Keeping these aspects in view, the AO held that it was highly unlikely as to why the assessee had paid such a huge amount to a non-resident company at Hong Kong without specifying the Page 29 of 58 29 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 nature of services rendered by them. He had further held that the payment made to SEL, Hong Kong was not a genuine payment and had not been incurred wholly and exclusively for earning the business income of the assessee. With regard to the claim under the head 'termination fees, the AO disallowed the entire sum u/s 40(a)(i) of the Act treating that the assessee was bound to deduct the TDS u/s 195(1) and failure to deduct TDS was disallowed u/s 40(a)(i) of the Act.
11.3. When these issues have travelled to the CIT (A) for relief, the CIT (A) had recorded his findings that a survey u/s 133A(1) of I.T. Act was conducted in the business premises of the assessee and during the course of assessment proceeding neither a copy nor the original agreement dated 1.7.2002 or the copy or the original of the scheme of arrangement dated 1.4.2005 or the copy / original of termination agreement were found which could be held as an evidence that the payments were for some other purpose (because payment is proved) and had not been on the basis of the alleged contract or scheme of arrangement. Secondly, Mr. Kothari, CMD in his statement on oath expressed his ignorance about the existence of any such contract. If such a person says in clear terms that he does not remember about any agreement between SEL and the assessee, it has to be held that no agreement existed and the payment was not for the purpose of business. Thirdly, even if it is agreed that there is payment, it is necessary to examine whether the payee was capable of doing such business so as to make it eligible to receive such payment. During the course of assessment proceeding, the AO had insisted for proofs of the existence of the company SEL and had also been required to show proof that such companies own Page 30 of 58 30 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 manpower, machineries and technology to provide the info and tracking of delivery schedules and therefore the AR was wrong in alleging that no specific proof was required by the AO. In fact, the AO in the assessment order speaks about some discreet enquiry conducted in respect of SEL which revealed that the SEL is likely to be non-existent. Such allegation itself would have roused the appellant at the appellate stage to show sufficient proofs and provide satisfactory explanation that SEL exists and it was financially sound and stable and carried on activities in the nature of customer tacking in Europe scientifically. Such could have been done by providing copies of incorporation certificate, commencement of business certificates, Memorandum and Articles of Associations, exact location of the industry or place of business, the nature of its activity, the financial statement, the audit report, its manpower with qualification of each employee and so on & so forth which a prudent businessman would definitely ask and require before assigning any contract of huge amount of Rs.10 crores unless the other party is a dummy or / and the contract is non- existent. However, nothing of such sort had been done. SEL to be dummy one having no activity at all in the remand report, no additional evidence had been furnished by the AR to disprove such allegation. The AO had shifted the burden of proof to the appellant to prove the capacity of SEL to perform the task of tracking the customers and delivery of goods of appellant to them. The onus, so shifted has not been attended to by the assessee at all. Thus, what prevented the appellant to file such proofs, viz., the Certificate of ROC, the copy of Memorandum, some activity chart, certificates of proof of manufacture or services rendered by the SEL from Hong Kong Government officials to at least show that such company existed Page 31 of 58 31 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 at the relevant period and was really capable of delivering the goods and services for which purpose the alleged agreement was made with it by the appellant. In the absence of such relevant evidences, according to the CIT (A), the AO had no other option but to treat such payment as not for the purpose of business and, hence, not allowable as revenue expenditure u/s 37(1) of I.T Act.
11.4. During the course of hearing before this Bench, the learned AR sought the permission of this Bench to produce certain evidences which, according to him, were vital piece of evidence for consideration. However, these evidences have not been placed either during the course of assessment or appellate proceedings. During the course of hearing, the learned D R argued that if the additional evidences sought to be furnished by the assessee were to be admitted by this Bench, the twin issues under consideration are to be remanded back to the file of the AO to examine the issues afresh. The learned AR had conceded to the argument of the learned D R with a rider that the AO be strictly directed by this Hon'ble Bench to confine himself to verify/examine as to whether the additional evidence now produced is authentic to the argument put forth of the assessee. 11.4.1. The additional evidences now produced were the documents the CIT (A) had specified in his order which would aid in establishing the genuineness of the expenditure. These documents were not available with the assessee during the course of appellate proceedings before the CIT (A) and the same is vital and necessary and, hence, the additional evidences now Page 32 of 58 32 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 produced is taken on record for advancement of substantial cause and justice.
11.4.2 On a careful perusal of the Service Agreement purported to have been entered into on 1.7.2002, it has been noticed under the recitals that 'SEL is a sourcing agent for orders who amongst other services, provide services on information and tracking of deliveries schedules'. With regard to premature termination of agreement by either party, it has been recited under the caption '4. Termination', the relevant portions of which are extracted as under:
'a. This agreement may be terminated by either party after 1st July 2012, giving to the other 12 months' notice in writing; ................................................................................................ d. Termination of contract before 1st July 2012 by FFI will result in payment to SEL of 3 times the last calendar years' commission.
........................................................................................' 11.4.3. The above facts have been reiterated by the assessee in its Statement of Facts attached to the Form No.35. The relevant portion of such assertion is as under:
"2. The appellant had appointed M/s South Elegant Limited, based in Hong Kong, as an agent for the tracking the orders of import and providing information on status of the deliveries of materials and also to canvas and advertise the appellant product the customers residing outside India.'' 11.5. Considering the rival arguments and also the additional evidence now furnished by the assessee which we have already admitted, we are of Page 33 of 58 33 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 the considered view that the twin issues, namely, (i) disallowance of Rs.10.68 crores being the 'Info & tracking of delivery schedules paid to SEL, Hong Kong and Gruyters BV'; & (ii) disallowance of 'termination charges of Rs.18.35 crores paid to SEL' require to be remitted back to the file of the AO for fresh consideration 11.5.1. We are not in agreement with the learned A. R's contention that the AO be directed to confine himself to examine the genuineness/authenticity or otherwise of the documents now produced before this Bench as additional evidences and, in the event, the same were found to be authentic, direction be given to allow both the expenses claimed as deductions. However, the AO has not only doubted the genuineness but also questioned the business necessity in making such huge payment of commission and termination fees. Therefore, the AO shall examine the genuineness and the necessity of such huge payment as to whether it is commensurate with the services received from SEL. In other words, whether such payment [commission + termination fee] has been laid out or expended wholly and exclusively for the purpose of business or was it a mere ploy to divert funds from the country 11.5.2. In essence, both the issues as mentioned (supra) are restored to the file of the AO with specific directions to look into the issues afresh and to take appropriate action in accordance with the provisions of the Act after affording a reasonable opportunity to the assessee of being heard.
Since these issues are restored to the file of the AO, the contention as to whether the service agreement is valid and whether the payments are Page 34 of 58 34 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 disallowable u/s 40(a)(i) of the Act has not been adjudicated/considered.
It is ordered accordingly.
12. The next ground of the assessee is that the authorities below have erred in disallowing/restricting the claims under various heads, namely, staff Welfare expenses and administration Expenses etc., Staff Welfare Expenditure & administrative expenses - others:
12.1. It was the case of the AO that the assessee had debited Rs.67.21 lakhs towards Staff Welfare expenses, however, on verification, he had found that the expenditure mainly on providing food to its employees which was not an allowable expenditure. Moreover, according to the AO, this expenditure was over and above the canteen expenditure which has been claimed separately. Further, no bills/vouchers were made available for verification and that a significant amount was incurred which was unverifiable; the AO resorted to disallow 25% of such expenditure claimed [Rs.16.8 lakhs].
12.2. Likewise, the assessee had claimed Rs.83.22 lakhs under the head 'Others'. In the absence of any documents/bills to support such expenses, the AO was unable to verify as to whether such expenditure was incurred wholly and exclusively for business purpose and, accordingly, he made a disallowance of 20% of such expenditure [Rs.16.64 lakhs]. 12.3. When these issues went before the CIT (A) for consideration, the CIT had opined that the AO had neither during the course of assessment proceedings nor remand proceedings called for bills/vouchers for Page 35 of 58 35 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 verification. However, one of the reasons mentioned for such disallowance being 'cash expenditure' which could not be verifiable, the CIT (A) deemed it fit to restrict the additions to Rs.10 lakhs and Rs.9 lakhs in respect of 'staff welfare expenditure' and 'administrative expenditure' respectively. 12.4. It was contended before us by the learned AR that the CIT (A) was not justified in restricting the addition to Rs.10 lakhs under the head 'staff welfare expenses' as the said amount was expended to secure the healthy service thereby providing the food at the premises. The authorities below, it was contended, have erroneously treated that the assessee claimed the canteen expenditure separately whereas no such separate ledger A/c exist and all the expenses pertaining to canteen are grouped under staff welfare. It was, further, explained that 'staff welfare' included expenditure on medical expenses of the staff. As the entire expenditure under the head 'staff welfare' was expended wholly and exclusively for the business of the assessee, the same is allowable u/s 37(1) of the Act.
12.4.1. In respect of disallowing Rs.9 lakhs being the expenditure under the head 'administrative expenses - Others', it was argued that this expenditure included security charges, business promotion, printing and stationary, conveyance etc. which were part of the business activity. As the expenditure incurred, according to the learned AR, was wholly and exclusively for the business and, hence, was allowable expenditure u/s 37(1) of the Act.
12.5. The AO had stated in the assessment order that no bills/vouchers/documents were produced for verification in support of the Page 36 of 58 36 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 expenses claimed [Refer: Paras 6 & 7 of the asst. order] whereas the assessee claimed during the course of hearing that 'information sought by the learned AO (ledger extracts of Staff Welfare and Other administrative expenses) was submitted to the learned AO during the assessment proceedings...'[Refer: P 9 of assessee's Note dt.14.6.2012]. 12.5.1. During the course of hearing, the learned A R had furnished nine voluminous paper books running into thousands of pages which, inter alia, containing the correspondences [along with copies of ledgers account] made with authorities below. In its letter dated 8.12.2009 addressed to the AO, the assessee had furnished the printout of ledgers, pertaining to, among others, (i) staff Welfare; (ii) business promotion expenses; (iii) Other administrative expenses; (iv) sample expenses; (v) canteen expenses etc., This has been duly acknowledged by the Office of the Addl. CIT, Range-11, Bangalore on 8.12.2009 [courtesy: P 1186 of P.B. 4 Part 1 of A.R]. Even though the AO had admitted in his assessment order dated 8.12.2009 [para 4.2.] that '.........The assessee company has thereafter filed its written replies dated 27.11.2009, 30.10.2009 and dated 8.12.2009 which have been considered', we are afraid, the AO would not have been in a position to verify all the claims of the assessee with reference to the ledger accounts, cash vouchers etc., which were, admittedly, running into hundreds of pages. 12.5.2. Admittedly, in the instant case, details with regard to the 'staff welfare' and other administrative expenses, the break-up of which, such as the Ledger account, voucher Numbers and other details have been Page 37 of 58 37 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 provided to the assessing officer for verification(courtesy: Page No.1189 of PB AR ].
12.5.3. As pointed out above, the assessee had furnished print out of the ledger accounts which contained the details of expenses towards staff welfare, other administrative expenses etc. Even though the AO had vouched that the written replies of the assessee up-to 8.12.2009 have been considered, we are of our own apprehension that the AO would not have adequate time at his disposal to consider the voluminous details submitted on 8.12.2009 which was, incidentally, the date on which the assessment order was passed. Therefore, it was in-probable to verify the details of expenses claim minutely which contained enormous pages. Even the random checking of such details would not have served any meaningful purpose. When the details of such expenses claimed by the assessee were in the possession of the AO, we are of the considered opinion that the AO should not have resorted to disallow the claim of the assessee in an ad-hoc basis. In view of the principles of natural justice, both the issues, namely, (i) staff welfare expenditure; and (ii) administrative expenses are remitted back to the file of the AO with a specific direction to look into the matter afresh with reference to the details furnished by the assessee in the shape of print-out of ledger accounts and to take appropriate action in accordance with the provisions of the Act. It is ordered accordingly.
12.5.4. We have also duly perused with due respects the case laws on which the learned AR had placed strong reliance and to reiterate that the Hon'ble High Court and Hon'ble Benches of the Tribunals have emphasized Page 38 of 58 38 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 that ad-hoc disallowance of expenditure without pointing out the justifiable reasons for doing so cannot be sustained. In the present case, even though the details of expenses claimed were in his possession, the AO had, without pointing out any omission and commission in the details furnished, resorted to restrict the claims of the assessee on an ad-hoc basis which, in our view, is against the principles of natural justice. Thus, both the issues have been remitted back to the file of the AO for fresh consideration.
13. The other issue [ground No.8] raised by the assessee was that the order of the assessing officer was bad in law as no opportunity of being heard was extended when the additions were made during the assessment proceedings.
13.1. At the outset, we would like to point out that there is no substance in the allegation of the assessee since the assessment proceedings were stretched to almost four months right from 10.9.2009 to 8.12.2009 [source: Asst. order] and that the assessee had ample time at its disposal to put across its grievance, if any, at that relevant point of time. Therefore, this allegation of the assessee doesn't deserve any merit. It is dismissed accordingly.
A.Y 2007-08 - ITA No.1243/B/10- [by the assessee]:
14. For this assessment year too, the assessee had raised a similar theory [ground No.3] that the AO had not provided adequate opportunity to put forth its view etc. In this connection, we would like to reiterate that during the assessment proceedings, the assessee was extended four opportunities (dates of hearing) on 28.10.2009, 27.11.09, 2.12.09 and again Page 39 of 58 39 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 on 8.12.2009 to put forth its objections/contentions etc. Such being the ground reality, we find no substance in the argument of the assessee that it had not been given adequate opportunity by the AO. This ground of the assessee is, therefore, dismissed.
15. The assessee's claims under various heads, as detailed below, have been disallowed by the assessing officer which has been restricted to15% by the CIT (A) for the reasons recorded in the respective impugned orders under dispute.
Under the head Disallowed by the AO Restricted to by CIT(A) at 15% Staff Welfare expenses Rs.70,38,859/- Rs.26,39,572/-
Others Rs. 8,33,587/- Rs. 5,00,152/- Repairs & maintenance Rs. 2,20,986/- Rs. 1,00,000/-
15.1. At the outset, we would like to reiterate that the above disallowances by the AO as well as restrictions resorted to by the CIT (A) were primarily on an ad-hoc basis. In the instant case, admittedly, the relevant details furnished by the assessee were before the AO when the assessment was concluded. In spite of the same, the AO went ahead to disallow/restrict the claim of the assessee on ad-hoc basis. For the preceding assessment year in the assessee's own case for similar issues, namely, (i) staff welfare expenses; & (ii) administrative expenses - Others, we have, for the detailed reasons recorded therein, restored the matter to the file of the AO for fresh consideration. The same directions hold good for this assessment year as well. It is ordered accordingly. Page 40 of 58 40 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 15.2. In respect of the claim of the assessee under Travel and Conveyance, the AO had disallowed Rs.22.98 lakhs out of Rs.76.62 lakhs debited in the P & L account. The observation of the AO for making an ad- hoc disallowance reads as follows:
"8. The assessee company has debited a sum of Rs.76,62,602/- towards traveling and conveyance. When compared to immediate preceding year, on a turnover of Rs.150.90 crores the assessee company has incurred an expenditure of Rs.1.02 crores whereas during the assessment year in question, on a turnover of Rs.20.24 crores the assessee company has shown to have incurred an expenses of Rs.0.76 crore which is much higher when compared to the preceding year. Further on verification, it was found that the expense debited under this head is not fully supported by proper bills/ vouchers. Hence, a disallowance of 30% of the expenses debited under this head is made and added to the returned income which works out to Rs.22,98,780/-...."
On further appeal, the CIT (A) restricted the addition to Rs.11,49,390/-. The assessee being aggrieved is in appeal before us. The learned counsel for the assessee submitted the above said expenses were incurred for business purpose and duly supported by bills and vouchers. The AO did not examine the details of vouchers and, therefore, it was submitted it was wrong and erroneous to note that the expenses debited under this head was not fully supported by bills and vouchers. Necessary details were in fact furnished and the AO, without calling for further explanation made an ad-hoc disallowance; It was submitted that a substantial expenditure is on account of providing free transportation services to the staffs and the employees of Page 41 of 58 41 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 the company as the company operates three shifts i.e., 24/7 and, hence, free transportation became necessity and critical. 15.2.1. The details of expenses claimed under this head have been furnished by the assessee to the AO which has been acknowledged by the AO. This being so, we are of the considered view that the AO was not justified in making disallowance of the assessee's claim on an ad-hoc basis by comparing the turnover and the expenses for the previous year with that of the current year. As rightly pointed out by the learned AR that a substantial part of the expenditure was for providing free transportation services to its staff and employees and as such the entire expenditure claimed deserved to be allowed in full. Accordingly, the entire claim of the assessee is allowed.
Water charges :
16. The assessee had claimed Rs.20.67 lakhs under the head 'water charges.' It was the stand of the AO that the assessee had not produced any evidence in support of such a huge claim when the assessee's turnover had drastically come down compared to the preceding years. In the absence of any proof for having incurred such a huge expenses, the AO had resorted to disallow 30% of the expenses which came to Rs. 5,19,993/- which has been restricted to 15% by the CIT (A).
16.1. During the course of hearing, it was contended that during the course of assessment proceedings, the AO did not call for any of the vouchers and had not considered the details given by the assessee vide its letter dated 8.12.2009 and, therefore, the AO's comment that the assessee Page 42 of 58 42 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 had not produced any evidence in support of this expenditure was unfounded as no vouchers were called for during the course of hearing. It was, further, contended that the learned CIT (A) had not recorded any reason for restricting the disallowance to 15% of the expenditure.
The learned D R present was heard.
16.2. During the course of hearing, the learned A R had furnished, [as already stated supra] nine voluminous paper books running into thousands of pages which, inter alia, containing the correspondences [along with copies of ledgers account] made with authorities below. In its letter dated 8.12.2009 addressed to the AO, the assessee had furnished copies of printout of the ledgers, pertaining, among others, to water charges [Refer: pages 464 - 473 paper Book 2] This has been duly acknowledged by the Office of the Addl. CIT, Range-11, Bangalore on 8.12.2009 [courtesy: P 153 of P.B. 2 of A.R]. Even though the AO had admitted in his assessment order dated 8.12.2009 [para 4.2.] that 'The assessee company has thereafter filed its written replies dated 27.11.2009, 30.10.2009 and dated 8.12.2009 which have been considered', we are of the considered view that the AO would not have been in a position to verify all the claims of the assessee with reference to the ledger accounts, cash vouchers etc., 16.2.1. Therefore, we are of the opinion that the AO was not justified in resorting to disallow the claim of the assessee on ad-hoc basis when all the relevant details were available with him. The AO is accordingly directed to verify the assessee's claim with reference to the details furnished by it Page 43 of 58 43 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 and to take suitable action in the matter. To enable the AO to do the above mentioned exercise, this issue is restored to him.
17. Likewise, the assessee had also claimed deductions under the heads 'Sample Expenses and Business promotion expenses' of Rs.5.96 lakhs and Rs.11.27 lakhs respectively. It was the case of the AO that on verification of the details furnished by the assessee, it was found to be mainly these expenses were related to the credit card expenses of its Managing Director. As no evidence was produced by the assessee to suggest that those expenses were attributable to the business activities of the assessee, the AO had resorted to disallow a lump sum disallowance of Rs.10 lakhs as, in his view, the partial involvement of such expenses for the personal use of the managing director cannot be ruled out. 17.1. During the course of hearing before us, the learned AR took a similar stand that no bills/vouchers were called for by the AO and also the details furnished vide its letter dated 8.12.2009 has not been considered by the AO etc., As a matter of fact, this issue has since been considered by the AO and of the view that those expenses were related to the credit card expenses of its managing director. Moreover, the AO had specifically pointed out that no evidence was produced by the assessee to remotely suggest that those expenses were attributable to the business activities of the assessee.
17.2. Significantly, even at this stage of hearing too, the assessee has not come up with any evidence to rebut the AO's findings [ para 17]. In view of the above, we are of the considered view that the authorities Page 44 of 58 44 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 below were justified in resorting to such disallowance and restricting of the assessee's claim. Therefore, there is no infirmity in the CIT (A)'s stand which requires our intervention on this point. It is ordered accordingly.
18. The other issue relates to Customs duty on machinery, i.e., in ground No.9, the assessee had raised an issue that the CIT (A) erred in disallowing a sum of Rs.1 lakh as against the claim of Rs.2,20,986/-. This issue in brief, is that the assessee had debited Rs.24,33,308 towards repairs and maintenance - plant and machinery. However, on verification of the details furnished by the assessee, the AO had noticed that the assessee had debited a sum of Rs.2,20,986/- towards customs duty - machinery. According to the AO, since the expenditure debited towards customs duty on machinery was capital in nature, the same was not an allowable expense. 18.1. As could be seen from the grounds of appeal raised before the CIT (A), the assessee had represented that "Ground No.10. The learned DCIT erred in disallowing a sum of Rs.2,20,986/- under the head 'repairs & maintenance' on the facts and circumstances of the case." Even in its Statement of Facts [attached to Form No.35], the assessee had mentioned as 'Repair and maintenance of Rs.2,20,986/-' [Courtesy: Para 2 of Statement of facts before the CIT (A)]. However, while dealing with this issue, the CIT (A), perhaps, under wrong notion, treated this claim of 'customs duty - machinery' falls under the head 'repairs & maintenance' [as subscribed by the assessee] and restricted the addition of Rs.2,20,986/- to Rs.1,00,000/-.
Page 45 of 58 45 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-1118.2. We have carefully considered the assessee's contentions and also diligently perused the reasoning of the AO in disallowing the assessee's claim. It is an undisputed fact that the assessee had debited a sum of Rs.2.2 lakhs towards customs duty - machinery. Admittedly, the expenditure debited towards customs duty on machinery was capital in nature, the AO was well within his domain to come to a conclusion that the expenditure was nothing but capital in nature. It is ordered accordingly. 18.3. Before parting with, we would like to reiterate that the amount of Rs.2.2 lakhs towards customs duty has been included by the assessee under the head 'repairs and maintenance' which must have prompted the CIT (A) to restrict the addition to Rs.1 lakh by treating the said claim also for having incurred for the maintenance of the machinery by the assessee. Since this expenditure has been precisely incurred towards 'customs duty - machinery' which was capital in nature, the CIT (A) was not justified to restrict the disallowance to Rs.1 lakhs without going into the merits of the issue.
We shall now take up the issues raised by the Revenue for adjudication.
II. A.Y 2006-07 - ITA No.1242 / B/10 - By the Revenue:
19. With regard to these two issues raised by the Revenue in (i) Ground No.3 - 'staff welfare expenses'; and (ii) ground No.4 - 'administrative expenses - others', we would like to point out that for the reasons recorded in assessee's appeals for the AYs 2006-07 and 2007-08 (supra), both of these issues were restored to the files of the AO for fresh Page 46 of 58 46 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 consideration. As the issues raised by the Revenue are similar to that of the issues raised by the assessee, the findings recorded in the assessee's appeals hold-good here too. In essence, the grounds raised by the Revenue are allowed for statistical purpose.
20. The other issue (ground No.5) raised by the Revenue relates to the stand of the CIT (A) in allowing Rs.8,14,25,233/- being the remuneration paid to the MD of the assessee.
20.1. The assessee claimed that it had paid remuneration to its Managing Director Shri Anupam Kothari of Rs.8,14,25,233/- for the period under consideration. The entire claim of the assessee has been rejected by the AO on the ground that Shri Kothari stayed in Monte Cario, Italy and according to his statement on oath, he had totally stayed in India in a year hardly for 14 - 15 days and the executives of the assessee carried out the functions of the assessee.
20.2. Aggrieved, the assessee took up the issue with the CIT (A) for relief. It was contended by the assesee before the CIT (A) that its MD was the policy maker and gives direction to the assessee as how to conduct the business. It was, further, argued that the AO had not brought any evidence on record as to why the expenditure has been disallowed. The salary paid to the MD was in consonance with the profits earned by the assessee and that the MD had handled every sale which had brought the kind of profit etc. It was submitted that the salary paid to the MD was assessed as income in the hands of the MD u/s 143(3) of the Act which has Page 47 of 58 47 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 been accepted by the revenue. There was also TDS on the entire amount of salary to paid Shri Kothari.
20.3. After due consideration of the assessee's contentions, the CIT (A) had recorded his findings that the AO had not brought any evidence on record to prove that the payment was excessive, even though the AO had, in the remand report, mentioned that the provisions of s.40A(2) are attracted. The AO's reasoning of MD's physical presence in India [hardly for 14 - 15 days in a year) was countered by the assessee that the physical stay of the MD in India doesn't have anything to do with the assessee's business. The CIT (A) had also justified the argument of the assessee that the MD was directly responsible for its business as he had brought in sales from Italy and other European countries and, therefore, justified the remuneration paid to Shri Kothari. The CIT (A) had also highlighted that the remuneration paid to the MD has been taxed in his hands and also necessary TDS effected. Thus, he had deleted the entire disallowance of Rs.8.14 crores. 20.4. Before us, the learned D R had supported the stand of the AO and in particular that by keeping himself away from the work spot, the MD had divested all his responsibilities by delegating them to others to manage the day-to-day affairs of the assessee and, thus, he was ineligible to receive such remuneration. It was, therefore, pleaded that the stand of the CIT (A) be assailed and that of the AO be restored.
20.5. On the other hand, the learned AR had supported the CIT (A)'s stand in deleting the entire disallowance.
Page 48 of 58 48 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-1120.6. We have carefully considered the rival submissions. It was an undisputed fact that the managing director of the assessee had hardly positioned himself in the work place of the assessee to monitor its affairs on day-to-day basis. However, being the managing director, he took upon himself to solicit global orders for the produce of the assessee. There was no bar in delegating the powers of supervision, functioning and control of the assessee to his trusted lieutenants thereby he had positioned himself in a place in the Globe where there was a great demand for the products of the assessee [to procure orders for supply of fabrics etc.]. Moreover, the AO had failed to bring any documentary proof on record to suggest that the absence of the MD from the work place had adversely reversed the fortune of the assessee. Further, the remuneration of the MD of the assessee has been taxed in his hands u/s 143(3) of the Act and also necessary TDS has been effected.
20.6.1. Keeping the above facts and circumstances of the issue in view, we are of the considered view that the AO was not justified in disallowing the remuneration of Rs.8.14 crores paid to the MD of the assessee. It is ordered accordingly.
21. The other issue (ground No.6) raised by the revenue relates to the CIT (A)'s direction to the AO to adopt the municipal value of the rent in respect of Yeshwantpur Unit.
21.1. The issue, in brief, is that the assessee had claimed an expenditure of Rs.45.27 lakhs being rent paid to Yeshwantpur Unit of the assessee which has been leased out to JKPL, a sister concern. It was the Page 49 of 58 49 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 case of the AO that apart from Yeshwantpur Unit, three other units have also been leased out by the assessee to JKPL for which the assessee was getting rent of Rs.12.25 lakhs from JKPL including the Yeshwanthpur unit which was, according to the AO, meager considering the fact that the assessee was paying rent of Rs.45.27 lakhs in respect of Yeshwanthpur Unit to the land lord. According to the AO, the assessee's intention in not charging proper rent from JKPL was to enable the JKPL to increase its income so as to avail benefit u/s 10B of the Act. Accordingly, the AO had brought to tax Rs.33.02 lakhs being the difference between the rent paid to the land lord and the rent received from JKPL.
21.2. When the issue went before the CIT (A) for adjudication, the CIT (A) had, after taking into account the contentions of the assessee as recorded in his order under dispute, observed that 'in terms of section 23 of the Income-tax Act, 1961, the higher of the rent received or rent receivable following needs to be adopted as ALV. Since the AO has not brought anything on record to hold that the rent received is not in excess of the municipal valuation, I am left with no option, but to agree with the AR and I hereby direct the AO to adopt the municipal value of the rent , if it is in excess of the rent received.'[Para 11.1.] 21.3. Before us, the learned D R had forcefully supported the AO's stand as the AO had brought out the willful intention of the assessee in charging less rent from its subsidiary which would facilitate its sister concern to post increased income so as to claim exemption from tax u/s 10B of the Act. This clandestine intention of the assessee has been exposed by Page 50 of 58 50 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 the AO thereby he had brought to tax-net the difference between rent paid and rent received from its sister concern. It was, therefore, pleaded that the stand of the AO requires to be sustained.
21.4. On the other hand, the learned AR submitted that the premises on which the rent paid by the assessee and the Unit on which rent received by the assessee from JKPL were quite different and, therefore, the AO has got the basic facts wrong. Therefore, it was submitted that the AO's comparison of rent with other Unit and the building were incorrect as the location, tenure, size, connectivity, time of entering into agreement were all different and, hence, not comparable.
21.5. We have carefully considered the rival submissions and diligently perused the relevant case records. It was the case of the assessee that different units were leased out to its sister concern. It is relevant to mention here that the determination of the rent for a property depends upon its location, size, amenities available, connectivity to the main thoroughfare etc. What was relevant here was as to whether the building alleged to have been taken on rent by the assessee was the same building leased out to its sister concern for a lesser rent? During the course of hearing before us, it was vouched by the learned A R that the building taken on rent by the assessee has not been leased out to its sister-concern as projected by the AO in his assessment order.
21.5.1. In view of the new fact which was not before the AO in the course of assessment proceedings, we are of the considered opinion that it would meet the end of justice, if the issue is analyzed by the AO afresh as Page 51 of 58 51 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 to whether the building taken on higher rent was the same building which was leased out for lesser rent to its sister concern. Accordingly, this issue is also remitted back to the file of the Assessing officer for necessary action at his end. It is ordered accordingly.
AY 2006-07 - ITA No.141/B/11 - Revenue's appeal:
22. In this appeal, the main grouse of the Revenue was that the CIT (A) erred in holding that the amount was taxed in the proceedings u/s 143 (3) of the Act and, therefore, was not taxable u/s 201 of the Act. 22.1. The issue, in brief, was that during the course of assessment proceedings, as pointed out earlier, the AO had noticed that the assessee had made remittances to SEL, Hong Kong towards compensation for termination of service agreement entered into with SEL and that no TDS has been effected on the said remittances. Accordingly, the AO had initiated proceedings u/s 201(1) of the Act for the failure on the part of the assessee to effect TDS. According to the service agreement entered into with SEL, the assessee had engaged SEL as a sourcing agent w. e. f. 1.7.2002 for a period of ten years. As per the terms of the said agreement, the assessee had paid compensation of Rs.18.35 crores for premature termination of the agreement and the said amount was remitted to the non- resident SEL without effecting TDS. According to the AO, the nature of services (to be) rendered by SEL and also the basis of commission payable etc., have not been spelt out in the said agreement.
Page 52 of 58 52 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-1122.2. During the course of proceedings u/s 201(1) and 201(1A) of the Act, the assessee was required to furnish and explain the circumstances under which the assessee had not effected TDS while making remittances to SEL. After due consideration of the assessee's contentions, analyzing the provisions of s. 9(1)(i) r. w. s. 5(2)(b) of the Act and for the detailed reasons recorded in his impugned order under dispute, the AO had observed in his concluding paragraph as under:
"15. Thus, the assessee company ought to have done TDS on the outward remittances made to the non-resident as per provisions of sec. 195(1) of the Indian I.T. Act whereas it has failed to do the same. Therefore the Indian company is hereby treated as defaulter u/s 201(1) and taxed accordingly.........."
22.3. Aggrieved, the assessee took up the issue with the CIT (A)-IV for relief. The CIT (A) had, after analyzing the contentions put- forth by the assessee, reasoning of the AO to treat the assessee as a defaulter u/s 201(1) of the Act and also comprehensively analyzing the ruling of the Hon'ble Supreme Court in the case of GE India Technology Ltd v. CIT (supra), concluded that there was no violation of s.195 of the Act by the assessee. The relevant portions of the findings of the CIT (A), for appreciation of facts, are reproduced as under:
"9.1. Item No.(i):
..................................Apparently even after conducting survey u/s 133A at a later stage by the AO [as can be seen from the regular assessment order passed by the AO on 8.12.2009 wherein this amount was disallowed u/s 37(1)] it was not established that the non-resident had any Page 53 of 58 53 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 permanent establishment in India. Even, the AO has come to such a conclusion on presumptive basis and not on concrete facts. The appellant has categorically denied having any PE in India as also carrying out the Indian operations through any employee or a representative in India. It was reiterated by the appellant that the non-
resident was carrying on the agency commission business from Hong Kong and the ultimate buyers were mainly from European countries. It is relevant to quote from the regular assessment order of the AO dt. 8.12.2009 page 10 where the AO has concluded in para 4.9 as under:
'South Elegant people have never visited the premises of the appellant company.' From the facts brought on record as also from the survey conducted u/s 133A by the regular AO it is not established that M/s. SEL had any permanent establishment in India. Accordingly, it is held that M/s SEL had no PE in India."
9.2. Item No.(ii):
................Accordingly, even as per explanation 2(a) to section 9(1)(i), since M/s.SEL's activities are limited to the agency commission towards purchase of goods or merchandize for the non-resident buyers abroad, M/s. SEL's activities cannot be regarded as having 'business connection'. Accordingly, it is held that no income accrued or arose in India since there was no business connection as per Explanation 2(a) to section 9(1)(i)."
9.3. Item No.(iii):
As per provisions of section 28(ii)(c) 'Any person.........................thereto', getting any compensation or any payment 'due to' or 'received by' becomes taxable in their hands. For applying these provisions, it is to be proved that the foreign agent had an agency in India but in this case of M/s SEL was a commission agent on the foreign soil i.e., in Hong Kong and was not having any Page 54 of 58 54 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 agency in India and, accordingly, these provisions are not applicable to the appellant...."
..................................................................................................... 9.6. Item No.(vi):
The very same issue of violation of the provisions of section 195 has been considered in the regular order passed by the AO u/s 143(3) on 8.12.2009. in this order, it is held that there is violation of provisions of section 195 and has further held that, this violation has led to the disallowance of the same amount of Rs.18,35,79,000/- u/s 40(a)(i). Accordingly, even on the ground that it is not genuine expenditure which is allowable u/s 37(1) as also in view of violation of section 195, disallowance is made u/s 40(a)(i). This disallowance has now been confirmed by the CIT (A)-I in ITA No.63/DC-11(3)/A1/09-10 dated 11.8.2010. The relevant portion of the confirmation as appearing in page 26 reads as under:
'In the absence..........................It may be mentioned that I have not entered into the dispute whether the payment is allowable or disallowable u/s 40(a)(i) of I.T. Act or not..........' From these facts, it is clear that the AO [ACIT, 11(3)] has not accepted it as genuine business expenditure allowable u/s 37(1). Even after disallowance u/s 37(1), the AO has relied on the judgment in the case of Samsung v. CIT reported in 320 ITR to conclude that it was also disallowable u/s 40(a)(i). Now, the Hon'ble Supreme Court has set aside the Hon'ble Karnataka High Court judgment in the GE Technology case (327 ITR
456), relying solely on the Hon'ble Karnataka High Court judgment does not arise. Since, it is held that it is not a genuine business expenditure which has also been confirmed by the learned CIT (A)-I holding that on such Page 55 of 58 55 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 payment taxes where (sic) were deductible u/s 195 would go contrary. The moment it is held that the taxes are deductible on such payment made to the non-resident it puts stamp of approval on its genuineness. That will go contrary to the finding that it was not allowable revenue expenditure u/s 37(1). Perhaps, this was the reason as to why the CIT (A)-I choose not to enter into dispute regarding allow-ability or dis-allowability u/s 40(a)(i). If it is held that the provisions of section 195 are applicable, consequently it amounts to accepting indirectly as to its genuineness and that goes against the finding of the AO of its disallowable nature u/s 37(1).
Accordingly, apart from the reasons discussed above, in item Nos.(i) to (v), in paragraphs 9.1 to 9.5., for the reasons discussed in this para also, it cannot be held to be violation of section 195... This will not prejudice the findings of the AO that the amount is allowable u/s 37(1) and if the higher appellate authorities give a different finding, then this issue is again open for interpretation." 22.4. Aggrieved, the Revenue has come up with the present appeal. It was the case of the Revenue that the CIT (A) erred in holding that the amount was taxed by the AO in the proceedings u/s 143(3) and, therefore, is not taxable u/s 201(1). It was further urged that this is a separate proceedings altogether. It was, therefore, prayed that the stand of the AO on this point requires to be restored.
22.5. On the other hand, the learned AR supported the findings of the CIT (A) and pleaded that as there was no infirmity in the stand of the CIT (A), there was no cause for the Revenue in seeking the intervention of this Bench on the issue.
Page 56 of 58 56 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-1122.6. We have carefully considered the rival submission and diligently perused the relevant case records.
22.7. At the outset, we would like to reiterate that the claim of deduction u/s 37 of termination charges amounting to Rs.18.35 lakhs as genuine business expenditure was restored to the file of the AO for fresh consideration [Para 11.5.2 supra]. Therefore, the question of disallowance of the same amount by invoking the provision of s. 40(a)(i) need to be decided only after the decision is taken by the AO as regard to the allow- ability or otherwise of the amount u/s 37. Therefore the adjudication of the issue that is raised by the Revenue in this appeal is premature and, hence, need to be considered along with the claim of deduction u/s 37 of the Act. Hence, the plea of the Revenue is restored to the file of the AO with a direction to take appropriate action in accordance with law after examining the genuineness of payment u/s 37 of the Act. In other words, the issue of disallowance of the same amount by invoking the provision of s. 40(a) (i) of the Act is other side of the same coin. The question of disallowance by invoking the provision of s. 40(a) (i) will arise only in the event the payment is found to be allowable u/s 37 of the Act. It is ordered accordingly. In essence, the appeal of the Revenue is allowed for statistical purpose. A.Y 2007-08 - ITA No.1270/B/10 Revenue's appeal:
23. At the outset, we would like to reiterate that the above disallowances by the AO as well as restrictions resorted to by the CIT (A) in respect of (i) Staff welfare expenses; (ii) Administrative expenses -Others; were based primarily on ad-hoc basis. As pointed out by us in the assessee's Page 57 of 58 57 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11 own case for the assessment year 2006-07 and 2007-08 (supra), necessary details with regard to the above expenses were made available to the AO on the date on which the assessment was passed. In conformity with our findings in the assessee's appeal these issues are restored to the AO for fresh consideration. It is ordered accordingly. Therefore, the Revenues' grounds on these issues are allowed for statistical purpose. 23.1 The expenditure of travelling expenses was discussed at para 15.2 (supra) and for our reasoning mentioned in para 15.2.1 (supra), we dismiss the appeal of the revenue.
23.2 With regard to Sample exp. & business Promotion expenses (Gr.7), we would like to point out that similar issue has been raised by the assessee for the AY 2007-08 under appeal wherein we have, after due consideration of the issue and for the reasons recorded therein, confirmed the disallowance made by the AO. As the issue raised by the Revenue is similar and identical, our findings recorded (in para 17.2. above) holds good here too. It is ordered accordingly. In essence, this ground of the Revenue is allowed.
24. The last ground relates to (Ground No.8) customs duty on machinery. This issue has been dealt with by us in the asssessee's appeal (supra). Our findings recorded therein hold good here also. It is ordered accordingly. In essence, this issue is decided in favour of the Revenue. Page 58 of 58 58 ITA Nos.1242 & 1243-10, 1269 & 1270-10, 141-11
25. In the result:
(i) the assessee's appeal for the AYs 2006-07 and 2007-08 are partly allowed for statistical purpose;
(ii) The Revenue's appeals for the AY 2006-07 [ITA Nos.1269/B/10 & 141/B/11 - two appeals] are partly allowed for statistical purpose &
(iii) The Revenue's appeal for the AY 2007-08 is partly allowed.
The order pronounced on the 30th day of November, 2012 at Bangalore.
Sd/- Sd/-
(N BARATHVAJA SANKAR) (GEORGE GEORGE K)
VICE PRESIDENT JUDICIAL MEMBER
Copy to : 1. The Revenue 2. The Assessee 3. The CIT concerned. 4. The CIT(A) concerned. 5. DR 6. GF MSP/ By order Senior Private Secretary, ITAT, Bangalore.