Income Tax Appellate Tribunal - Indore
Crystopia Energy System Pvt. Ltd., ... vs Department Of Income Tax on 6 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M.
PAN NO. : AAACC6792J
I.T.A.No.164/Ind/2011
A.Y. : 2005-06
ACIT, M/s.Cristopia Entergy
System Pvt. Ltd.,
3(1), vs Indore.
Indore.
Appellant Respondent
Appellant by : Shri Keshav Saxena, CIT DR
Respondent by : Shri Manoj Phadnis, C. A.
Date of Hearing : 6.03.2012
Date of : 10.04.2012
pronouncement
ORDER
PER R. C. SHARMA, A.M.
This is an appeal filed by the Revenue against the order of CIT(A) dated 03.06.2011 for the assessment year 2005-06.
2. Rival contentions have been heard and records perused. Facts of the case are that the assessee company is involved in the business of assembling refrigeration machine i.e. 'Screw
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type Chillers' which are imported from M/s CIAT, France in Completely Knocked Down (CKD) condition. Another product is 'Nodules' or manufacturing thermal energy storage systems under 'Technical collaboration with M/s. Cristobia Energy Systems SA, France. The products are used by Pharmacy industry, hotels, shopping malls, hospital etc. Assessee is a closely held company and Shri Deepak Kemkar is its Managing Director and other than him there are S/Shri Falconier J L, Gardiol J P, Lenotre C and Shrinivasan K B as Directors on the board of company. Assessee Company is a 50:50, joint venture between M/s Cristopia Energy Systems SA, France and M/s Kehems Consultants Pvt Ltd of India. It is also important to put on record that M/s Cristopia Energy Systems SA, France is associated concern of M/s CIAT, France and M/s Kehems Consultants Pvt Ltd is associated concern of M/s Kehems Engineering Pvt Ltd. Controlling stake in the Kehems Consultants Pvt Ltd lies with Shri Deepak Kemkar, who is Managing Director of assessee company and is also owner of M/s Kehems Engineering Pvt Ltd himself and through his family members.
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3. During the Assessment proceedings for the A Y 2005- 06, it was observed by the AO that there is a disproportionate increase in consumption of raw materials as compared to the AY 2004-05 vis-a-vis AY 2003-04. The Assessing Officer stated that during AY 2005-06 the assessee has booked similar %age of raw material consumption. In this connection assessee was asked to furnish comparative details of raw material consumption for last three years i.e. 2002-03 - 04-05. Assessee has furnished such details vide its written submission dated 06/12/2007.
4. On verification of comparative statement of sales and material consumption, the Assessing Officer stated that the assessee has shown more consumption in %age terms as compared to A Y 2003-04 and showing increasing trend from preceding AY 2004-05. In view of this assessee was asked to justify the increase in rate of raw material consumption. In reply assessee has furnished following explanation:-
"Justification for Increase in Material Consumption to Sales:
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1. The details of Material Consumption as percentage to Sales, as submitted earlier is enclosed for ready reference.
2. It will be seen that the Material Consumption in case of Chillers is at 82.08% for the year ended 31st March, 2005, as compared to 82.50 % for the year ended 31st March, 2003.
3. In case of Nodules the Material Consumption has decreased to 21.14% for the year ended 31st March 2005 from 26.86'% for the year ended 31s1 March 2004.
4. The gross margin is more in case of Nodules Division as compared to Chiller Division.
5. The total turnover in case of Chillers has increased from Rs.211.46 Lacs for the year ended 31st March 2003 to Rs.558.86 Lacs for the year ended on 31s1 March 2005. As against this the turn over of Nodules has decreased from Rs. 305. 19 Lacs to Rs. 211.60 Lacs during the same period.
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6. It is because of increase in the turn over of low margin Chiller and simultaneous decrease in the high margin turn over of Nodules that the total Material Consumption as percentage of Sales increased from 45.87% to 66.24% during the above mentioned period.
7. All the purchases and sales are verifiable.
8. The above reasoning has been accepted by the Hon'ble CIT Appeals in respect of the appeal against the order of Id. AO for AY 2004-05. Consequently the additions have been deleted.
9. The prices at which the materials have been purchased from M/s. CIAT, France are lower than the price at which the said material is sold in the open market. Therefore, there is no instance where any undue benefits are passed on to M/s. CIAT, France.
10. In view of the above, no additions are required based on the facts of the case for the year under assessment. 5
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5. However, the Assessing Officer did not satisfy with the assessee's submission and rejected the books of account. The Assessing Officer further observed that arms length price determined regarding purchase from M/s. CIAT, France is not reliable and the method used for determining ELP is comparative own control price method. After rejecting books of account, the Assessing Officer increased gross profit by 23.28 % of consumption of raw materials. The cost of raw material was reduced to 42.06 % of assessment year 2002-03. Thus, the addition of Rs. 1,79,37,329/- was made on account of excess consumption of raw materials.
6. By the impugned order after recording detailed finding, the ld. CIT(A) deleted the addition. Following was the precise observation of the CIT(A) :-
"From the records it is seen that a similar addition was made, by the AO in A Y 2004-05 which, after due consideration of facts and circumstances, was deleted by the CIT(A). The department went in appeal before the ITAT against the order of the CIT(A) and the ITAT has in its order dtd. 25-05-2010 in ITANo. 384/Ind/2007 has 6
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affirmed the action of CIT(A) in deleting the addition. Under these circumstances, there being no change in the facts during the year under consideration, the addition of "Rs. 1,79,70,329/-made on account of excess consumption of raw material is hereby deleted Ground No.1 is allowed. "
7. Aggrieved by the above order, the assessee is in further appeal before us.
8. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee company is engaged in manufacturing of Thermal Energy Storage System ( Nodules and refrigeration machine (chillers). Besides manufacturing and selling of the products, the assessee is also engaged in trading of these items. During the course of assessment proceedings, the assessee has furnished details of value and quantity of manufacture of nodules and chillers.
9. Comparative statement of turnover and cost of material consumption for assessment year 2003-04, 04-05 & 05-06 were also furnished. The details of sales of trading items 7
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alongwith reconciliation with the audit report and profit and loss account and balance sheet were also furnished before the Assessing Officer. However, the Assessing Officer did not satisfy with the assessee's submission and by observing that there is disproportionate increase in consumption of raw material, trading addition of Rs. 1,79,37,329/- was made by rejecting the books of account. We do not find any justification for rejection of books of account in so far as no mistake much less a cogent mistake was pointed out by the Assessing Officer in the entries recorded in books of account with regard to consumption of raw materials, nor in the method of accounting being followed by the assessee consistently. We found that over-all gross profit of the assessee during the relevant assessment year under consideration was 26.24% on the sales of Rs. 8.22 crores. In the assessment year 2004-05, the gross profit was at 30.99 % on the sales of Rs. 6.37 crores. There is no dispute to the well settled proposition that with the increase of turnover, marginal sacrifice of gross profit is envisaged. As against turnover of Rs. 6.37 crores in the immediately preceding year, the turnover during the year 8
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under consideration has increased to Rs. 8.22 crores. Thus, there was increase of 29 % in the total turnover during the year. The gross profit of assessment year 2005-06 was Rs. 1.97 crore, which is also increased during the year to the extent of Rs. 2.15 crores. Thus, there was over-all growth in the business. Books of account maintained in regular course of business cannot be rejected light heartedly without pointing out precise mistake in the books of account. Merely on the plea that there is marginal decline in gross profit rate, the book result cannot be rejected without pointing out any defect in the entries so recorded in the regular books or without showing that the assessee has concealed any sales form the book or has over recorded the expenditure incurred on consumption etc. Not only quantity of purchase, sale and consumption was verifiable, but the comparative value of the same in terms of similar consumption made in earlier and subsequently year were also on the record. We had verified comparative chart of manufacturing and profit and loss account, technical specifications of the components imported by the assessee, copies of bills of entries, copies of 9
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orders/invoice, documents required to be maintained under Rule 10-D of the Income-tax Rules for international transactions, details of Associate Enterprises and the details of raw materials supplier having transactions above Rs. 5 lakhs and purchase of refrigeration machines. We had also gone through the technology transfer agreement entered into by the assessee and approval given by RBI for foreign collaboration and the justification for arms length price alongwith the details of two manufacturing divisions, product-wise trading account and the quantitative details of raw materials. The verification of all these documents clearly indicate that there is no excess consumption of raw materials and the Assessing Officer was not justified in rejecting the books of account and thereby making trading addition on allegation of excess consumption of raw materials. We find that similar addition made by the Assessing Officer in the assessment year 2004-05 was deleted by the ld.CIT(A) against which the Department was in appeal before the I.T.A.T. and the I.T.A.T. in its order dated 25.5.2010 in I.T.A.No. 384/Ind/2007 has affirmed the action of the CIT(A) in deleting the addition. As the facts and 10
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circumstances during the year under consideration are the same, we respectfully follow the order of the Tribunal in assessee's own case and confirm the action of the CIT(A) for deleting the addition.
10. The Revenue is also aggrieved for deletion of addition of Rs. 43,99,120/- made on account of commission payment. During the course of scrutiny assessment, the Assessing Officer observed that out of total commission of Rs. 43.99 lakhs, the assessee has paid commission of Rs. 25.67 lakhs to M/s. Kehems Engineering Private Limited, which is related concern. In this connection, assessee has been asked to furnish complete details alongwith justification during assessment proceedings. In response assessee has filed various detailed submissions and evidences on various dates as below :-
As per submission dated 21/09/2007:
5. That the commission has been paid to M/s. Kehems Engineering Pvt. Ltd. @ 3% of net sales price. Since our products are having Guarantee for one year, M/s. Kehems Engineering Pvt. Ltd. has undertaken the maintenance 11
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and repairs required for the same during the guarantee period of one year.
As per submission dated 07/12/2007 "Annexure 4 Justification of Commission paid to M/s Kehems Engineering Private Limited.
1. The assessee company undertakes the manufacture of the Chillers and the Nodules which are used in the air conditioning systems.
2. The orders are received from supply, installation, erection/testing and commissioning of Air Conditioning Systems with guarantee/warranty conditions.
3. The scope of works of M/s Kehems Engineering Private Limited is as under:
(a) To undertake the installation, erection/testing and commissioning of the airconditioning system.
(b) To meet the warranty/guarantee claims of the customers. The general warranty/guarantee claims are 12
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upto 18 months from the date of supply or 12 months from the date of commissioning. Whichever is earlier.
(c) To meet all the post sales requirements including replacement of the defective parts.
4. To fulfill the above obligations, M/s Kehems Engineering Private Limited has employed the necessary staff and has to carry the inventory of the spare parts. During the financial year 2004-05, the company had employed around 10 technical staff on its pay roll which has increased to nearly 20 as on date.
5. The shareholders of M/s Cristopia Energy Systems (India) Private Limited are:-
M/s CIAT FranceM/s Kehems Consultants Private LimitedBoth the shareholders own equal shares in the company. Mis CIAT France has three directors on the Board of the Company while Mis Kehems Consultants Private Limited has only two directors on the Board.
6. No formal agreement is entered into between M/s 13
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Cristopia Energy Systems (India) Private Limited and M/s Kehems Engineering Private Limited.
7. The Board of Directors of M/s Cristopia Energy Systems (India) Private Limited has passed a resolution in their meeting held on 16.10.2000 to pay the commission to Mis Kehems Engineering Private Limited. Copy enclosed.
8. It needs to be emphasized that the decision is taken by the Board of M/s Cristopia Energy Systems (India) Private Limited in which Mis CIA T France has majority directors. M/s CIAT France had no shareholding in Mis Kehems Engineering Private Limited in the financial year 2004-
05.the decision is taken by the Board on commercial basis after taking into account the interest of the company.
9. Copies of the Purchase Order of the under mentioned parties are enclosed which clearly show that the order received by M/s Cristopia Energy Systems (India) Private Limited include erection, installation, testing, commissioning and also the warranty/guarantee conditions. Against these Purchase 14
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Orders.
S.No. Name of the Party Commission
paid to M/s.
Kehems Engg.
Pvt.Ltd.
1. M/s. Suvidha Engineers Pvt.Ltd. 78,463.00
2. M/s. Tata Honeywell 1,55,124.00
3. M/s. Pancard Clubs Ltd. 33,865.00
4. M/s. Terna Public Charitable Trust 74,183.00
5. M/s. IDEB Construction Project 3,49,995.00
P.Ltd.
10. The Warrantee/Guarantee claims raised by the customers on M/s. Kehems Engineering P.Ltd. are received by it on the website at the email id [email protected] copies of the following mails received recently are enclosed :-
(a) Mail dated 27th October 2007
(b) Mail dated 5th November 2007
(c) Mail dated 2ih August 2007
11. However, the Assessing Officer did not satisfy with the assessee's contention. By further stating that no written 15
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agreement was entered by assessee with Khemka Engineering and that Indian partner of the assessee company has siphoned the whole of the reserves and surplus during the assessment year 2005-06, he disallowed total commission expenditure of Rs. 44.49 lakhs.
12. By the impugned order, the ld. CIT(A) deleted the disallowance by observing as under :-
" Ground no. 2 relates to addition of Rs. 43,99,120/- made on account of disallowance of commission payment. The Assessing Officer made this addition by observing that there is no written agreement between the assessee and the commission agents, that the Board resolution passed by the company is fabricated document and that purchase orders no where quote any thing about existence of any "Commission Agents". The fact that 'warranty/guarantee'has been provided to the customers does not in any way suggest that such 'warranty/guarantee' is responsibility of M/s. Kehems Engg. Pvt.Ltd. And others to whom commission has been paid.
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On going through the submissions of the appellant it clearly emerges that there is substance in the same. It is not necessary that every agreement should be reduced in writing. The conduct of parties play important role in deciding the issue whether an agreement does exist or not. The AO has not brought anything on record to hold that the resolution of Board is a fabricated document. The supporting documents filed by the appellant duly authenticate the services - rendered by the commission agents and payment of commission made to them. Likewise, the disallowance of Rs. 5,70,000/- comprised in total disallowance of Rs, 43,99,120/- has actually been allowed as discount to the buyers of one group of hotels by the appellant company through re-negotiations after receipt of sale order for Rs. 26,55,000/- . The AO has not established that the expenditure is not allowable under the provisions of law. In respect of an amount of Rs. 18,31,835/- comprising in total disallowance, the AO has observed that in absence of bank account 17
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statements, returns of income and books of account of the concerned persons it cannot be verified that commission has actually been paid to them for meeting business expediency. Nobody prevented the AO from verifying the facts. The AO should have exercised powers available to him u/s 131/133(6) and should have made necessary enquiries in case of doubt. He has failed in making such enquiries at the assessment stage. It is settled law that unless otherwise is proved, the apparent is to be taken as true. It is also pertinent to mention here that the AO has imported provisions of section 2(22)(e) under misconception which have no relevance with the point at issue. It further clearly emerges that AO has confused himself in making such disallowance and the same has simply been disallowed for the sake of disallowance only.
Considering all the facts and circumstances of the case, the addition is deleted and the ground of appeal is allowed."
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13. We have considered the rival submissions and found from record that commission payment has been made by the assessee for rendering the services for enhancement of sales.
Merely on the plea that there is no written agreement for the services so rendered, no disallowance of commission for such services is justified. Such agreement may be oral and may also be inferred by the conduct of parties. A clear finding has been recorded by the ld.CIT(A) to the effect that supporting documents filed by the assessee duly authenticate the services rendered by the commission agent and payment of commission made to them. There is no dispute to the well settled legal position that whenever an expenditure is claimed, the onus is on the assessee to prove that expenses have been incurred for the purpose of business wholly and exclusively, and when such payment is made to some related person burden is on the assessee to prove that payment so made was not in excess of prevailing market rates. In the instant case, we found that the payment of commission was for the services rendered by the commission agent and which has been duly 19
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corroborated by the supporting documents furnished before the Assessing Officer during the course of assessment proceedings. The finding recorded by the ld.CIT(A) to the effect that the documents so produced clearly indicate authentication of the services rendered by the commission agents and the payment of commission made to them has not been controverted by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the finding recorded by the ld.CIT(A) resulting into deletion of disallowance of expenditure made towards commission.
14. Next grievance of the Revenue relates to deletion of addition of Rs. 20,82,551/- on account of foreign exchange fluctuation.
15. Rival contentions have been heard and records perused. The Assessing Officer has made disallowance of Rs. 20.82 lakhs on account of loss debited to the profit and loss account regarding foreign exchange fluctuation, which comprised of following items :-
(a) Foreign Exchange fluctuation due to exchange difference of Rs. 11,00,102/- on account of raw material purchases.
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(b) Foreign Exchange fluctuations due to exchange difference of Rs. 57,522/- on account of export sales realization.
(c) Foreign Exchange difference on account of repayment loan amount to Rs. 9,24,928/- .
16. By the impugned order, the ld. CIT(A) deleted the addition after having the following observations :-
" Ground No.3 relates to addition of Rs. 20,82,551/--
made on account of foreign exchange fluctuations. The AO made the addition by observing that the assessee has repaid a loan and interest to M/s CIAT Sa France for loan account showing opening balance of Rs. 45,46,233/and repayment of Rs. 54,71,1611- and Rs. 9,24,928/- towards exchange fluctuation. Although this loan was provided with interest as on 31-03-2004 by it was held back that maximum amount can be remitted to the associated enterprise. The matter has been considered. The AO has not properly appreciated the facts of the case and has proceeded on wrong footings. It is a fact that the appellant assesses took loan from M/s CIAT SA, France in Indian rupees. The amount was repaid by 21
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purchasing the French Francs for repayment of loan. On account of decrease in value of Indian rupee, more amount had to be paid in Indian currency and this being a revenue liability was claimed in the year of occurrence. it has been held by the Apex Court in CIT v Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC), that loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u/s 37(1) of the ITAct,1961. It has also not been establshied by the AO that the appellant assessee has not followed accounting standards. Since the appellant follows mercantile system of accounting, the claim has rightly been claimed in this year.
Considering the facts and circumstances of the case, the disallowance is deleted and this ground of appeal is allowed. "
17. We have considered the rival submissions and found from record that loss has been occasioned to the assessee due to fluctuation in foreign exchange rates. There is no dispute to 22
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the well settled legal proposition that loss on account of foreign exchange fluctuation, in respect of trading items or loss on purchase of raw materials etc., the same is to be allowed as revenue expenditure, however, where loss has been occasioned in respect of loans taken for the purpose of acquiring capital goods which is capital in nature, such loss can not be allowed as revenue expenditure and is to be treated as capital loss. In the instant case, it is clear that loss of Rs. 11,00,102/- was on account of purchase of raw material, therefore, loss occasioned due to foreign exchange fluctuation was clearly allowable as revenue expenses. Similarly, loss of Rs. 57,522/- was on account of export sales realization, therefore, allowable as revenue expenses. However, it is not clear as to whether the loan taken from Associated Enterprises M/s.CIAT France and M/s. Cristopia Energy System Private Limited, S.A. France, was on account of revenue or capital purpose. In the interest of justice, we restore the matter back to the file of Assessing Officer with regard to loss of Rs. 9,24,928/- on account of repayment of loan, to find out the purpose for which loan was taken and to decide the issue in 23
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terms of proposition laid down by the Apex Court in the case of Woodward, 312 ITR 254. We direct accordingly.
18. Last grievance of the Revenue relates to deletion of addition of Rs. 2,50,000/- on account of Travelling Expenses, Rs. 42,000/- on account of vehicle repairs and maintenance and Rs. 70,000/- on account of telephone and trunk calls.
19. By the impugned order, the ld. CIT(A) deleted the addition after having following observations :-
1. Ground No.4 , 5 and 6 relate to addition of Rs.
2,50,000/-, Rs.42,000/and Rs.70,000/- made on account of disallowance of travelling expenses, vehicle repairs and maintenance and telephone respectively. The AO made the impugned additions observing that there is 100% increase in the head of travelling expenditure as compared to preceding year and that payments have been made on vouchers made by employees and directors and personal element cannot be denied therein.
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On going through the submissions of the appellant it appears that there is substance in the same. The AO has not appreciated the corporate structure of the appellant and has misdirected himself in coming to the conclusion that a company can have personal expenditure. In view of corporate structure of the appellant, there is no occasion for persona element in the expenditure claimed nor any thing to that effect has been established by Assessing Officer. Considering all the facts and circumstances of the case, the additions made are deleted and grounds of appeal no. 4, 5 and 6 are allowed.
20. We have considered the rival submissions and found from record that the disallowance has been made by the Assessing Officer on the plea that there is 100 % increase in the expenses as compared to the previous year and the payments have been made by vouchers. There is no allegations 25
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that the payments are not supported by vouchers. Considering the status of the company, which is a Corporate entity, there is no reason to disallow the expenses on the ground of personal element. The assessee being a corporate entity, we do not find any merit in the disallowance of expenses in view of the decision of Gujarat High Court in the case of Sayaji Iron, 253 ITR 749.
21. In the result, the appeal of the Revenue is allowed in part in terms indicated hereinabove.
This order has been pronounced in the open court on 10th April, 2012.
(JOGINDER SINGH) ( R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated :10th April, 2012.
CPU*
10.4
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