Income tax - Whether when excise duty liability is that of contract manufacturers, same can be taken over by assessee as matter of commercial expediency and can also be treated as revenue expenditure - NO: ITAT

By TIOL News Service

NEW DELHI, MAR 19, 2014: THE issues before the Bench are - Whether when the Revenue has allowed the expenditure incurred on import of mould utilised by contract manufacturers against payment of rent, any change in the treatment of such expenditure is required in the subsequent year when there is no change either in law or in facts and Whether when the excise duty and interest payments liabilities are that of the contract manufacturers, the same can be taken over by the assessee as a matter of commercial expediency and can also be treated as revenue expenditure. And the verdict partly goes in favour of the Revenue.

Facts of the case

A) The assessee is a wholly owned subsidiary of M/s Tuppeware Asia Pacific Holdings Private Limited, Mauritius which holds 99% equity capital of the assessee. The remaining 1% was held by M/s Tupperware Home Parties Inc., USA. The Group owns the brand name “Tupperware”. The assessee is engaged in trading of plastic kitchenware products It purchases the products from the contract manufacturers (Dart Manufacturing India Private Limited and Innosoft Technologies Limited). During assessment proceedings, AO found that assessee had claimed mould expenses of Rs. 46,632,929/- and the moulds were used by Dart India and ITL against rent payments. On query in this regard, assessee submitted that it had obtained permission from the Ministry of Industry to act as a technology transfer agent and marketing company. since the products manufactured have to meet the international quality standards and specifications established by Tupperware worldwide which require use of high quality and specific type of molds. It further furnished that since the designs of the products are patented designs, the molds used for manufacture of such products were not available in the open market. Therefore, the Company had to import them from overseas group companies on hire basis and provide the same to the contract manufacturers to enable them to manufacture the products. Once the contract manufacturer completed the order placed by the Company the molds were returned back to the Company and therefrom to the mold owner(s), in case, the particular mold was no longer required for use in manufacture. During the year under consideration, the company debited a sum of Rs. 4,66,32,929/- in its books of account as mold rental expenses. The said expenses were paid to the overseas entities on account of rental charges for the use of molds in manufacture of the products.

However, the AO was not satisfied with the assessee's submissions and held that the assessee had wrongly been claiming the rental expenses. That it had resulted in less payment of excise duty by Dart India and ITL and at the same time it had reduced the taxable income of the assessee. That therefore, this arrangement appeared to be colorable device to reduce the tax liabilities on part of all these persons and hence, the principles laid down in the famous decision of McDowell were to be applied. AO disallowed the claim of rental expenses in the hands of the assessee on the ground that the moulds were being used in the manufacturing by Dart India and ITL which were right entities to claim these expenses. Accordingly, AO proceeded to disallow the impugned expenses.

On appeal, the CIT(A) held that the expenditure in question was allowable under section 37 of the I.T. Act.

B) Assessee claimed the liabilities of Dart Manufacturing India Pvt. Ltd. (Dart India) and Innosoft Technologies Ltd. (ITL) which was related to excise duty and interest amounting to Rs. 4,94,09,120/- levied by the Customs & Central Excise Commission in view of the Settlement Commission order and discharged by the Company as contractual obligation towards contract manufacturers. AO observed that it was very clear that the liabilities of all the taxes and duties was that of the seller and not that of the assessee. In this regard, AO referred to the decision of the order of the Custom and Excise Settlement Commission dated 10.11.2006 in which these liabilities of excise duty was levied against the Dart India and ITL and not against the assessee.

On appeal, the CIT(A) affirmed the action of the AO. He concluded that seeing from any angle the liability of Rs. 4,94,09,120/- being the liability created against the contract manufactures was not an allowable expenditure in the hands of the assessee in the impugned assessment year.

On appeal, the Tribunal held that,

A) ++ we have perused the records. At the outset, we note that the mould expense in this regard was being incurred by the assessee for the asstt. year 1997-98. The same has been allowed by the AO as business expenditure. No disallowance in this regard was made in the preceding asstt. year i.e. 2005-06 also in 143(3) assessment. In these circumstances, we find that there is no change in the facts and legal position. In this regard, we find that Jurisdictional High Court in the case of CIT vs. Dalmia Promoters Developers (P) Ltd., has held that for rejecting the view taken in earlier assessment years, there must be material change in the fact, situation or in law. We find that in this case there is no change in the facts, situation or in law. Hence, the Revenue cannot be allowed to adopt a different stand. This is also reiterated by the Apex Court decision in Excel Industries. In this regard, it was held that when in earlier asstt. years the Revenue accepted the order of the tribunal in favour of the assessee, then Revenue cannot be allowed to flip flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it;

++ even on merits, we find that the expenditure on mould is allowable in the hands of the assessee. The payment of mould rental was done by the assessee under a contractual obligation with the contract manufacturer;

++ the product being dealt by the assessee had to meet international quality and specification of Tupperware worldwide which requires use of high quality and specific type of moulds, as the design of products are patent design. The moulds used by manufacturer of products are not available in the open market. Therefore, the company had to import these molds from overseas group company on hire basis and provide the same to contract manufacturers to enable them to manufacture the products. Once the contract manufacturer completes the order placed by the assessee, the molds are returned back to the company and therefrom to the molds owners in case the particular molds, is not required for use of manufacturer. We find that the above contract and molds borrowed by the assessee can by no stretch of imagination be considered as a colorable device. In our considered opinion, the same has been rightly allowed by the CIT(A) as Revenue expenses.

++ we also agree with the CIT(A) that even if for the sake of argument, if it was to be presumed that the payment of mould rentals is the liability of the contract manufacturers and so incurred by them in that case the cost of such mould rentals would be part of 'purchases' as it would increase the production cost of the contract manufacturer and accordingly, the purchase price bargained by the assessee would be increased by the same amount of mould rental. Thus, in the above situation the assessee would not incur rental expenses, but will have to pay resultant higher purchase price to the contract manufacturer. Thus the position in the hands of the assessee will be that the net effect on revenue would be the same. Hence, the situation would be revenue neutral;

++ we do not find any infirmity in the order of the CIT(A). Accordingly, we uphold the same.

B) ++ we find that assessee has claimed the liability of Dart India Ltd. and ITL pertaining to excise duty and interest amounting to Rs. 4,94,09,120/- levied by the Custom and Central Excise Commission. This has been borne by the assessee on the plea that it has contractual obligation towards contract of manufacturers in this regard. Further, assessee has claimed that the demand of excise duty related to cost component which was computed wrongly, hence, enhancement thereof was to be borne by the assessee as price adjustment. Further it has been claimed that it was on account of commercial expediency that assessee had to bear this expenditure liability. This was meant to safeguard the interest of the contract manufacturers;

++ however, we note that the plea that assessee has contractual obligation towards the contract manufacturers in this regard is devoid of cogency. The relevant portion of the agreement, it was clearly mentioned that “manufacturer shall pay all taxes relating to its performance of service under this agreement including the manufacture assembly sales and delivery of products”. Thus, it was clear that it was the contract manufacturer who was to bear all the taxes relating to the performance of the service under the agreement. There is no variation in the terms of agreement. The Counsel of the assessee’s submissions that the contract in this regard got amended by means of the letters and the debit notes is not acceptable. There is no proper variation in the terms of agreement. Merely letters exchanged and debit issued after more than 5 years can not be accepted as binding variation / change in the formal terms of agreement relied in this regard. Furthermore, we agree with the AO that even if the assessee has contended that it has taken the liability since, these manufacturers are exclusively selling the goods to it so the liability is in the nature of additional cost, the liability does not relate to this year and the same pertains to earlier years. Hence, assessee’s claim for the current year is unjustified;

++ furthermore, the assessee’s claim is that it was on account of commercial expediency that the liability has been taken over this by the assessee to maintain the relationship with these companies and to safeguard them from additional burden of some duties and taxes, levied against them. We find that this plank of argument also remains un-substantiated. Assessee cannot be allowed to claim such expenditure as revenue expenses which is claimed to have been incurred to safeguard the long term interest of the assessee, which remains unsubstantiated. Hence, we agree with the CIT(A), this expenditure cannot be treated to be a revenue nature and hence, not allowable against the taxable income. The case law relied by the Counsel of the assessee of Sabena Detergents P Ltd. from Madras High Court is not applicable on the facts of the case. That case related to advertisement expenditure incurred on products of sister concern, for which assessee was sole distributor and marketing agent. Hence, we do not find any infirmity in the order of the CIT(A). Accordingly, we affirm the same.

Regards

Prarthana Jalan

Income tax - Whether when assessee enters into an MoU with non-resident consignment agent to reimburse all such costs that are incurred to complete exports sales, such expenses can be allowed as business expenditure - YES: ITAT

NEW DELHI, MAR 20, 2014: THE issue before the Bench is - Whether when the assessee enters into an MoU with a non-resident consignment agent to reimburse all such costs that are incurred to complete the exports sales, such expenses can be allowed as business expenditure. And the answer goes in favour of the assessee.

Facts of the case

A) The assessee company is engaged in the business of manufacturing, food processing and infotech. During assessment, the AO noticed that assessee had claimed certain expenses as"USA office expenses". When the AO asked the assessee to justify its claim with supporting evidence, in response, the assessee submitted that M/s Global Reliance Inc. deducted the business expenses amounting to USD 343347/- equivalent to Rs.1,51,07,247/- in the course of export sales of the goods on behalf of the assessee in the relevant year. The assessee also enclosed the certificates from M/s Global Reliance Inc. and a certificate in respect of selling and administrative expenses claimed to have been verified by the CPA in the USA. The AO pointed out that in reality the assessee did not maintain any office in the USA. The AO held that the assessee had no substantive evidence in its possession to show that these claimed expenses had actually been incurred for the purpose of business of the assessee and secondly, that the assessee had made its entire export sale of M/s Global Reliance Inc. and all export invoices had been raised in the name of M/s Global Reliance Inc. Therefore, the so called claimed expenses of the assessee, which had been incurred by the M/s Global Reliance Inc. and claimed by the assessee as its "USA office expenses" were in any case in the nature of post sale expenses and the same could not be said to be expenses pertaining to the export business of the assessee. On appeal, CIT(A) partly allowed the appeal.

The CIT(A) observed that assessee had entered into an agreement with M/s Global Reliance Inc. USA on 30.03.2004 which was effective from 01.04.2004 to 31.03.2005. As per the agreement it was seen that the assessee was to bear all the expenses incurred out of India on account of marketing which would include road freight, ocean freight, custom duty, warehousing charges etc. on actual basis. In addition to above it was also a part of the agreement that the assessee would pay an amount @ 9.05% of the total sales on account of selling and administrative expenses, remuneration and other incidental. It was also agreed that all the above expenses would be deducted by Global Reliance Inc. out of the sale proceeds and the net amount payable would be credited to the account of the assessee. One of the important contentions in the assessee's argument "was that all the payments had been made to Global Reliance Inc under a mutual agreement and since the counter parties to the agreement had not made any misgivings about the genuineness or the reasonableness of the payment, therefore, the AO could not disregard the payment made by virtue of the above agreement. The AO had observed that the agreement was not registered and it was only in the nature of a self serving document between two related parties and therefore, the agreement" was a sham agreement only for the purpose of avoidance of payment of taxes. Assessee also claimed expenses by way of selling and administrative expenses under the USA offices expenses. As per the agreement, the liability of the assessee towards selling and administrative expenses was to an extent of maximum of 9.05% of the sales as fixed by the agreement discussed above. The AO observed that these expenses were being disallowed since the assessee had not submitted any evidence regarding the above expenditure. Perusals of the facts on record showed that the assessee had filed the details of the major expenses incurred under the head selling and administrative expenses. The bills and vouchers regarding the above were also sent to the AO.

Before the Tribunal, the assessee's representative submitted a copy of decision of ITAT Delhi 'C' Bench in assessee's own case for AY 2003-04 dated 14.10.2009 passed in assessee's appeal in ITA No.228/Del/2009 and revenue's appeal for the same assessment year in ITA No. 815/Del/2009 wherein the entire controversy was restored to the file of AO with a direction to examine assessee's claim afresh. The AR had also filed a copy of the order of CIT(A) dated 30.3.2013 for AY 2003-04 by which appeal of the assessee had been allowed by deleting impugned addition in respect of expenses incurred by M/s Global Reliance Incorporated, USA on behalf of the assessee. On the other hand, DR submitted that the CIT(A) erred in law and on facts in deleting the addition of Rs.4,07,92,581 out of total addition of Rs.4,33,78,000 made by the AO on account of ocean freight, custom duty, warehousing expenses, road freight of USA and selling and administrative expenses. The DR further contended that the CIT(A) had erred in deleting above addition being the fact that the evidences submitted by the assessee could not prove that these expenses actually pertain to assessee's business. The DR further contended that the expenses claimed by the assessee were not allowable to the assessee as no TDS had been deducted by the assessee on these payments which as per version of the assessee were contractual payments. The DR also contended that CIT(A) grossly erred and was not justified in accepting the explanation of the assessee that the Central Government department had granted subsidy to the assessee on the basis of these expenses. The DR also pointed out that in the return of income, the assessee had not declared any subsidy as its income and, on the other hand, it has just netted off the expenses which proves that the assessee had no intention to declare the income actually accrued or received by it. The DR finally submitted that AO made disallowance and addition on reasonable and cogent grounds which was wrongly deleted by the CIT(A), therefore, the impugned order may be set aside in this regard by restoring that of the AO.

B) Before the Tribunal, the assessee's representative submitted that when a major part of the expenditure incurred by the assessee has been accepted by CIT(A), then another minor part of the claimed expenditure cannot be disallowed. The AR placed reliance on the judgment of SC in the case of GE India Technology Centre Pvt. Ltd. vs C.I.T. (2010-TII-07-SC-INTL)and judgment of Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. vs DCIT (2009-TII-44-ITAT-MUM-SB-INTL). The AR pointed out that in the case of GE India Technology Centre Pvt. Ltd. the Apex Court had held that mere remittance to non-resident duty to deduct tax at source does not arise unless remittance contains wholly or partly taxable income. In the case of Mahindra & Mahindra Ltd. ITAT Mumbai (SB) interpreting the provisions of section 9(1)(vi) Explanation 2 held that in case of remittance or reimbursement expenses where no element of income taxable of India is found, then the same is not taxable in India and question of tax deduction at source does not arise. It was further submitted that when a major part of expenses had been allowed by CIT(A), then the remaining small amount cannot be disallowed without any basis. The AR submitted that the entire expenses claimed by the assessee were pertaining to "USA, office expenses" which were reimbursed to M/s Global Reliance Inc. and there was no element of income taxable in India. Therefore, the duty to deduct TDS cannot be fastened on the assessee and entire claim of the assessee deserves to be allowed. On the other hand, DR had submitted that if the CIT(A) had allowed major part of the expenses claimed by the assessee considering the same as reimbursement of "USA, office expenses", then remaining part of claim may be disallowed in absence of any details or evidence regarding the expenditure like car expenses, donation, membership fee, newspapers and periodicals and legal and professional fees not related to the sales. The DR pointed out that the onus was on the assessee to prove and establish his claim related to the expenses incurred only and exclusively for the purpose of business u/s 37(1). The DR had vehemently contended that when the assessee was unable to substantiate his claim for a part expenditure and no details or evidence had been filed regarding the same, then such claim deserves to be disallowed and the authorities below rightly disallowed a part of expenses for which the assessee could not discharge his onus to prove.

Held that,

A) ++ it as per terms of the agreement (MOU) dated 19.9.2002 between the assessee and M/s Global Reliance Inc., the expenses in the nature of selling and administrative expenses were clearly the responsibility of the assessee and the assessee had to reimburse the same to its consignment agent i.e. M/s Global Reliance Inc. It is a well accepted proposition that in case of a standard consignment, sale is effected by the consignment agent on behalf of the consignor and the agent is not responsible for any expenses incurred for such sale and expenses actually incurred or paid on behalf of the consigner is reimbursed to the consignment agent. The AR's contention on this point is that apart from actual ocean freight, custom duty paid in USA, warehousing expenses in USA, road freight in USA, selling and administrative Expenses in USA and other incidental expenses and the remuneration of the consignment agent was fixed @9.05% of the sales made in USA by Global Reliance Inc. as per terms of the subsequent agreement dated 30.03.2004 to regulate and monitor the same remain within the budgeted cost allocation which is a prudent business decision of the assessee to control the expenses incurred by consignment agent. The AR also contended that the department should follow the rule of consistency as per decision of SC in the case of Excel Industries;

++ the expenses incurred on behalf of the assessee by its consignment agent M/s Global Reliance Inc, the entire expenses claimed by the assessee were related to marketing and sales expenses and as per clause 03 of the first agreement dated 19.9.2002, the assessee was responsible for all costs, taxes and other tax expenses relating to the import from India to USA and sale of products made by Global Reliance Inc. including custom duty, ocean freight and land freight of USA, warehousing expenses in USA and other general and administrative expenses including USA Salaries payments, Telephone Expenses, Travelling Expenses, Staff Education and Medical Expenses, Courier Expenses, Web Hosting Expenses, USA Local Expenses, Membership Fees paid to different Associations, Legal & Professional Fees, Car Expenses etc. We also observe that as a prudent business decision and with an aim to restrict and control expenses in USA, the assessee also fixed the selling and administrative expenses remuneration and other incidentals @9.05% of the sales effected in USA. Undisputedly, the amount of remittance or reimbursement made to Global Reliance Inc. also contained an element of commission of consignment agent i.e. Global Reliance Inc. but at the same time, we clearly observe that the consignment agent has not rendered any service in India and, therefore, consignment commission is not taxable in India. On very careful perusal of assessment order, impugned order of the Commissioner of Income Tax(A) and entire record and material placed before us, we observe that the authorities below have not disputed the procedure adopted by the assessee and its consignment agent i.e. M/s Global Reliance Inc. that the assessee raises bills/invoices by estimating net realizable value (i.e. gross sales value in US minus US expenses) and under the relevant custom rules an ARE-1 was field by the assessee in respect of all goods leaving Indian custom boundaries and same detail was duly declared in ARE-I by the assessee and total amount for the same was amounting to Rs. 9.65 crores. We also observe that the authorities below have also not disputed rather accepted the accounting method of the assessee that out of the gross sales realized in USA was declared as turnover by the assessee in the final account and US expenses were also claimed separately therein;

++ in view of the above observation made in earlier para, we hold that the Assessing Officer concluded the assessment on contradictory finding because on the one hand, the Assessing Officer has considered gross sales realized value in USA as sales of the assessee for the financial year under consideration and on the other hand the AO held that the export sale was completed when the consigned goods left the Indian Customs Border and all expenses incurred thereafter were post sale expenses. Accordingly, we are inclined to hold that first part of findings of the Assessing Officer are correct that the gross sales realized value in USA is the export sales of the assessee but export sales was not completed when the goods left the Indian Custom Borders because it was consignment which was intended to be sold through consignment agent of the assessee i.e. M/s Global Reliance In. in USA. We further clearly observe that as per above set of facts, all US expenses incurred by the consignment agent on behalf of the assessee were the responsibility of the assessee as per MOU dated 19.9.2002 and subsequent agreement dated 30.3.2004, which were also certified by CPA audit report, when actual export sale was effected at USA through consignment agent on behalf of the assessee, then expenses claimed by the assessee for the purpose of business cannot be treated as post sales expenses and observations and findings of the Assessing Officer are not correct and justified in this regard and we set aside the same to this extent only;

++ on the basis of above factual matrix emerged from the evidence submitted by the assessee before the authorities below, we clearly observe that the ratio of decision of SC in the case of GE India Technology Centre P. Ltd. is applicable to the present case. We also hold that the benefit of the ratio of the decision of Special Bench, Mumbai in the case of Mahindra & Mahindra is also squarely applicable to the present case in favour of the assessee. Hence, in this situation and above facts and circumstances of the case, Circular No. 715 dated 8.8.95 is not applicable to the present case. Coming to the issue of consistency, we clearly observe that the Commissioner of Income Tax(A) has granted relief to the assessee in the AY 2003-04 pertaining to the same claim of the assessee and we are unable to see any valid reason to interfere with the same in the impugned order. Under these circumstances, we are inclined to hold that the department does not have any valid reason to take a different stand on this issue which the Commissioner of Income Tax(A) has taken in favour of the assessee for AY 2003-04. 24. In the result, we hold that the CIT(A) has granted relief for the assessee on reasonable, justified and cogent grounds which were again followed by CIT(A) in assessee's own case for AY 2003-04 vide its order dated 30.03.2013. We are unable to see any ambiguity, perversity or any other valid reason to interfere with the same. Accordingly, all grounds of the Revenue being devoid of merits are dismissed;

B) ++ at the outset, we find it appropriate to consider the ratio of the judgment of SC in the case of GE India Technology Centre, wherein it has been held that mere remittance to non-resident, TDS obligation does not arise unless remittance contains wholly or partly taxable income. In the case in hand, CIT(A) has given benefit to the assessee by accepting the claim of the assessee that a major amount of expenditure reimbursed to M/s Global Reliance Inc. was acceptable and assessee got relief in this regard. ITAT Mumbai Special Bench in the case of Mahindra & Mahindra has held the same legal proposition that reimbursement of expenses where no element of income taxable in India is found, then question of TDS by the payer does not arise. The CIT(A) partly allowed appeal of the assessee granting relief and deleting the addition of Rs.4,07,92,581 but a part of claimed expenditure amounting to Rs.25,85,419 was confirmed and upheld with the observation that no details or evidences have been filed regarding the remaining expenses. In the absence of any details or evidences regarding the expenditure of Rs. 2585419/- the above expenses are being disallowed. Moreover it is also seen that the expenses claimed for which no evidences were filed like car expenses, donations, membership fees, newspaper and periodicals legal and professional fees are also not relating to the sales and therefore, they can not be allowed as business expenditure under the provisions of section 37(1). In view of the findings above the expenditure of Rs. 2585419/- is being disallowed. In the present case, CIT(A) has given benefit to the assessee after detailed examination of the claim of the assessee but a minor part of the claim has been disallowed in absence of any details or evidence regarding the expenditure of Rs.25,85,419 and the same has been disallowed by the CIT(A) partly confirming the addition made by the AO. From the detailed paper book, we are unable to see any cogent or relevant details or evidence which could substantiate or establish the claim of the assessee related to the part disallowance made by the CIT(A). Thus, we are unable to see any ambiguity, perversity or any other valid reason to interfere with the findings of CIT(A) pertaining to part disallowance confirmed and upheld by the CIT(A) and we decline to take a different view in this regard. Accordingly, sole remaining ground of the assessee is dismissed by holding that the assessee miserably failed to substantiate its claim of Rs.25,85,419/- with cogent and reliable evidence and the assessee could not discharge its onus in this regard. Therefore, the impugned order is also upheld in regard to confirmation of part disallowance and sole remaining ground of the assessee is dismissed. In the result, the appeals of the Revenue as well as of the assessee are dismissed as discussed above.

 

Regards

Prarthana Jalan

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