IT: Where estimation of warranty provisions was not excessive as compared to actual expenditure on this account, provision for warranty expenses was to be allowed
IT: Where no interest bearing borrowed funds were used for investment in shares, no disallowance is called for out of interest expenditure
IT: Once it was found that services were rendered by agent and commission was paid, same should be allowed as business expenses
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[2013] 37 taxmann.com 371 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'D'
Eimco Elecon (India) Ltd.
v.
Joint Commissioner of Income-tax*
A.K. GARODIA, ACCOUNTANT MEMBER
AND KUL BHARAT, JUDICIAL MEMBER
AND KUL BHARAT, JUDICIAL MEMBER
IT APPEAL NOS. 3254 (AHD.) OF 2009 AND 36 & 37 (AHD.) OF 2010
[ASSESSMENT YEARS 2005-06 & 2006-07]
[ASSESSMENT YEARS 2005-06 & 2006-07]
MAY 31, 2012
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Warranty, provision for] - Assessment years 2005-06 and 2006-07 - Provision for warranty expenses debited to spares account was disallowed on ground that same was in nature of contingent liability - Whether since method of accounting adopted by assessee for relevant year regarding making provision in respect of warranty expenses was consistently followed by assessee in subsequent years, and estimation of warranty provisions also was not excessive as compared to actual expenditure on this account, disallowance of warranty provision was not justified - Held, yes [Para 2.3] [In favour of assessee]
II. Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Interest] - Assessment year 2006-07 - Assessing Officer applying section 14A made disallowance of interest expenditure in connection with making investment in shares - Whether since assessee had substantial own funds and no interest bearing borrowed funds were used for investment in shares, no disallowance was called for out of interest expenditure - Held, yes - Whether however, a reasonable disallowance under section 14A out of administrative expenses was called for - Held, yes [Para 4.2.3] [Partly in favour of assessee]
III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Commission] - Assessment year 2006-07 - Assessee-company made commission payment on export sale of certain machines to a company of Bangladesh - Commission payment was disallowed on grounds that assessee could not produce any evidence regarding actual rendering of any services by agent and that assessee failed to give any basis for bifurcation of commission of a single order between four different agents - Whether since assessee produced sufficient material to show that services were rendered by agent and commission was paid, disallowance of commission was to be deleted - Held, yes - Whether further, assessee had furnished a reasonable explanation that entire project could not be handled by main agent and it had engaged services of three other persons and as per their terms between themselves, payment was distributed by them among themselves, revenue should not have disallowed payment - Held, yes [Para 4.3.6] [In favour of assessee]
CASE REVIEW-I
Rotork Controls India (P) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC) (para 2.3) followed.
CASE REVIEW-II
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 4.2.3) and CIT v. Rotork Controls (India) Ltd.[2007] 293 ITR 311 (Mad.) (para 2.1) followed.
CASES REFERRED TO
Rotork Controls India (P) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC) (para 2.1), CIT v. Rotork Controls (India) Ltd. [2007] 293 ITR 311 (Mad.) (para 2.1) and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 4.2.1).
Sunil Talati for the Appellant. B.L. Yadav for the Respondent.
ORDER
A.K. Garodia, Accountant Member - Out of this bunch of three appeals, there is one appeal of the Revenue for the asst. yr. 2005-06 in ITA No. 36/Ahd/2010 which is directed against the order of learned CIT(A)-IV, Baroda, dt. 30th Oct., 2009 and the remaining two appeals are cross-appeals filed by the assessee and the Revenue which are directed against the order of learned CIT(A)-IV, Baroda dt. 30th Oct., 2009 for the asst. yr. 2006-07. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
2. First, we take up the appeal of the Revenue for the asst. yr. 2005-06. There is only one effective ground raised by the Revenue which is as under :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 48,61,158 being disallowance of warranty provision debited to spares account, contrary to auditor's finding in the audit report that it was in the nature of contingent liability. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the AO. The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the AO be restored."
2.1 Learned Departmental Representative of the Revenue supported the assessment order whereas learned Authorised Representative supported the order of learned CIT(A). He also submitted that learned CIT(A) has followed the judgment of Hon'ble Apex Court rendered in the case of Rotork Controls India (P) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. He submitted that in the first round, the Tribunal has restored back this matter to the file of learned CIT(A) for a fresh decision in ITA No. 1380/Ahd/2009, dt. 17th July, 2009. He submitted a copy of this Tribunal decision. He further pointed out that it was held by the Tribunal in this order in the first round that the decision of Hon'ble Madras High Court rendered in the case of CIT v.Rotork Controls (India) Ltd. [2007] 293 ITR 311, and the subsequent decision of Hon'ble apex Court in the same case Rotork Controls (India) Ltd.(supra) was not available when the matter was decided by learned CIT(A). Hence, the matter was restored back to the file of learned CIT(A) to decide the issue afresh in the light of this decision of Hon'ble apex Court. He further submitted that in the impugned order, learned CIT(A) had decided the issue in favour of the assessee by following this judgment of Hon'ble apex Court after examining all the details and, therefore, the order of learned CIT(A) should be confirmed.
2.2 He also submitted a chart of year-wise sales, warranty provision and actual expenses regarding warranty. He pointed out that as per these details for the present year, the sale was of Rs. 9,722.32 lacs and the provisions made for warranty @ 0.5 per cent was calculated at Rs. 48,61,159. He further submitted that actual warranty expenses incurred by the assessee in the present year were Rs. 177.17 lacs and in all the earlier years and in the preceding year also, the expenses incurred is much higher and, therefore, the provision made by the assessee for warranty is not excessive and unreasonable.
2.3 We have considered the rival submissions, perused the material on Record and have gone through the orders of authorities below. We find that this issue is now covered in favour of the assessee by the judgment of Hon'ble apex Court rendered in the case of Rotork Controls (India) Ltd. (supra). There is no dispute on this aspect also that the method of accounting adopted by the assessee for this year regarding making provision in respect of warranty expenses is consistently followed by the assessee in the subsequent years. Regarding the estimation of warranty provisions also, it is seen that the same is not excessive as compared to the actual expenditure on this account. Considering all these facts, we do not find any reason to interfere in the order of learned CIT(A).
2.4 In the result, appeal of the Revenue is dismissed.
3. Now, we take up the appeal of the Revenue for the asst. yr. 2006-07. In this year also, only one effective ground has been raised by the Revenue which is as under :
| "1. | On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 48,61,158 being disallowance of warranty provision debited to spares account, contrary to auditor's finding in the audit report that it was in the nature of contingent liability. | |
| 2. | On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the AO. |
Relief claimed in appeal.
The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the AO be restored."
3.1 It was agreed by both the sides that this issue is identical to the issue raised by the Revenue in the appeal for the asst. yr. 2005-06 and the same can be decided on similar lines.
3.2 In that year, we have held as per para 2.3 above that no interference is called for in the order of learned CIT(A) and on the same lines, we hold in the present year also that no interference is called for in the order of learned CIT(A) on this issue.
3.3 In the result, the appeal of the Revenue for this year also is dismissed.
4. Now, we take up the assessee's appeal for the asst. yr. 2006-07 in ITA No. 3254/Ahd/2009.
4.1 Ground No. 1 is general.
4.2 Ground No. 2 is as under :
"2. The Hon'ble CIT(A) has erred in confirming the disallowance of Rs. 4,54,220 under s. 14A of the IT Act, 1961 r/w r. 8D of the Rules. It is submitted that the disallowance is uncalled for and be directed to be deleted."
4.2.1 It was submitted by the learned Authorised Representative that as per the judgment of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203, r. 8D is prospective and the same can be invoked in asst. yr. 2008-09 and afterwards. It was further submitted that in the present case, the AO has invoked r. 8D which is not justified. He further submitted that the assessee company had substantial own funds of Rs. 83.89 crores whereas, investment in shares is amounting only to the tune of Rs. 1.99 crores. He further submitted that in the preceding year also, there was substantial interest-free fund of Rs. 77.45 crores whereas, the investment in that year was Rs. 1.02 crores only. He further submitted that new shares purchased during the present year have been acquired from internal accrual because the profits of the present year is of Rs. 2.83 crores and Rs. 2.55 crores in the preceding year. He submitted that in the light of these facts, no disallowance can be made in respect of interest expenditure in connection with making investment in shares. He submitted that the AO has made disallowance of Rs. 3,51,407 on account of interest disallowance, which should be deleted in full. Regarding the disallowance made by the AO in respect of administrative expenses, it was submitted that as per this judgment of Hon'ble Bombay High Court, only reasonable disallowance can be made.
4.2.2 Learned Departmental Representative supported the orders of authorities below.
4.2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgement cited by the learned Authorised Representative. Considering the facts of the present case, it has to be accepted that no interest bearing borrowed funds were used for investment in shares and, therefore, no disallowance is called for out of the interest expenditure. As per this judgment of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), r. 8D is not applicable in the present case because assessment year involved is asst. yr. 2006-07. Still some disallowance under s. 14A out of the administrative expenses is called for. Normally we restore such matters to the file of the AO for a fresh decision but considering smallness of the amount of disallowance made by the AO regarding administrative expenses of Rs. 1,02,484 we feel that an estimated disallowance could be confirmed on reasonable basis and no effective purpose will be served by restoring this matter back to the file of the AO. Considering the facts of the present case,. We feel that disallowance of Rs. 50,000 out of administrative expenses will meet the ends of justice. We hold accordingly. This ground is partly allowed.
4.3 Ground No. 3 is as under :
"3. The Hon'ble CIT(A) has erred in confirming the disallowance of Rs. 1,09,16,495 being export commission paid to four parties. Your appellant submits that the same was paid for securing export orders through agents who assisted in bidding, technical evaluation, price negotiation, liaison with customers, collection of outstanding etc. Commission paid is wholly and exclusively for the purpose of, business, be directed to be allowed as claimed. It be held so now."
4.3.1 Brief facts till the assessment stage are noted by learned CIT(A) in para 4 of his order which is reproduced below :
"4. The next ground of appeal is regarding disallowance of export commission of Rs. 1,09,16,495. During the year, appellant had debited commission expenses of Rs. 1,09,16,495 as under in respect of exports to Bangladesh :
| Sl. No. | Name of person | Amout (Rs.) | |
| 1. | Marfatia & Co. | 44,16,495 | |
| 2. | Soma Mukherjee | 5,00,000 | |
| 3. | Fatima S. Broachwala | 30,00,000 | |
| 4. | Saifuddin F. Broachwala | 30,00,000 | |
| Total | 1,09,16,495 |
On being asked to furnish details of export turnover, on which the said commission was claimed to have been paid, appellant submitted that during the year, it had made export sale of 13 RSL machines worth Rs. 2,68,28,602 and spares worth Rs. 81,58,230 to M/s NAMNAM/MHMP, Dhaka, Bangladesh. On this export turnover of Rs. 3,91,76,103, appellant had claimed that export commission of Rs. 1,09,16,495 was paid to abovementioned four persons. The AO noted that appellant had claimed commission payment of about 30 per cent of the total export turnover and the so-called commission was without any written contract. In response to AO's proposal to disallow the commission, by referring to the fact that commission on a single order had been paid to four different persons without any basis and the appellant had failed to furnish any documentary evidence, appellant contended that export orders were secured through commission agents, who assisted it in bidding, technical evaluation, price negotiation and liaison with customers, since it did not have any office in Bangladesh. Appellant contended that the agents had relationship with Bangladesh customers and hence their services were helpful in securing the order. As per appellant, the agents also visited Bangladesh on its behalf and IDS was deducted by the appellant from the payments made. Details such as PAN, address and confirmation from the agents were filed. Appellant contended that due to engaging the commission agents, it could fetch better price with much higher profitability than that realized in domestic sales. The AO observed that the contention of appellant about agents assisting it in bidding, technical evaluation, price negotiations and liaison with customers was unsubstantiated and in spite of adequate opportunities to put forth documentary evidences in support of this contention, no evidences other than copy of handwritten debit note of M/s Marfatia & Co. could be submitted. AO further observed that the contention about agent visiting Bangladesh on its behalf also remained unsubstantiated. AO further observed that in spite of being specifically asked, appellant failed to give any basis for bifurcation of the commission on a single order between four different agents and no details of specific services rendered by each of these agents were furnished. Also, no details of any qualification or past experience in similar line for Soma Mukherjee, Fatima S. Broachwala and Saifuddin F. Broachwala were furnished. AO also observed that iron-collection of service-tax from payments made to three persons showed that no services were rendered by these persons and the payments were in the nature of gratuitous payments. AO also observed that the fact that appellant was able to charge premium of 800 to 900 per cent of the domestic sale value of spares indicated that the payments called 'export commission' were actually of the nature that attract provisions of Explanation to s. 37(1). AO disallowed export commission of Rs. 1,09,16,495."
4.3.2 Being aggrieved, the assessee carried the matter in appeal before learned CIT(A) but without success and now, the assessee is in further appeal before us.
4.3.3 In the course of hearing before us, it was submitted by the learned Authorised Representative that this disallowance was made by the AO and confirmed by CIT(A) mainly on this basis that the assessee could not bring on record correspondence with the principal or the concerned agent or any confirmation from principal/customer regarding involvement of agent and the assessee could not produce any correspondence with the agent also. He submitted that during the course of assessment proceedings and during the course of appellate proceedings before learned CIT(A), the correspondence of the assessee with the agent could not be brought on record because the same were lying with the managing director and he was sick and ultimately expired but now, some of these correspondence could be located while searching his cupboards etc. and since it goes to the root of the matter, the same could be admitted as additional evidence. Learned Departmental Representative did not have any serious objection and since these additional evidences go to the root of the matter to decide as to whether any services were rendered by the agent or not, we admit these additional evidences.
4.3.4 It was further submitted by the learned Authorised Representative that as per these correspondence of the assessee with the agent M/s Marfatia & Co., it can be seen that they were acting as the agents of the assessee company for export to Bangladesh and the orders were procured by them and they were also monitoring, commissioning the equipment at the buyer's end and were taking up the matter with the assessee for solving out the problems of the buyer. Regarding the second objection of the Revenue that the payments were made to four different persons, it was submitted that the payments were made to different persons as per the instructions of the agent M/s Marfatia & Co. as per letter dt. 30th June, 2005 as per which, they have requested for payment of Rs. 46,78,986 to them and Rs. 5 lacs to Soma Mukherjee and Rs. 30 lacs each to Fatima S. Broachwala and Saifuddin F. Broachwala. He submitted that assessee is concerned with the services and payment for that. The services were rendered by M/s Marfatia & Co. and if he in turn has taken help form others and instead of making payment directly to them, he asked the assessee to make direct payments to those persons in part, then no adverse inference should be drawn against the assessee on the basis of such direct payments to other persons who had rendered services to the assessee through M/s Marfatia & Co. (agent). It is submitted that this can be explained by a hypothetical example. Suppose, a person 'A' goes to a restaurant and order for some drinks, Chinese dishes, Indian dishes and some ice creams from that restaurant. This restaurant offers Indian dishes from own sources and outsources the balance items and for the same the restaurant presents four bills including one bill of the restaurant and three bills of the outsiders and ask 'A' to make payment of the entire amount, the same is equivalent to the present case and since those things in a restaurant is happening day in and day out, no adverse inference should be drawn against the assessee on this account that part payments were made to three different persons. As against this, it was submitted by the learned Departmental Representative that the assessee could not establish rendering of services, therefore, no interference is called for in the order of learned CIT(A).
4.3.5 Learned Departmental Representative supported the orders of authorities below. Regarding additional evidences submitted by the learned Authorised Representative, it was submitted by him that these are self serving documents and hence, no interference is called for in the order of learned CIT(A) on this issue.
4.3.6 We have considered the rival submissions, perused the material on and have gone through the orders of authorities below. We find that there is no dispute regarding this aspect that for the first time in this year, assessee has made export worth Rs. 268.28 lacs to Bangladesh on account of sale of BRFL machine and also exported spares worth Rs. 81.58 lacs to Bangladesh. In this manner there is export turnover of Rs. 391.76 lacs. Against this export, the assessee has claimed deduction on account of commission payment of Rs. 1,09,16,495. This claim of the assessee was rejected by the AO mainly on this basis that .the assessee could not produce any evidence regarding actual rendering of any seryices by the agent. The second objection of the AO is that the assessee has failed to give any basis for the bifurcation of the commission of a single order between four different agents. In the course of hearing before us, learned Authorised Representative has submitted some additional evidences which were admitted by us in view of this fact that the same go to the root of the matter and, therefore, admitted. As per these additional evidences, it is seen that these are correspondence between the assessee and the agent M/s Marfatia & Co. during July, 2004 to June, 2005. The agent has intimated the assessee that they are having very good contacts in Bangladesh and they are aware of the works contract awarded for underground mining project of Bangladesh to a Korean company and this company requires some mining machinery and for the same, the agent has intimated the assessee company that if the assessee is interested, they can procure orders for the assessee from Korean company. In reply, the assessee company sent the required product literature and other details and thereafter, this agent intimated the assessee that product literature was forwarded by them to the Korean company. They also asked the assessee company to quote the payment terms and Despatch Schedule etc. There are other letters in this connection between the assessee and the agent and as per letter dt. 30th June, 2005, the agent M/s Marfatia & Co. made a request to the assessee that since they cannot alone handle the whole project, there were some other persons also involved in the execution of this contract and, therefore, they have requested the assessee company to make payment of Rs. 65 lacs to three different persons and only the balance amount of Rs. 46,78,986 was to be paid to M/s Marfatia & Co. The assessee made the payments accordingly. Considering all these facts, we are satisfied that the assessee have brought on record sufficient material in support of this contention that services were rendered by the agent. Regarding this aspect that on what basis the payment were made to four different persons in connection with single order, we are satisfied that for this also, the assessee has furnished a reasonable explanation that the entire project could not be handled by M/s Marfatia & Co. and they have engaged services of three other persons and as per their terms between themselves, the payment was distributed by them among themselves. It makes no difference to the assessee as to whether the entire payment was made to M/s Marfatia & Co. and thereafter, he distributes the amount to three different persons or whether the agent request the assessee to make separate payments to all the four persons. It has no bearing on the allowability of the commission expenses, once it is found that the services were rendered and commission is paid, the same should be allowed as business expenses. Therefore, we delete this disallowance. This ground of the assessee is allowed.
4.5 In the result, appeal of the assessee is partly allowed.
5. In the combined result, both the appeals of the Revenue in ITA Nos. 36 and 37/Ahd/2010 are dismissed and the appeal of the assessee in ITA No. 3254//Ahd/2009 is partly allowed
Regards
Prarthana Jalan
__._,_.___
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