The order of the Bench was delivered by
1. The assessee has filed appeals for the assessment years 2005-06, 2006- 07 and 2008-09 and the Revenue has filed appeal for the assessment year 2005-06 challenging the orders passed by the learned Commissioner of Income-tax (Appeals)-15, Mumbai. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
2. The assessee-company is engaged in the business of manufacturing and trading in pesticides, agro chemicals and seeds. Assessments of three years under consideration were completed by the Assessing Officer by making various types of additions. The assessee has filed these appeals challenging the additions confirmed by the learned Commissioner of Income-tax (Appeals) and the Revenue has filed the appeal challenging the relief granted by the learned Commissioner of Income-tax (Appeals). Certain issues in all the appeals filed by the assessee are identical in nature and they are being considered together.
3. The first common issue urged by the assessee relates to the disallowance of the lease rental paid to IBM for taking computers on lease. The assessee had treated lease as "financial lease" in its books of account and accordingly claimed interest portion as expenditure. However, in the Income-tax computation, the assessee treated the same as "operating lease" and accordingly claimed the entire lease rentals (principal + interest portion) paid by it as revenue expenditure. The Assessing Officer, however, treated the nature of lease as "financial lease" and accordingly disallowance claim for deduction of the principal portion of the lease rental. The learned Commissioner of Income-tax (Appeals) also confirmed the same.
4. The learned authorised representative submitted that an identical issue was considered by the co-ordinate Bench of the Tribunal in the case of Dow Chemical International Private Limited v. Addl. CIT (a group company) in I. T. A. No. 7460/Mum/2010 relating to the assessment year 2006-07 dated March 10, 2015 and the said issue was set aside to the file of the Assessing Officer for determination of the nature of lease by examination of the lease agreement.
5. On the contrary, the learned Departmental representative submitted that computers are normally returned back to the supplier after completion of lease period for refurbishing/upgrading them in order to suit the requirement of the assessee in order to reduce the investment cost in computers. Accordingly he submitted that the lease can only be financial lease as opined by the Assessing Officer.
6. We have heard the rival contentions and perused the record. As submitted by the learned authorised representative, the co-ordinate Bench of the Tribunal has considered the issue and restored the same to the file of the Assessing Officer with the direction to examine the lease agreement in order to ascertain as to whether lease agreement entered by the assessee is in the nature of financial lease or operating lease. In the instant case also the lease agreement was not examined by the tax authorities. Proper examination will throw light about the nature of lease, which would decide the manner of treatment of lease rental. Accordingly, consistent with the view taken in the case of Dow Chemical International Pvt. Ltd. (supra), we set aside the order passed by the learned Commissioner of Income-tax (Appeals) on this issue and restore the same to the file of the Assessing Officer with the direction to examine the lease agreement in order to ascertain the nature of lease and take appropriate decision in accordance with law, after affording adequate opportunity of being heard to the assessee.
7. The next common issue urged by the assessee relates to the treatment of advances received from the customers as unexplained cash credit under section 68 of the Act.
8. The learned authorised representative submitted that the assessee has been receiving advances from its customers towards supply of products. Such advances are normally adjusted against the subsequent sales made to the customers. At the time of hearing the learned Assessing Officer asked the assessee to file confirmation letters from the customers along with their permanent account numbers. Since the numbers of the customers were high as much as 700, the assessee could not obtain the confirmation letters from all the customers. However, the assessee has obtained confirmation letters from majority of the customers and in respect of the remaining parties, the assessee has furnished the ledger account copies to prove that the advances were adjusted against the subsequent sales. The learned authorised representative submitted that the learned Commissioner of Income-tax (Appeals) has given a partial relief in the assessment year 2005-06, i.e., he has deleted the addition wherever the confirmation letters were filed along with the permanent account numbers. In respect of the other two years, the learned Dispute Resolution Panel had directed the Assessing Officer to delete the disallowance, if the advances have been adjusted against the subsequent sales. The learned authorised representative pleaded that the impugned additions need to be deleted since they have been received from the regular customers during the course of regular business operations.
9. On the contrary, the learned Departmental representative submitted that the assessee has failed to prove the genuineness of the advances by filing the confirmation letters including the permanent account numbers of persons from whom advances were received. Further the Assessing Officer has already granted relief in respect of advances, which have been adjusted against the subsequent sales.
10. We have heard the parties on this issue. It is the contention of the assessee that the advances have been received from its regular customers through banking channels and the same has been adjusted against the subsequent sales made to those customers in most of the cases. The assessee has also submitted that due to high volume of customers, it could not obtain confirmation letters from all the parties. Further the learned authorised representative submitted that the assessee cannot also enforce the customers to furnish their permanent account numbers. We notice that the learned Dispute Resolution Panel has directed the Assessing Officer to delete the addition, if the advances have been adjusted against the subsequent sales made to the parties. We are of the view that the direction given by the learned Dispute Resolution Panel is reasonable one. At the same time, there is merit in the contention of the assessee that the assessee cannot enforce its customers to furnish their permanent account numbers. However, if advances have been adjusted against the subsequent sales, it would be reasonable to accept the genuineness of the advances since they have been received from the regular customers who were not related parties of the assessee. Accordingly we direct the Assessing Officer to delete the addition, if the advances have been adjusted against the subsequent sales. For that purpose, the assessee is directed to furnish a chart showing adjustment of deposits against the subsequent sales. We notice from the orders passed for the assessment years 2006-07 and 2008- 09, the Assessing Officer has sustained a portion of advances, presumably on the reasoning that they have not been adjusted against the subsequent sales. We notice that the assessee had shown before the Dispute Resolution Panel that a sum of Rs. 10 lakhs received as advance was returned back and hence the Dispute Resolution Panel has directed the Assessing Officer to delete the same. Hence, in case the advances have not been adjusted against the subsequent sales, we are of the view that the assessee should be provided with an opportunity to explain the reasons, which shall be examined by the Assessing Officer in accordance with the law. Accordingly we set aside the additions confirmed by the learned Commissioner of Income-tax (Appeals) in the assessment year 2005-06 and the orders passed by the Assessing Officer in other two years and restore them to the file of the Assessing Officer for examining them afresh in the light of discussions made supra.
11. Next common issue contested relates to transfer pricing adjustment made on payment of royalty. The assessee has paid royalty at five per cent. on domestic sales and eight per cent. on export sales to its associated enterprise named M/s. Dow, Netherlands. The Assessing Officer noticed that M/s. Dow, UK has paid royalty to Dow, Netherlands at three per cent. on domestic sales and five per cent. on export sales. Hence the Assessing Officer made transfer pricing adjustment by adopting rate of three per cent. and five per cent. as given by Dow, UK. The learned authorised representative submitted that an identical issue was considered by the co- ordinate Bench of the Tribunal in the assessee's own case in I. T. A. No. 1443/Mum/2011 relating to the assessment year 2004-05 and the Tribunal, vide its order dated August 10, 2016, has deleted the transfer pricing adjustment. Accordingly, the learned authorised representative pleaded that the order of the Income-tax Appellate Tribunal passed for the assessment year 2004-05 may be followed in these three years also.
12. The learned Departmental representative did not dispute the factual aspect submitted by the learned authorised representative.
13. We have heard the parties on this issue. We notice that the identical issue was considered by the co-ordinate Bench in the assessee's own case for the assessment year 2004-05 (supra) and the same has been decided in favour of the assessee. For the sake of convenience we extract below relevant observations made by the co-ordinate Bench for the assessment year 2004-05 :
"7.1 In order to appreciate the aforesaid, the following discussion is relevant. The royalty paid by the assessee to its associated enterprise, i.e., Dow Netherlands has been approved by the Secretariat of Indus trial Approval (SIA), Ministry of Industry (Government of India) vide communication dated September 7, 1996 and also by the Reserve Bank of India dated March 11, 1997. Before us, a reference has also been made to paper book, wherein the aforesaid communications have been placed as also a communication SIA dated January 22, 1997, which is in continuation to its earlier approval dated September 17, 1996. In terms of such approvals, the assessee is permitted to pay its foreign collaborator, i.e., Dow, Netherlands, royalty at five per cent. on domestic sales and eight per cent. on export sales. In this background, before the Transfer Pricing Officer the assessee asserted that since royalty was paid in terms of the approvals by the Central Government, the payment of royalty was at the arm's length rate. In other words, the rate of royalty approved by the Central Government was used as a reliable data for benchmarking the transaction of payment of royalty. In this manner, the assessee adopted the comparable uncontrolled price (CUP) method as the most appropriate method to benchmark its international transaction of royalty and the rate approved by the Central Government was used as a reliable comparable uncontrolled price data. Similar was the position taken by the assessee in the assessment year 2003-04. Apart therefrom, the assessee had also canvassed that even after application of the tranactional net margin method (TNMM) to test the arm's length nature of its transaction of payment of royalty, no adjustment was necessitated. Be that as it may, the Transfer Pricing Officer noted that another associated enterprise of the assessee namely, UK King Lynns Plant (in short "Dow, UK") was also paying royalty to Dow, Netherlands, which was at lower rates. Based on the above, the Transfer Pricing Officer determined that the royalty paid by Dow, UK was a comparable transaction and accordingly determined the arm's length royalty payment at three per cent. for domestic as well as five per cent. for the gross export sale, which were the rates at which royalty was paid by Dow, UK to Dow, Netherlands. In the assessment year 2003-04 as also in the instant assessment year, the assessee had challenged the aforesaid action of the Transfer Pricing Officer. Firstly, it was canvassed that the rate of royalty payments having been approved by the Government of India, such rates constitute a valid comparable uncontrolled price data and no further adjustment was required to the stated value of the royalties paid. Secondly, the learned representative for the assessee also pointed out that the comparable transaction adopted by the Transfer Pricing Officer, i.e., payment of royalty by Dow, UK to Dow, Netherlands was a wrong approach inasmuch as comparison could be made only with an uncontrolled transaction, whereas in the case of Dow, UK and Dow, Netherlands, both were associated enterprises and, therefore, payment of royalty by Dow, UK to Dow, Netherlands was a controlled transaction and accordingly, the same could not be considered as a valid comparable uncontrolled price data. In so far as the latter plea of adoption of controlled transaction was concerned, the Commissioner of Income-tax (Appeals) in the assessment year 2002-03 has accepted the plea of the assessee. However, with regard to the plea of the assessee based on the rate of royalty approved by the Central Government is concerned, the Commissioner of Income-tax (Appeals) rejected the same as according to him, such rates could not be considered as valid comparable uncontrolled price data. The Commissioner of Income-tax (Appeals) had however, allowed relief by benchmarking royalty payment under the transactional net margin method whereby, the margins from the manufacturing activities of the assessee were found to be favourable vis-a-vis those of the comparables concerns. The Tribunal in the assessment year 2003-04 upheld the ultimate conclusion of the Commissioner of Income-tax (Appeals) to delete the addition on the ground that the basis on which the royalty was paid by the Dow, UK to Dow, Netherlands was different than that was paid by the assessee to Dow, Netherlands inasmuch as Dow, UK was paying royalty as a percentage of gross sales, whereas the assessee was paying royalty at net sales, in accordance with the Foreign Exchange Control Regulations. The Tribunal found that if the royalty payable was calculated by adopting the same basis, then the royalty being paid by Dow, UK was higher than what has been paid by assessee-company to Dow, Netherlands and, thus, the royalty paid by the assessee was at an arm's length rate, and no adjustment was required. On this basis, the Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) deleting the addition in the assessment year 2003-04.
7.2 Now in the present year, the case of the assessee is that the plea that the rate of royalty approved by the Central Government as also by the Reserve Bank of India constitutes a valid comparable uncontrolled price data has been affirmed by the honourable Bombay High Court in the case of CIT v. SGS India Pvt. Ltd. (I. T. A. No. 1807 of 2013 dated November 18, 2015). In this context, the learned representative for the assessee pointed out that before the honourable High Court, the Revenue had relied upon Press Note No. 9 (2000 series) issued by the Central Government for adopting the rates of royalty prescribed therein for benchmarking royalty payable. In this context, reference was made to para 8 of the order of the honourable High Court, wherein clause (IV) of the Press Note was specifically noted, which provided for payment of royalty up to eight per cent. on export sales and five per cent. on domestic sales. The learned representative for the assessee explained that though clause (IV) of Press Note No. 9 (2000 series) considered by the honourable High Court related to payment of royalty by a wholly owned subsidiary to its off shore parent company, but similar treatment has been extended even to other entities also vide A. P. (DIR Series) Circular No. 5 dated July 21, 2003 issued by the Reserve Bank of India, Exchange Control Department, Central Office, Mumbai, a copy of which has been placed on record. The learned representative for the assessee pointed out that before the honourable High Court, the Revenue stated the Press Note No. 9 (2000 series) dated September 8, 2000 was applicable to examine the reasonableness of the royalty paid while computing the arm's length price.
7.3 On the basis of the aforesaid it is canvassed that the royalties paid by the assessee are in terms of the approval granted by SIA as also in terms of Circular No. 5 dated July 21, 2003 (supra) of the Reserve Bank of India and, therefore the royalty paid at eight per cent. on exports and five per cent. on domestic sales are to be considered at the arm's length rate.
7.4 Although the learned Departmental representative did not dispute the factual matrix, but he has merely relied upon the order of the Transfer Pricing Officer in support of the case of the Revenue.
7.5 In our considered opinion, following the judgment of the honourable Bombay High Court in the case of SGS India P. Ltd. (supra), the payment of royalty by the assessee to its associated enterprises, Dow, Netherlands at five per cent. on domestic sales and eight per cent. on export sales is liable to be considered as at an arm's length rate in view of Circular No. 5 dated July 21, 2003 (supra). Therefore, the addition made by the Assessing Officer on this count is unsustainable. In the ultimate analysis, we uphold the action of the Commissioner of Income-tax (Appeals) in deleting the addition, albeit, on a different ground."
14. Consistent with the view taken in the assessment year 2004-05, we direct the Assessing Officer to delete the addition made on account of transfer pricing adjustment.
15. Now, we shall take up other issues urged in appeal filed for the assessment year 2005-06. The first issue relates to the disallowance of leave encashment under section 43B of the Act. The learned authorised representative submitted that the honourable Calcutta High Court in the case of Exide Industries Limited v. Union of India [2007] 292 ITR 470 (Cal) has held that the provision of section 43B(f) relating to disallowance of "provision for leave encashment" is arbitrary, unconscionable. The learned authorised representative further submitted the same view was expressed by the honourable Kerala High Court in another decision.
16. On the contrary, the learned Departmental representative submitted that the decision rendered by the honourable Calcutta High Court in the case Exide Industries Limited (supra) has since been stayed by the honourable Supreme Court in the case of CIT v. Exide Industries Ltd. in SLP CC No. 12060008 dated September 8, 2008. Subsequently the honourable Supreme Court in SLP CC No. 22889/2008 dated June 27, 2007 in the case of CIT v. Exide Industries Ltd. has held that, during the pendency of appeal, the assessee has to pay tax as if section 43B(f) is on the statute book. Accordingly, the learned Departmental representative submitted that the disallowance of provision for leave encashment is required to be made under section 43B(f) of the Act.
17. We heard the parties on this issue and perused the record. As submitted by the learned Departmental representative, the honourable Supreme Court, in the case of Exide Industries Ltd., (referred supra) has stayed the decision rendered by the honourable Calcutta High Court and further held that the disallowance should be made in terms of section 43B of the Act, during the pendency of appeal, as if section 43B(f) is in the statute book. Hence the provision for leave encashment is required to be disallowed in terms of section 43B(f) of the Act, if it has not been paid on or before the due date prescribed for furnished return of income under section 139(1) of the Act. However, since the decision of the honourable Supreme Court is pending, we set aside this issue to the file of the Assessing Officer with the direction to modify the addition, if required, in accordance with the decision that shall be rendered by the honourable Supreme Court.
18. The next issue urged by the assessee in the assessment year 2005-06 relates to disallowance made under section 43B of the Act in respect of outstanding bonus and excise duty liabilities. The assessee initially did not disallow the bonus and excise duty payable, which were outstanding as at the year end, as per the provisions of section 43B of the Act. When the Assessing Officer raised the queries in that respect, the assessee admitted that it is a mistake and filed revised computation of income. In the revised computation of income so filed, the assessee made additional claim in respect of expenditure which are allowable under section 43B of the Act during the assessment year 2005-06 on payment basis. The said additional claim was initially omitted to be made in the original return of income. The Assessing Officer refused to accept the additional claim made through revised computation of income. The learned Commissioner of Income-tax (Appeals) also confirmed the same and hence the assessee has filed this appeal.
19. We have heard the parties on this issue. It is settled proposition of law that the Assessing Officer is required to compute the correct total income and further deduction which is legally allowable to the assessee cannot also be denied. The honourable Bombay High Court in the case of CIT v. Pruthvi Brokers and Shareholders P. Ltd. [2012] 349 ITR 336 (Bom) has held that the appellate authorities are entitled to consider new claim made subsequent to filing of return. Accordingly, we admit the additional claim put forth by the assessee and direct the Assessing Officer to consider the same in accordance with the provisions of section 43B of the Act.
20. The next issue urged in the assessment year 2006-07 relates to the disallowance of sample expenses of Rs. 11,30,424. In respect of the above- said claim the Assessing Officer asked the assessee following queries :
(a) Whether samples issued from manufactured goods or trading goods ?
(b) Whether expenditure already included in purchasing ?
However the assessee gave only break-up details of "sample expenses". The Assessing Officer noticed that the assessee did not answer the specific queries raised by him and further the assessee also did not substantiate the claim with evidences. Accordingly he disallowed the claim of the assessee. Before the learned Commissioner of Income-tax (Appeals), the assessee contended that the sample expenses are allowable under section 37(1) and also placed reliance on various case law. The learned Commissioner of Income-tax (Appeals) observed that there is no dispute that the expenses incurred on distribution of free samples is allowable under section 37(1) of the Act. He further observed as under :
"The Assessing Officer disallowed such expenses on the ground that the queries asked have not been replied and further observing that for manufacturing the samples no separate purchases are made and raw material and other incidental expenses are common. Therefore, unless the expenditure incurred in samples are separated and reduced from the total expenditure, the same cannot be claimed separately, otherwise, the expenditure would be allowed twice."
We notice that the assessee has not answered specific queries raised by the Assessing Officer and further no document was produced to show that the expenditure was not claimed twice. Hence, the learned Commissioner of Income-tax (Appeals) also confirmed the addition.
21. Before us, the learned authorised representative submitted that it would be difficult under the accounting system to claim the expenditure twice. He submitted that the expenditure of Rs. 11.30 lakhs includes expenditure of Rs. 1.43 lakhs incurred towards sample clearing charges. Other samples have been distributed to various peoples and the assessee has also furnished the list.
22. On the other hand, the learned Departmental representative submitted that the learned Commissioner of Income-tax (Appeals) has confirmed the disallowance since the assessee did not answer specific queries raised by the Assessing Officer. He submitted that the assessee has not proved that the expenditure was not claimed twice and it has also failed to produce evidences.
23. We have heard the parties on this issue. We have noticed earlier, the Assessing Officer has asked specific queries in order to ensure that no double claim was made. If the samples were purchased by the assessee, then the cost of samples should be reduced from the purchases and if the samples were distributed from manufactured goods, then the corresponding expenditure should be reduced from the concerned expenses. We notice that the assessee did not answer the specific queries raised by the Assessing Officer. Instead the assessee has proceeded to answer the queries under the impression that the Assessing Officer is questioning about its allowability under section 37(1) of the Act. The submissions made before the learned Commissioner of Income-tax (Appeals) shows that the assessee was under wrong impression. We notice that the Assessing Officer has also observed that the assessee has failed to produce evidences. Since the assessee did not appreciate the specific queries raised by the Assessing Officer, in our view, the assessee should be provided with an opportunity to prove the claim. Accordingly we set aside the order passed by the learned Commissioner of Income-tax (Appeals) on this issue and restore this matter to the file of the Assessing Officer for examining the same afresh. The assessee is directed to answer the specific queries raised by the Assessing Officer and also produce other information and explanations that may be called for by the Assessing Officer to substantiate the claim.
24. The next issue relates to the claim of set off of brought forward unabsorbed depreciation. Since this issue requires verification at the end of the Assessing Officer, we restore the same to his file with the direction to compute and allow the correct amount of brought forward unabsorbed depreciation.
25. In the assessment year 2006-07, the assessee has raised the grounds relating to charging of interest under section 234C and section 234D and also relating to non-granting of correct amount of interest under section244A of the Act. The learned authorised representative submitted that interest under section 234C of the Act is required to be computed on the returned income. With regard to other interest chargeable under section 234D and payable under section 244A, the learned authorised representative submitted that they are consequential in nature. Accordingly, we restore these issues to the file of the Assessing Officer with the direction to compute interest under section 234C on the returned income. We also direct the Assessing Officer to compute interest chargeable under section 234D and payable under section 244A in accordance with law.
26. In the assessment year 2006-07, the assessee has also raised a ground with regard to initiation of penalty proceedings under section 271(1)(c) of the Act. We decline to adjudicate this ground as it is premature at this stage.
27. We shall now take up the appeal filed by the Revenue for the assessment year 2005-06. The first issue urged by the Revenue relates to the disallowance of loss arising on revaluation of debtors and creditors balances on the basis of foreign exchange fluctuations. The Assessing Officer disallowed the claim under the impression that the loss was incurred due to cancellation of forward contracts on foreign exchange entered with the banks and hence the same was speculation loss. The learned Commissioner of Income-tax (Appeals) examined the claim and noticed that the assessee has made both gains and loss on account of revaluation exercise and the loss of Rs. 56.61 lakhs claimed by the assessee was net loss only. The details are given in page 10 of the order of the learned Commissioner of Income-tax (Appeals). He has further given a finding that the net loss of Rs. 56.61 lakhs represents loss occurred on account of restatement of debtors and creditors balances and accordingly deleted the addition. Under these set of facts, the learned authorised representative submitted that the impugned loss cannot be treated as notional/speculation loss and the same is allowable as per the decision rendered by the honourable Supreme Court in the case of CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC).
28. We have heard the learned Departmental representative on this issue and perused the record. Since the decision rendered by the learned Commissioner of Income-tax (Appeals) on this issue is in accordance with the decision rendered by the honourable Supreme Court in the case of CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC), we do not find any reason to interfere with his order on this issue.
29. The next issue contested by the Revenue relates to the disallowance of bad debts claim of Rs. 9.62 crores. The Assessing Officer disallowed the claim on the reasoning that the assessee has not established that the debts have become bad. Before the learned Commissioner of Income-tax (Appeals), the assessee has submitted that the debts written off by it pertains to sales of earlier years and further it has been written off in the books of account. Accordingly the assessee, by placing reliance on the decision rendered by the honourable Supreme Court in the case of T. R. F. Ltd. v. CIT [2010] 323 ITR 397 (SC) ; [2010-TIOL-15-SC-IT], contended that the bad debts claim should be allowed. Convinced with submissions made by the assessee, the learned Commissioner of Income-tax (Appeals) allowed the claim of the assessee. The Revenue is aggrieved by the said decision.
30. We have heard the parties on this issue. The learned Departmental representative did not dispute the fact that the amount of Rs. 9.62 crores represents sales made by the assessee in the earlier years, meaning thereby, the condition prescribed under section 36(2) stands satisfied. There is also no dispute that the assessee has actually written off the debts as bad in its books of account. Hence, we are of the view that the learned Commissioner of Income-tax (Appeals) was justified in allowing the claim of the assessee by following the decision rendered by the honourable Supreme Court in the case of T. R. F. Ltd. [2010] 323 ITR 397 (SC). Accordingly we confirm his order passed on this issue.
31. In the result, the appeal of the assessee is treated as allowed and the appeal of the Revenue is dismissed.