TMI Blog1993 (11) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... o manufacturing was carried out by the assessee-company unless and until they received specific orders. During the implementation of the manufacturing orders performance tests are carried out by the customers and tailormade items produced. Billing was made of 90 per cent. of the value of the goods manufactured on despatch and delivery with the exception that 100 per cent. of excise and sales tax was charged. The remainder of the 10 per cent of the cables cost (excluding the excise and sales tax) was payable to the assessee only on completion of the warranty period. It is the assessee's case that this withheld portion of the cost, viz., 10 per cent. referred to supra, did not represent the sale as its receipt was conditional, namely, based only on the fulfilment of certain conditions made by the assessee to its customers. It was in the wake of this stand that the assessee-company did not include a sum of Rs. 67,74,740, being the retention money in their turnover declared for the accounting period under consideration. There is a bifurcation of the aforesaid sum which consists of an amount of Rs. 52,80,660 withheld out of the transactions which took place during the relevant acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, 10 per cent. of the total order value shall be released against furnishing of certain documents, such as unqualified T. O. I. acceptance, advance bank guarantee for an equivalent amount issued by a scheduled bank. Submission of pro forma invoice and security deposit bank guarantee. 90 per cent. of the total order is payable on the submission of certain other documents, none of which have any bearing on the aspect disputed before us. The remainder of 10 per cent. which is contested is releasable on the fulfilment of the following conditions : (a) Receipt and acceptance of goods at purchaser's site. (b) Submission of all final technical documentation as required by U. I. L. (c) Submission of performance and workmanship bank guarantee, valid for the guarantee period, for an equivalent amount issued by a scheduled bank as per the pro forma of G. N. F. C. Towards transportation charges, a separate debit note shall be raised and the same shall be paid within 15 days from the date of receipt of complete goods at site. All the payments will be released within 15 days (except wherever mentioned specifically) from the date of receipt of required documents as mentioned in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods supplied shall give the required operational performance and shall be suitable for the service intended and be of the quality specified or of the best grade of their respective varieties if no quality is specified and shall conform to the specifications, drawings, samples and other descriptions contained in the purchase order. Vendor shall guarantee purchaser and its consultants and their authorised representatives against any and all defects in design, workmanship and materials for 18 months of operation or three years from the date of acceptance of the goods by the purchaser, whichever period ends earlier. Should any defect develop during guarantee period it shall be remedied promptly free of charge by the vendor and all expenses for transportation of goods, removing the goods and replacing them, etc., necessitated for such repairs or replacements shall be borne by the vendor. The guarantee period for the replaced goods shall be at least 12 months. The goods unless otherwise expressly stated herein are ordained by the purchaser in reliance on each and all of the warranties and guarantees specified herein and implied by law or usage of trade. The said warranties and guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee after the expiry of the warranty period. At page 34, the details of those cases are given where retention money was received by the assessee without execution of bank guarantee. Page 37 is the summary which shows a sum of Rs. 93,977.61 received by the assessee during the current accounting period without furnishing bank guarantee which sum represents the retention money but not credited by the assessee with a view to maintain consistency. Similarly, it also shows a sum of Rs. 2,21,862.04 credited to the profit and loss account on accrual basis though not received by the assessee. On the basis of these facts, Sri Khare submitted that it could not be said that the amount representing 10 per cent. of the cost of goods was the assessee's income. In his submission, neither this sum was actually received by the assessee nor the same accrued to them. According to him, there was no change of accounting involved in the case in hand and even if it amounted to a change, it was permissible as explained by the assessee as per Note 9 appended at page 116 of their paper book, being Schedule M relating to "Notes, forming part of the accounts for the period ended March 31, 1990". Ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he example of refrigerators and cars, etc., and contended that sometimes a few articles such as Rado watches also bore lifetime guarantee from their producers or manufacturers adding that it would be beyond imagination that in such cases the transaction of sale was never complete. It was also submitted on behalf of the Department that clause 11 of the specimen contract reproduced (at page 54) supra, suggested that the assessee guaranteed against any defects in their design, workmanship and materials for 18 months of operation or three years from the date of acceptance of goods by the purchaser whichever period ended earlier stating significantly that in the event of any such defect developing during the guarantee period it shall be remedied promptly free of charge by the vendor, there being a further guarantee for the replaced goods for a period of 12 months. It was thereafter urged that the whole of the sale price was realisable subject to the furnishing of a bank guarantee, and there was no clog or impediment put on the receipt of 10 per cent. of the amount disputed before us excepting to building up of pressure on the vendor with a view to secure their readiness for the remova ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the customer required a bank guarantee from the assessee-company which were to take care of the fulfilment of the obligations to remove any defects, etc., in the supply of materials in terms of clause 11 referred to (at page 54) supra. This, Sri Gupta concluded, made the sale transaction complete right at the beginning, i.e., the time when the goods went out from the assessee's premises for a particular customer and despatched according to the instructions of the latter. We have given our utmost consideration to the entire gamut of material placed before us and relied on and the detailed submissions made by either side. We are afraid we cannot subscribe to the approach canvassed by the assessee on the issue. There are plural reasons for our saying so. As is manifest, the assessee's case primarily depends upon the interpretation of the specimen contract which has already been referred to by us in extenso in the preceding paragraphs. As regards practice and consistency are concerned, indisputably it is against the assessee inasmuch as right from the inception till up to the assessment year 1989-90, they have been showing 100 per cent. of the sale price in their turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndee. There was no such provision in Simplex's case [1989] 179 ITR 8 (Cal), nor was it generally possible in a work of concrete piling for buildings which was the issue before the High Court of Calcutta. In fact, in that case, the specific certificate by the architect/engineer was required to be given to say that the work had been satisfactorily completed. If in that situation, 10 per cent. of the value of job work done was retained by the customer, it certainly stood on a different footing. Herein, the inspection has to be strictly allowed by the manufacturer to the vendee or its representative and that being so, any defect pointed out by the latter is supposed to have been corrected during the manufacturing process without which there is no possibility of the shipment of the materials. Thus, on the primary facts, the two cases are distinguishable. Proceeding further, as already stated above, the only liability of the assessee-company as envisaged by clause 11 read with clauses 35 and 36 is that in the event of any defect, it shall be promptly remedied by them at their cost. We find sufficient force in the plea advanced on behalf of the Department that in a case where such a stric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed by the vendor-assessee to the vendee enforceable as per the stipulations made therein. Incidentally, we may also refer to the pro forma bank guarantee available at page 66 onwards which refers to the obligation of the vendor for the due and faithful carrying out by the vendor of his obligations and liabilities in time and in the manner as provided in the order on the terms and conditions agreed to between the purchaser and the vendor. It also refers to the workmanship guarantee provided by the assessee-company and its fulfilment upon which the guarantee shall cease to have effect. In fact, it refers to the work and jobs described in the telex of indents issued by the purchaser, named as "let work" and the acceptance of the same by the vendee, only adding the need for execution of a bank guarantee for the due and faithful carrying out by the vendor of all its obligations and liabilities in time and manner as provided in the order on the terms and conditions agreed to between the parties. The pith and substance of the contract read with the bank guarantee referred to supra in the absence of any contrary intention of the parties, therefore, turns out to convey that the sale is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t could not be related back to the earlier year in which the actual supplies were made by the assessee to the hospital. In the case of Amar Nath Khandelwal [1980] 126 ITR 323, the High Court of Delhi on the facts of that case took the view that the income accrued to the assessee only when the bill for commission was accepted by the principals. In that case, their Lordships also held that the commission accrued to the firm and could not be assessed in the assessee's hands. In Hindustan Housing and Land Development Trust Ltd.'s case [1986] 161 ITR 524, the apex court was considering an issue where although the award was made in favour of the assessee enhancing the amount of compensation and such amount was receivable by him on furnishing of a security bond, this amount of additional compensation was held not to have accrued to the assessee as the entire amount was in dispute, the matter being sub judice on account of the appeal filed by the State Government. Their Lordships held that if the State Government's appeal was allowed in its entirety the right to payment of enhanced compensation would have fallen altogether. In Jehangir P. Vazifdar's case [1992] 42 ITD 67, the Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that the lending of a small sum to a director free of interest should be taken as an act of commercial expediency by the assessee. We have considered the matter carefully. Sri Hoskote is a technocrat and as a wholetime director of the company is associated with its activities since 1987. He is not holding any share and from that angle, he cannot be said to be substantially interested in the company. Merely because a loan of Rs. 56,000 free of interest was advanced by the company to him for his personal use, that would not justify a notional disallowance of interest in the absence of any finding of the Revenue authorities as to any nexus much less a direct one between this lending and the interest paid by them on the borrowings. The learned authorised representative for the assessee has also placed reliance on several decisions such as CIT v. Kishinchand Chellaram [1977] 109 ITR 569 (Bom) and others, but they need not be discussed in view of the absence of the Department's finding justifying disallowance. The assessee thus succeeds on this issue and the disallowance is deleted. In the result, the appeal is partly allowed. H. C. Srivastava ( Accountant Membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dnote) : " The assessee carried on the business of concrete piling for buildings. Up to and including the assessment year 1964-65, the assessee-company was crediting 100 per cent. of the job value but from the assessment year 1965-66, it credited only 90 per cent., deducting the retention money, which resulted in reduction of income. The Income-tax Officer treated it as a change in the method of accounting and did not accept the change, which resulted in an addition of income of Rs. 20,77,161 in the assessment year 1965-66, and Rs. 14,43,479 in the assessment year 1966-67. The Appellate Assistant Commissioner held that the retention money did not arise or accrue in the year in which the job was executed but at a later date depending on the completion of the contract and the certification by the architect/engineer that the work had been satisfactorily completed. The Tribunal found that while 90 per cent. of the job value was to be paid immediately, five per cent. was to be paid after satisfactory completion of the work and the remaining five per cent. after one year or so, and in some cases 10 per cent. was withheld till the architect gave a certificate of satisfactory completion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m ordered cables were manufactured strictly according to his specifications that the assessee could acquire the right to receive this 10 per cent. of the cost. In my opinion, on the different dates on which the assessee submitted the bills to the customers having regard to the nature of the contract no enforceable liability accrued or arose and, therefore, the assessee had no right to receive the entire amount till the satisfaction of the customer. The assessee, in my opinion, had no right to claim any part of the 10 per cent. The bank guarantee obtained only protected the assessee's interest. The bank guarantee could be converted into sale only when the particular period of warranty was over. A bank guarantee, therefore, cannot form part of the total turnover of this assessee under such circumstances. I am, therefore, of the opinion that the decision of the Calcutta High Court clearly applies to the facts of this case. I am of the opinion that the facts of this case are materially not distinguishable from the Calcutta High Court decision. I do not find any force in the plea advanced on behalf of the Department and accepted by my learned Brother that in a case where such a strict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee-company, to recover the amount from the bank. Therefore, even though the amount was received, the assessee has referred to this 10% of the price as "retention money" as the assessee was of the view that it could not be appropriated until the period of guarantee was over. Therefore, the assessee contended that this retention money had to be excluded in computing the total income of the assessee. On the other hand, the Revenue contended that under the terms of the contract the assessee had the right to receive the amount and, therefore, it could not be excluded in computing the total income. When the appeal was heard, the learned Judicial Member accepted the case of the Revenue. But the learned Accountant Member differed from him and held that until the guarantee period was over, the assessee had no right to the 10% of the amount and hence it should be excluded from the total income. Consequently, the following question has been referred to me for adjudication as a Third Member under section 255(4) of the Income-tax Act, 1961 : " Whether, on the facts and circumstances of the case, the sum of Rs. 52,80,660 could be said to accrue or arise to the assessee as its inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountant Member was also right in his view that because of the bank guarantee the assessee did not have an unconditional right to appropriate the sum even though it would receive the amount. I find that this situation was anticipated by the accounting standards of the Institute of Chartered Accountants of India. In Revenue Recognition (AS9), paragraphs 10 and 11 state the principle as follows : " 10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. 11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled : (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
