TMI Blog2014 (3) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... - 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 – the contract and molds borrowed by the assessee can by no stretch of imagination be considered as a colorable device – the CIT(A) rightly the expenses as Revenue expenses – the order of the CIT(A) upheld – Decided against Revenue. Provision written back towards obsolete stock – Held that:- CIT(A) held that the appellant company has been making provisions towards obsolete stock and these provisions were claimed as expenditure in earlier years – the contention of the assessee that certain provisions as detailed in written submissions were written back and hence the same are required to be taken out of the income declared for the assessment year so as to avoid double taxation of the same amount is accepted - the CIT(A) has asked the AO to make some factual verification regarding the correctness of claim of the assessee and also to take necessary undertaking from the assessee to grant assessee the desired relief – there is no infirmity in the order of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry in this regard, assessee submission were as under:- The Company has been permitted by the Government of India, Ministry of Industry, Department of Industrial Policy and Promotion, Secretariat for Industrial Approvals vide letter no. FC.II356(96)/6IO(95) dated April 11, 1996 to act as a technology transfer agent and marketing company. The Company is engaged, inter-alia, in trading activities in respect of plastic kitchenware products since its set up of business. It purchases the products from the contract manufacturers (Dart Manufacturing India Private Limited and Innosoft Technologies Limited). 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. Further, as the designs of the products are patented designs, the molds used for manufacture of such products are not available in the open market. Therefore, the Company has to import these molds 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 completes the order place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rental expenses in the hands of the assessee on the ground that the moulds are being used in the manufacturing by Dart India and ITL which are right entities to claim these expenses. Accordingly, AO proceeded to disallow the impugned expenses. The basic conclusion drawn by the AO were as under:- The payment of rental expenses to foreign concerns are liabilities of Dart India and ITL and not that of assessee since they are actual users of the moulds; Such an arrangement has resulted in less payment of excise duty by Dart India and ITL and at the same time reduced the taxable income of the appellant; Since the provisions of section 194C of the Act are not applicable, therefore, lease rentals are the liability of Dart India and ITL. 5. Upon assessee's appeal Ld. CIT(A) noted that the main issue in the case was that the contention of the AO that rental payment for the use of mould was a liability of Dart India Ltd. and ITL and hence, was not allowable in the hands of the assessee. 6. Ld. CIT(A) noted that assessee has been granted approval by the Ministry to act as a Technology Transfer Agent and also to enter into a joint venture with small scale units for the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We have heard both the counsel and perused the records. Ld. Departmental Representative placed reliance upon the order of the AO. He reiterated that assessee has adopted a colorable device. He submitted that the nature of transaction between the assessee and the contract manufacturer was that all purchasers and seller. Hence, there was no question of payment of moulds rentals by the assessee who is a purchaser. He further submitted that in excise proceedings the matter has gone to the Settlement Commission and excise liability in this regard fastened on the contract manufacturers. Hence, he submitted that the Ld. CIT's inference in this regard is not sustainable. Ld. Counsel of the assessee on the other hand supported the order of the Ld. CIT(A). he reiterated that use of moulds and the payments of rental by the assessee was a part of agreement with the contract manufacturer. He further placed reliance of the decision of the Hon'ble Apex court in Excel Industries 358 ITR 593. 11. We have carefully considered the submissions and 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rer 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 Ld. CIT(A) as Revenue expenses. 15. We also agree with the Ld. 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 appellant would be increased by the same amount of mould rental. Thus, in the above situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,277,736 Incase your goodself grants claim with regard to the above disallowances in the year under consideration, the appellant undertakes not to press the ,grounds of disallowance on provision basis before the ITA T in the respective years (i.e. in A Y 2005-06 A Y 2007-08 as stated above in the table). Thus, the appellant reiterates before your goodself that benefit! claim should be given on account of reversal of the provision of obsolete stock during the year under consideration. Should your goodself require any other information/ clarification in respect of the submissions made above, we shall be pleased to provide you the same. 20. Considering the above Ld. CIT(A) held as under:- The appellant company has been making provisions towards obsolete stock and these provisions were claimed as expenditure in earlier years. However, the AO has not allowed these provisions on the ground that provisions are ad hoc and contingent ones. The AR pleaded that certain provisions as detailed in written submissions were written back and hence the same are required to be taken out of the income declared for the impugned assessment year so as to avoid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the provision of obsolete stock was not allowable and added the same to the income of the assessee. 27. Upon assessee's appeal Ld. CIT(A) noted that similar issue has arisen in assessee's own case for asstt. year 2005-06 and the Ld. CIT(A) had allowed the same in favor of the assessee. Ld. CIT(A) noted that the submissions of the assessee are same in this year also and hence, following his appellate order for asstt. year 2005-06 and holding that facts and issue are identical, Ld. CIT(A) upheld the order of the AO. 28. Against the above order the Assessee is in appeal before us. 29. At the outset, Ld. Counsel of the assessee submitted that for asstt. year 2005-06 this Tribunal in assessee's own case in ITA No. 5823/Del/2010 vide order dated 7.6.2013 has decided the identical issue in favor of the assessee. Ld. DR could not controvert the submissions. We have carefully considered the submissions and perused the records. We find that the Tribunal in the aforesaid order has held as under:- 9. We have heard the rival submissions of both the parties and have gone through the material available on record. We find that the assessee is continuously following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly accepted accounting principles of valuation. In our view, the Ld CIT(A) was correct in law and on facts to have deleted the addition made by the Assessing Officer which was based not taking into consideration the hard realities of assessee's business. The addition in our view is properly deleted and we decline to interfere. 10. The Ld DR has mainly objected to the reliance of Ld AR on the case law because of the difference in items dealt by the assessee and in case law relied upon by Ld AR. Though there is difference in items but the principle of valuation of stock remains the same. The assessee instead of taking the net realizable value for valuation of closing stock took the cost price of obsolete item and created a provision for difference in cost price and market value and debited the same to P L Account, the effect of which is same. Therefore keeping in view the judicial pronouncements relied upon by the Ld AR and on the basis of facts and circumstances of the case, we allow the appeal of assessee. 30. Thus the Ld. CIT(A) order in asstt. year 2005-06 has been followed by the Ld. CIT(A) in this year and the Tribunal has reversed the order of the Ld. CIT(A) for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract manufacturers complete the order placed by the Company, the molds are returned back to the mold owner. The Central Excise Department in Hyderabad issued show cause notice demanding an additional demand of excise duty on Dart India and ITL and also proposed for recovery of interest. Dart India and ITL applied for the settlement of proceedings, initiated against them duty demand. However, the Settlement Commission has raised an excise demand including interest amounting Rs. 49,409,1207/- on Dart India and ITL for additional excise duty on the goods manufactured by them. A copy of the order passed by the Settlement Commission is enclosed herewith for your perusal (refer Annexure VA). The said demand has been taken over by the Company for the reason that excise duty paid by Dart India and ITL was on the goods manufactured by them for the Company and should form part of the purchase price adjustment. Therefore, the purchase price for the Company would increase by the amount of additional excise duty. In this regard, the Company has made an adjustment of the said liability amounting to Rs. 49,409,1207/- in the cost of sales tax Price Adjustment and claimed to be an allowabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is 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. The relevant portion read as under:- 15. As regard the immunity from payment of interest, we find that the duty liability pertains to the period April, 2000 to December 2004 in case of M/s Dart Manufacturing India Pvt. Ltd, and April 2002 to December 2004 in case or M/s Innosoft Technologies Ltd as such they enjoyed financial accommodation for a considerable period. Taking note of this, the Bench does not consider it appropriate to grant full exemption from payment of interest and consequently the Bench is or the view that simple @10% per annum should be paid for the same. However, we grant them immunity from penalty taking note of the corporation extended by the applicants. Accordingly. the applications are finally settled on the following terms and conditions in terms of sub section (7) of section 32F ibid:- (i) The duty lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liability does not relate to this year since the same pertains to the earlier years as slated above. The assessee claims that it has taken this liability on its head to maintain the relationship with these companies and to safeguard them from additional burden of some duties and taxes, levied against them in the course of business. But in this pretext, this expense can not be allowed to the assessee as a revenue expense since it is incurred as an occasional expense to safeguard the long term interest of the assessee and hence it is not of revenue nature and is not allowable against the taxable income.) In the light of above observations, the claim of Rs. 4,94,09,120/-, being liability of Dart. India Ltd. and ITL as additional excise duty and interest for the period from April, 2000 to December, 2004 in case of Dart India and from August, 2002 to December, 2004 in case of ITL. is hereby disallowed and added to the total income of the assessee. 36. Upon assessee's appeal Ld. 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 is not an allowable expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturer 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 as mentioned above. Ld. 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 cannot 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. 41. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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