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2015 (6) TMI 180 - DELHI HIGH COURT

2015 (6) TMI 180 - DELHI HIGH COURT - TMI - Allowable business expenditure - excise duty levied by the Custom & Central Excise Settlement Commission - Held that:- The additional excise duty were to be borne by the contract manufacturers, the contract manufacturers would have accounted for that amount in the purchase price of the goods, resulting in a higher price to be paid by the assessee. Therefore, this situation is, as per the ITAT's own explanation, 'revenue neutral' as well. The AO's deter .....

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in the previous years and as a result, could not have been claimed by the assessee as expenditure in the concerned previous years. In arriving at this conclusion, this Court relies upon its ruling in Rattan Chand Kapoor (1984 (2) TMI 60 - DELHI High Court)affirmed by this Court in Shri Ram Pistons & Rings Ltd [2008 (5) TMI 631 - DELHI HIGH COURT]. Thus the sum of ₹ 4,94,09,120/- paid by the assessee towards additional excise duty on behalf of the contract manufacturers constitutes deductib .....

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iled by the assessee under Section 260-A of the Income Tax Act, 1961 ("the Act"), against an order dated 14.03.2014 passed by Income Tax Appellate Tribunal ("ITAT") in ITA No. 1977/De1/2011 for Assessment Year (AY) 2007-08. The ITAT upheld the findings of the lower authorities and held that the sum of ₹ 4,94,09,120/- incurred by the assessee in respect of excise duty levied by the Custom & Central Excise Settlement Commission ("CESC") on Dart Manufacturing .....

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ng of the term under Section 37(1) of the Income Tax Act?" 2. The assessee is a wholly owned subsidiary of M/s. Tupperware Asia Pacific Holdings Pvt. Ltd., Mauritius which holds 99% of its equity share capital. The remaining 1% is held by M/s. Tupperware Home Parties Inc., USA. The group as a whole owns the brand name 'Tupperware' and carries out business activities through various subsidiaries in various parts of the world. 3. Accordingly, the assessee from time to time had entered .....

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ods so manufactured, the contract manufacturer had applied a certain method to capture the notional value of "free of cost" moulds for excise valuation, i.e., value of moulds would be considered on the basis of their capacity of production during the life time use of the moulds. However, the excise authorities had a different view on valuation of notional mould value to be used for excise valuation and disputed the same. Accordingly, the Central Excise Department in Hyderabad issued a .....

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for the assessee. The said additional excise duty liability was borne by the assessee as it was in respect of liability that arose on contract goods manufactured for the assessee; and arose only on account of variance in notional value of moulds provided "free of cost" by Tupperware to be used in manufacturing process. 7. The assessee filed its return of income for AY 2007-08 on 24.09.2008, wherein the liability incurred by the assessee herein towards additional excise duty was claimed .....

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nt of the said liability amounting to ₹ 4,94,09,120/- in the cost of sales as "Price Adjustment". A note was inserted by the assessee to the following effect:- "During the year the Company agreed to compensate certain contract manufacturers towards duty and interest thereon aggregating to ₹ 4,94,09,120/- levied by the Customs & Excise Settlement Commission as contractual obligation towards the contract manufacturers..." 8. The Assessment Order under Section 14 .....

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ot of the assessee. (b) Assessee has colluded with Dart/ITL to take their liability upon itself and reduce its taxable income. (c) AO noted that the assessee was also a co-applicant before the CESC and no liability was fixed against it. (d) The liability of additional excise duty related back to the period from April 2000 to December 2004 in case of Dart and August 2002 to December 2004 in case of ITL. Therefore, the expenditure cannot be claimed in the year under consideration, i.e., AY 2007-08 .....

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he following grounds:- (a) It was the contract manufacturer who was to bear all the taxes relating to the performance of the service under the agreement. There was no modification of the contract between the manufacturers and the assessee which shifted the burden of payment of excise duty on the assessee. (b) ITAT upheld the finding of the AO that the expenditure related back to earlier years due to which the expenditure cannot be claimed in the year under consideration. (c) The assessee's c .....

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hat can be factored in while adjudicating upon the allowability of expenditure under Section 37(1) of the Act is whether the same was incurred wholly and exclusively for the purpose of business. It is not a pre-condition that the expenditure must be incurred out of necessity. He further submits that there is no dispute that liability of additional excise duty levied upon Dart India and ITL by the CESC was discharged by the assessee herein in order to enable its business to function smoothly with .....

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s were "manufacturers of plastic table ware and kitchen ware for M/s Tupperware India Pvt. Ltd. on job work basis". Reliance is placed on the decision of this Court in CIT v. Dalmia Cement (P.) Ltd., 254 ITR 377 (Delhi), approved by the Supreme Court in S.A. Builders Ltd. v. CIT, [2008] 288 ITR 1. 11. Learned counsel submits that the ITAT as well as the CIT(A) failed to acknowledge that the term 'wholly' in Section 37(1) cannot be read as 'necessarily'. 'Wholly' .....

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#39;. 12. Assessee submits that the term 'commercial expediency' is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. 13. Learned counsel submits that .....

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he invoices raised for period subsequent to passing of the order of CESC. 14. Finally, learned counsel submits that the ITAT erred in holding that the expenditure incurred by the assessee cannot be allowed in the AY under consideration since the same pertains to payment of excise duty pertaining to earlier years. It failed to consider that the said additional liability has crystallized only during AY 2007-08 on account of order of the CESC, during the year under consideration. The assessee could .....

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p; Rings Ltd., (2008) 220 CTR 404 (Del). 15. On the other hand, learned counsel for the revenue defends the order of the ITAT and submits that the payment of excise duty cannot be claimed as expenditure within the meaning of Section 37(1) of the Act. Learned counsel submits that the expenditure related to years prior to the assessment year in question and, therefore, cannot be allowed as deduction in this assessment year. Further, there was no obligation on the assessee to bear the excise duty o .....

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; (c) Expenditure should be made wholly and exclusively for the purposes of business; (d) Expenditure should be incurred during the previous year; (e) Expenditure should not be incurred for any purpose which is an offence or which is prohibited by the law. 17. This Court in its recent decision in CIT v. Tupperware India Pvt. Ltd., [2015] 229 Taxman 318, was called upon to decide, inter alia, the allowability of expenditure towards rent paid for moulds provided by the assessee herein to the contr .....

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79) 118 ITR 261(SC)], does not mean 'necessarily'. Even expenditure incurred voluntary and without any necessity, but for promoting business and earning profit is allowable." This proposition has also been applied by the Bombay High Court in CIT v. N.G.C. Network India (P) Ltd., 368 ITR 738. 18. It is not disputed by the revenue that the assessee had in fact made payment of ₹ 4,94,09,120/- towards additional excise duty pursuant to the CESC's order dated 10.11.2006. Once t .....

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assessee in the interests of commercial expendiency. The moulds for manufacturing the goods marketed by the assessee were provided to the contract manufacturers by the assessee itself, as the said moulds were patented and not available in the market. Excise duty was levied on the notional cost of these moulds. The rent for these moulds was also paid by the assessee to the overseas entities, and not by the contract manufacturers. The contract manufacturers were carrying out the manufacturing act .....

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e revenue's contention that the appropriate entities which would claim the rental amount as expenditures were the contract manufacturers, and reasoned as follows: "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 cos .....

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as to how the above rationale applied by the ITAT to allow the deductibility of rental expenditure cannot be extended to the expenditure on additional excise duty incurred by the assessee. If, instead of the assessee, the additional excise duty were to be borne by the contract manufacturers, the contract manufacturers would have accounted for that amount in the purchase price of the goods, resulting in a higher price to be paid by the assessee. Therefore, this situation is, as per the ITAT's .....

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