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2015 (7) TMI 948 - ITAT BANGALORE

2015 (7) TMI 948 - ITAT BANGALORE - TMI - Disallowance of Short-landing i.e. short receipt of goods - AO held that the assessee had unnecessarily claimed this amount in the books of account, but that the assessee should have recovered this amount from its principal companies which supplied the goods to it short either through raising debit notes or reducing the bills amount - Held that:- As during the relevant financial year, the short-landing is only 0.05% on sales and 0.07% of the cost of good .....

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articularly when it is negligible has to be allowed as expenditure to the assessee. We appreciate the contention of the assessee that raising debit or credit note on small amounts might be more costly than setting off the above shortage. Further, it is to be left to the wisdom of the businessman as to the method he wants to adopt to make a transaction cost-effective. Therefore, we are of the opinion that the claim of the assessee of short-landing particularly because it is negligible as compared .....

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sessee and the genuineness of the same is not doubted by the AO, it is immaterial as to whether the loss is arising out of error committed by the external service provider or the assessee, it is the loss of the assessee and it can be claimed by the assessee. Further this view is in consonance with the decisions relied upon by the assessee (cited supra). The argument of the assessee that write off of negligible amount of loss on account of above error is cost effective as compared to claims to be .....

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e is making payment to the professional agency towards these services. On going through the chart filed by the learned counsel for the assessee showing the ratio of the loss on such breakage to sales, we find that loss on account of breakage is 0.07% of the sales during the relevant assessment year which is negligible as compared to the huge turnover of the assessee. The assessee is making payment to the professional agency for the services rendered by them but the breakage is not attributable t .....

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AEs to the assessee and as to how the knowledge is made available to the assessee to bring it within the provisions of section 40(a)(ia) of the Act for non-deduction of tax at source. For coming to the conclusion that the knowledge is made available to the assessee, the nature of the transaction has to be looked into. Merely holding that the work of catalogue printing, brochures etc., is not a highly specialized one and is available within the country, cannot be said to be a specialized activity .....

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ished bills and vouchers in support of its claim. The burden is on the assessee to furnish the necessary details in support of the claim of expenses made by it. In the absence of such details, the AO has made disallowance which has been restricted to 15% by the CIT(A). We do not see any reason to interfere with the order of the CIT(A) on this issue. - Decided against assessee.

Disallowance of Travelling expenses - Held that:- CIT(A) on perusal of the evidence filed by the assessee has .....

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IT(A) to rebut the above finding of the CIT(A). Therefore, we do not see any reason to interfere with the order of the CIT(A) on this issue. - Decided against assessee.

Treatment of SAP costs - AO disallowed 50% of the same and brought it to tax - CIT(A) deleted disallowance - Held that:- Genuineness of the payment made by the assessee is not doubted by the AO nor is the purpose of the program being for assessee’s business is doubted by the AO. As long as the expenditure is for the pu .....

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ouse management and customs clearances disallowed - Held that:- The only ground on which the AO has disallowed is that at the time of inspection, very few of the employees of the contractor were present at the premises. The contention of the assessee that the time of inspection was 6 PM is not rebutted by the department. Such being the time of inspection, explanation of the assessee that the employees of the contractor have already left for the day is not unacceptable. Since the expenditure is f .....

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is not called for. - Decided against revenue.

Stock issued for Genosys production as consumables disallowed - Held that:- Though the assessee has claimed that Genosys Production has manufactured the products and offered income from sale of these products as assessee’s income, the CIT(A) has not verified the same and has accepted the contentions of the assessee at face value and allowed relief to the assessee. In view of the same, we deem it fit and proper to remit this issue to the f .....

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quality measures would be treated in a casual manner, thus requiring significant write off. From the chart given by the assessee, we find that the quality rejection amounts to 0.13% of sales and 0.17% on cost of goods sold. Considering the nature of the goods manufactured by the assessee, it cannot be presumed that the quality of goods is always met and that write off is not necessary. Therefore, since genuineness of the expenditure has not been doubted by the authorities below, we are inclined .....

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ll these are cross appeals both by the assessee as well as the revenue against the respective orders of the CIT(A)-III, Bangalore, for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09. 2. Brief facts of the case are that the assessee-company which was incorporated in the year 2003 is a wholly owned subsidiary of Sigma Aldrich Foreign Holdings Co. Inc, having its registered office and has also trading unit at Bangalore. The assessee is engaged in the manufacture and trading of chemicals .....

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for various details and the assessee produced such details which include books of account, bills and vouchers and bank statements etc. AO also visited the premises of the assessee-company on 29/05/2008 and the statement of one of the directors of the company i.e. Ms.Vanja Krishnan, was recorded on oath u/s 131 of the Act on 29/05/2008 and 5/6/2008. On perusal of the profit and loss account, AO observed that the assessee had disclosed a total turnover of ₹ 78,10,85,435/- on which the asses .....

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o the returned income of the assessee and brought them to tax. 3. Aggrieved, the assessee preferred an appeal before the CIT(A) who granted partial relief to the assessee. Against the confirmation of the additions by the CIT(A), assessee is in appeal before us while against the deletion by the CIT(A) of additions made by the AO, revenue is in appeal before us. 4. We shall now proceed with each of the additions confirmed by the CIT(A) for the assessment year 2005-06: I. Short-landing: The assesse .....

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lowed the same holding that the assessee has not given any basis for such claim. Further considering the statement of the director, the AO held that the assessee had unnecessarily claimed this amount in the books of account, but that the assessee should have recovered this amount from its principal companies which supplied the goods to it short either through raising debit notes or reducing the bills amount. He further held that this claim of the assessee is not genuine. He, accordingly, disallo .....

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onsidered individually,, such value has been charged off. He reiterated the contention that the assessee has a global policy not to issue credit memo for amounts less than USD 2500 (approximately INR ₹ 150,000/-). It is submitted that also from the cost benefit perspective, the cost entailing processing of the credit or debit notes would be higher than the cost recovered. He, therefore, prayed that the disallowance of the sums written off by the assessee towards shortage in receipt of good .....

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of goods traded by the assessee. Upon perusal of the material on record and in the light of averments of both the parties, we find that during the relevant financial year, the short-landing is only 0.05% on sales and 0.07% of the cost of goods sold by the assessee. It is also worth mentioning that the loss is not pertaining to a single item but is the total of many items imported by the assessee. In the case of shipment, it cannot be disputed that there is a possibility of wastage in quantity d .....

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e left to the wisdom of the businessman as to the method he wants to adopt to make a transaction cost-effective. Therefore, we are of the opinion that the claim of the assessee of short-landing particularly because it is negligible as compared to its sales and cost of goods sold, has to be allowed. This ground of appeal is accordingly allowed. II. Error in preparation of goods receipt and physical difference: As regards this issue, the assessee had claimed an amount of ₹ 96,444/- on accoun .....

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cation entry for the same. During the year there are only about 10 cases where the error has occurred. We ship approximately 21,000 bottles every month, which is an average of 1000 bottles each day. Due to customer need for faster deliveries, our warehouse personnel are hard pressed to ship products as soon as possible. Furthermore, the warehouse functions are outsourced to a service provider. Due to the nature of functions in the warehouse, the staffs manning those functions are not highly educ .....

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operations service provider i.e. Ondolex Corporation and they should be asked to pay for it. He accordingly disallowed the same and brought it to tax. (ii) Aggrieved, the assessee preferred an appeal before the CIT(A) who upheld the disallowance and the assessee is in appeal before us. (ii) The learned counsel for the assessee submitted that the assessee has written off the expenses under the head error in preparation of goods receipt as a rectification entry on account of documentation error in .....

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ess who lacked proper training and knowledge, have erred in accounting the goods received or in shipping of certain items sold by the assessee. He, therefore, submitted that these errors are unintentional and was wholly and exclusively associated with the business of the assessee and is an allowable expenditure u/s 37(1) of the Act. As regards the difference in the physical stock, he submitted that the assessee ships approximately 21,000 bottles every month which is an average of 1000 bottles ea .....

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diture. He relied upon the following decisions: i) Boston Scientific International BV India vs. ADIT (2010) 40 SOT 11(Mum.Tri.), ii) CIT vs. Wolkem India Ltd. (2009) 315 ITR 211 (Raj.), iii) CIT vs. Hotline Teletube & Components Ltd. (2008) 175 Taxman 286 (Delhi), iv) Emersons Process Management India P.Ltd. vs. Addl.CIT (2011) 47 SOT 157 (Mum.Tri.) v) Alfa Laval India Ltd. vs. DCIT (2003) 133 Taxman 740 (Bom.) (iii) The learned Departmental Representative, on the other hand, submitted that .....

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the warehouse personnel and that the assessee should have claimed the loss from such contractor and further that it is not the expenditure of the assessee. In our opinion, as long as the loss is arising out of the business operations of the assessee and the genuineness of the same is not doubted by the AO, it is immaterial as to whether the loss is arising out of error committed by the external service provider or the assessee, it is the loss of the assessee and it can be claimed by the assesse .....

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e assessee. III. Breakage: The assessee had claimed an amount of ₹ 5,67,832/- under the head breakage and on query by the AO, assessee explained as under: Most of the products dealt by Sigma are packed in Glass bottles. Although due care is taken at the time of packing of the materials, due to the inherent characteristic of the packing materials and since the materials are handled physically at various points like the airports, other transport areas, warehouses, etc., there is bound to be .....

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(ii) Aggrieved, the assessee preferred an appeal before the CIT(A) who granted partial relief by restricting the disallowance to ₹ 1,50,000/-. Aggrieved, the assessee is in appeal before us. (iii) The learned counsel for the assessee submitted that although due care is taken at the time of packing of material, due to the inherent characteristics of the packing materials and since the materials are handled physically at various points like the airports, other transport areas, warehouses, e .....

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e the loss towards breakage is on account of business activity of the assessee, it is allowable as business expenditure. The learned Departmental Representative, however, supported the orders of the authorities below. (iv) Having regard to the rival contentions and the material on record, we find that the genuineness of loss towards breakage of glass bottles containing chemicals is not doubted by the AO. The only reason for making disallowance is that handling of these bottles is by a profession .....

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professional agency for the services rendered by them but the breakage is not attributable to the employees of the professional alone. In such a situation, we do not agree with the observation of the AO that the assessee should have claimed the loss from the professional agency only. As long as the loss is on account of business activity carried on by the assessee, it cannot be disallowed. Therefore, the ground of appeal relating to this issue is allowed. IV. Management fee paid to Sigma Aldrich .....

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support activities like product catalog/brochure designing and printing, competition analysis etc. The AO disallowed the same holding that the assessee had already paid an amount of ₹ 31.42 lacs to Sigma Aldrich, Germany and ₹ 32.81 lacs to Sigma Aldrich, USA towards cost of catalogues etc., and further that there is nothing on record to suggest that any management services were rendered by Sigma Aldrich, Germany or USA to the assessee-company. He accordingly brought it to tax. (ii) .....

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ns of sec. 40(a)(ia) are attracted. He observed that management fee is claimed to have been paid towards cost of time spent by persons in USA in marketing, publishing, graphics and catalogue printing and for marketing support analysis and activities which amounts to making available the technical know-how as per DTAA between India and USA. He therefore held that TDS ought to have been made on this amount and accordingly the provisions of sec. 40(a)(ia) are applicable. Aggrieved, the assessee is .....

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tanding appended to the India-USA DTAA explains that unless the technology can be utilized by the recipient without recourse to the service provider, the services cannot be termed as fees for included services. He relied upon the following decisions in support of this contention: i. Raymond Ltd. vs. DCIT (2003) 86 ITD 791(Mum) and ii. Intertek Testing Services India P.Ltd. In re (2008) 175 Taxman 375 (AAR - New Delhi) The learned Departmental Representative, on the other hand supported the order .....

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see. He also observed that in the very next year these companies are stated to have been paid for brochures, printing materials etc., which services are easily available at reasonable price with international quality within the country. Therefore, the CIT(A) has held that it is made available of technical knowledge to the assessee and that the provisions of 40(a)(ia) are applicable. As the payment of management fee to its AEs was referred to the TPO for determination of ALP and the TPO has accep .....

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e knowledge is made available to the assessee to bring it within the provisions of section 40(a)(ia) of the Act for non-deduction of tax at source. For coming to the conclusion that the knowledge is made available to the assessee, the nature of the transaction has to be looked into. Merely holding that the work of catalogue printing, brochures etc., is not a highly specialized one and is available within the country, cannot be said to be a specialized activity requiring making available of the t .....

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lfare expenses . The assessee furnished the following details before the AO: Particulars Amount (Rs.) Gifts to employees 5159 Insurance premium for employees 557758 Pantry expenses at office 191849 Training and seminars 678414 Total 14,33,180 However, the assessee failed to furnish bills and vouchers in respect of this expenditure except in respect of expenditure on insurance and some communication in respect of training of the employees. The AO, therefore, disallowed 35% of the same and added i .....

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t see any reason to interfere with the order of the CIT(A) on this issue. This ground of appeal is therefore rejected. VI. Travelling expenses: The assessee has claimed a sum of ₹ 50,89,575/- as reimbursement by the assessee-company to its holding company Sigma Aldrich, USA towards expenses of its employees and directors. The AO observed that the assessee has failed to furnish supporting bills and vouchers in respect of this expenditure and also that the same has been incurred towards trav .....

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ad submitted all the supporting bills and vouchers with the AO but the AO has not considered the same. The CIT(A) however was not convinced with the assessee s contention and confirmed the addition made by the AO and the assessee is in second appeal before us. (iii) On perusal of the material on record we find that the CIT(A) on perusal of the evidence filed by the assessee has observed that several of these are invoices drawn by Wipro towards SAP Functional Consultancy Charges rather than invol .....

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(A) on this issue. This ground of appeal therefore is rejected. (iv) In the result, the assessee s appeal is partly allowed. 5. For the very same assessment year, the revenue has filed an appeal against the reliefs given by the CIT(A) by deleting the additions made by the AO on the following counts: I. SAP costs: The assessee-company had paid an amount of ₹ 1,25,46,254/- to Sigma Aldrich Germany towards ERP implementation cost and also a sum of ₹ 5,23,930/- to Sigma Aldrich USA towar .....

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, license fees to SAP for each user and maintenance of the SAP system. Sigma USA and Sigma Germany have been licensed to use the ERP software developed by SAP and they in turn have sub licensed i.e. authorized the group companies to use the same. The actual creator of this software is SAP America, Inc,3999 West Chester Pike, Newtown Square, PA 19073, USA: and Sigma USA and Sigma Germany have been licensed by them to use the same. Reasons for treatment of SAP costs as revenue expenditure Sigma-US .....

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y have charged Sigma-India its share of expenses on the above basis. Since these expenses are recurring in nature, it is treated as revenue expenses. The AO held that this amount has been debited by Sigma USA & Sigma Germany to the account of the assessee towards assessee s share in respect of IT services and license fee etc. and further the SAP-ERP package of module was brought and installed by the assesseecompany in the year 2003 at the inception of the company and huge amount of about  .....

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preferred an appeal before the CIT(A) who granted relief to the assessee and the revenue is in appeal before us. (iii) The learned Departmental Representative, supported the order of the AO while the learned counsel for the assessee relied upon the order of the CIT(A). (iv) We find that genuineness of the payment made by the assessee is not doubted by the AO nor is the purpose of the program being for assessee s business is doubted by the AO. As long as the expenditure is for the purpose of bus .....

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The assessee had claimed payment of ₹ 1,13,84,956/- towards logistic services, warehouse management and customs clearances provided by M/s.Indelox Services Pvt. Ltd. The AO examined the rates as per the agreement and noted that during the course of inspection of the premises on 29/5/2008, no staff from the contractor was found in the premises. On a query from the AO, assessee submitted that M/s.Indelox was engaged by the assessee to provide services such as warehouse management which inclu .....

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which was involved in the customs documentation process. Therefore, the assessee justified payment to M/s.Indelox Services. The AO was however not convinced with the assessee s explanation and expressed doubts about the quality of the contractors and particularly in view of the fact that no employees were present during the time of inspection he held that payment of such huge sum to the contractor is not justified. He, therefore, disallowed a sum of ₹ 20 lakhs out of the total payment to M .....

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n 740 (Bom.) affirmed by Hon ble Supreme Court in (2008) 295 ITR 45 (SC), ii) Oil and Natural Gas Commission vs. ACIT (1999) 69 ITD 69 (Del Trib.), iii) ACIT vs. Arthur Anderson & Co. (5 SOT 393)(Mum Trib.) and iv) Sonic Biochem Extractions P. Ltd. vs. ITO (2013) 35 Taxmann.com 463 (Mum Trib.) (iii) On examination of the material on record, we find that genuineness of the services rendered by M/s.Indelox is not doubted by the AO. The only ground on which the AO has disallowed is that at the .....

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the cases relied upon by the assessee (cited supra). We, therefore, agree with the findings of the CIT(A) and we see no reason to interfere with the same. The ground of appeal of the revenue is rejected. (iv) In the result, the revenue s appeal (IT(TP)A No.387/Bang/2012) is dismissed. IT(TP)A No. 269/Bang/2012: 6. This appeal by the assessee is for the assessment year 2006- 07. I. Shortage of receipt of goods: The assessee has claimed a sum of ₹ 12,51,672/- towards shortage in receipt of .....

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the said disallowance and the assessee is in second appeal before us. On going through the chart filed by the assessee, we find that the percentage of physical difference on sales is 0.55% and on cost of goods sold is 0.79%. This is a little higher than the loss claimed by the assessee in the earlier assessment year. However, for the detailed reasoning given by us for the earlier assessment year, we grant relief to the assessee on this count also. III. Breakage: The assessee had claimed a sum of .....

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mpany was trading in special chemicals which has specialized uses and the assessee, being a leading supplier of such high quality research chemicals, has to maintain high quality all the time. It was submitted that due to oxidation and chemical reactions, the products lose shelf life and hence are scrapped and claimed as expiry products. The AO did not agree with this contention of the assessee and held that the entire purchase of the assessee is from parent holding company and if any item has r .....

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CIT (2003)(133 Taxman 740) and ii. CIT vs. Wolkem India Ltd. (2009)(315 ITR 211)(Raj.) (iv) Having regard to the rival contentions and the material on record and the judicial precedents on the issue, we find that this issue is covered in favour of the assessee by the decisions relied on by the assessee cited supra. The Hon ble Bombay High Court in the case of Alfa Laval India Ltd. (cited supra) has observed at para.8 of its order as under: 8. In the present case, there is no dispute that the dul .....

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an 10 per cent of the cost. Under the circumstances, it could not be said that the valuation of the obsolete items done by the assessee and certified by the auditors was not proper or arbitrary. The AO in fact has arbitrarily valued the items in question at 50 per cent of the cost without disclosing the basis of such valuation. The AO had not doubted the correctness of the certificate of the auditors regarding the valuation of obsolete items. The summary of the obsolete items were before the AO. .....

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findings of the AO on the ground that the list of obsolete items were not produced by the assessee. Accordingly, we answer the question No. 1 in the negative, that is, in favour of the assessee and against the Revenue. Similarly, the Hon ble Rajasthan High Court, in the case of Wolkem India Ltd., (cited supra) in para.5 of its order held as under: 9. As per the provisions of s. 145A of the Act of 1961, the income from business under the head "Profits and gains from business" has to be .....

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holding that the inventories valued by the assessee @ 5 per cent is excessive did not care to estimate the net realizable value of the store and proceeded to disallow the amount of ₹ 68,59,108 written off as obsolete stores and claimed in P&L a/c altogether. It has come on record that the assessee has valued the inventories such as nut bolt glass fuse bearing bushes, lock pin, pipe, screw etc. which were rusted, non-moving and unusable on account of obsolescence/damage/deterioration b .....

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n at 10 per cent of the cost by the CIT(A), cannot be faulted with. Taking the above into consideration and the nature of the assessee s business, we agree with the contention of the assessee that the goods of the assessee which are nearing expiry date have to be written off. Further, the ratio of such goods to sale is only 0.12% on sales and 0.18% on cost of goods sold. Therefore, we are of the opinion that such disallowance is not called for. The assessee s ground is accordingly allowed. V. Ma .....

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(ii) For the reasons given in the earlier assessment year on this very issue, the ground of appeal is treated as allowed for statistical purposes. (iii) In the result, the assessee s appeal (IT(TP)A No.269/Bang/2012 is partly allowed. IT(TP)A No.388/Bang/2012 (A.Y.2006-07): 7. In this appeal, the revenue has raised grounds against deletion of the following additions: I. Stock issued for Genosys production as consumables: The assessee had written off ₹ 27,01,436/- as raw material supplied t .....

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ined in this regard The AO was not convinced with the assessee s contentions and disallowed the same against which the assessee preferred an appeal before the CIT(A) who allowed the same and the revenue is in appeal before us. (ii) The learned Departmental Representative submitted that the CIT(A) has given relief to the assessee without verifying the contentions of the assessee that Genosys is the laboratory facility of the assessee and also that it has offered income from sale of products manuf .....

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ve been written off by the assessee but the goods manufactured by Genosys Production has been traded and income there-from has been declared as assessee s own income and therefore there is no necessity of making disallowance and the CIT(A) has accepted this contention of the assessee. (iv) Having regard to the rival contentions and the material on record we find that though the assessee has claimed that Genosys Production has manufactured the products and offered income from sale of these produc .....

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nue s ground of appeal for assessment year 2005-06 and for the detailed reasons given therein, this ground of appeal is rejected. 8. In the result, the revenue s appeal is treated as partly allowed for statistical purposes. 9. Assessment year: 2007-08: I. Shortage in receipt of goods: The assessee had claimed a sum of ₹ 43,68,182/- as shortage in receipt of goods which was disallowed by the AO and the disallowance was confirmed by the CIT(A) against which the assessee is in appeal before u .....

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sallowed by the AO and against the same assessee filed an appeal before the CIT(A) who granted partial relief to the assessee and the assessee is in second appeal against the balance addition confirmed by the CIT(A). We find that the entire claim of the assessee amounts to 0.41% on sales and 0.54% on cost of goods sold. Similar issue had arisen in the assessment year 2005-06. For the detailed reason given therein, this ground of appeal is allowed and the addition is set aside. III. Quality rejec .....

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elief to the assessee. Against the order of the CIT(A), both the assessee as well as the revenue is in appeal before us. (ii) The learned counsel for the assessee submitted that it is the assessee s quality policy that wherever quality of any batch is rejected by the customers from anywhere across the world, the assessee scraps the entire batch as the same has not met the standard quality. It is further submitted that the AO has not doubted the genuineness of the said quality rejection but has d .....

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a casual manner, thus requiring significant write off. From the chart given by the assessee, we find that the quality rejection amounts to 0.13% of sales and 0.17% on cost of goods sold. Considering the nature of the goods manufactured by the assessee, it cannot be presumed that the quality of goods is always met and that write off is not necessary. Therefore, since genuineness of the expenditure has not been doubted by the authorities below, we are inclined to grant full relief to the assessee .....

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firmed the addition. The assessee is in appeal before us. However, the learned counsel for the assessee has not been able to rebut this finding of the CIT(A) that it appears to be duplication without any specific justification. Therefore, we see no reason to interfere with the order of the CIT(A) on this issue and this ground of appeal is rejected. 10. In the result, the assessee s appeal is partly allowed and the revenue s appeal is dismissed. 11. Assessment year: 2008-09: I. Shortage in receip .....

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77; 89,14,241/- on account of physical difference in stock and the AO has disallowed the same which has been confirmed by the CIT(A) and the assessee is in second appeal before us. In the chart filed by the assessee, we find that the difference in stock amounts to 0.42% on sales and 0.56% on cost of goods sold. For the detailed reasoning given by us for the assessment year 2005-06 this ground of appeal is allowed. III. Breakage: The assessee has claimed a sum of ₹ 5,48,567/- on account of .....

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