TMI Blog2010 (7) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 14,05,175/- out of the service charges paid to CDSS. 3. In the Assessment Year 2003-04, during the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has paid service charges of ₹ 90,67,708/- to CDSS, in respect of which, the assessee submitted a copy of service agreement to the AO. From the service agreement it was noted by the AO that in consideration of services rendered, CDSS was entitled to receive service charges @ 0.7% of its net sales. The AO was of the view that net sale would mean gross sales as reduced by sales returned during the relevant period. The assessee was then asked to furnish working of amount of ₹ 90,67,708/- paid to CDSS which working as submitted by the assessee is as under:- Gross Sales 1557840256 Less: Car Care 5599689 Base Oil 2695038 Empty Barrels 799392 Other Traded Items 2064424 Export Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , one with CDSS and other with M/s. Valvoline Inc. and as per these agreements quantifying amounts were worked out. The AO has not verified these facts and also not controverted. The assessee gave the details of working and reasons for doing so. The AO has not given reasons for not accepting the working given by the assessee for quantification of commission/royalty paid. After going through the submissions of the AR, working furnished by him, the disallowance is not called for. Accordingly Ground No.3 is allowed. (Relief: ₹ 5,04,245/-). 4.1 The CIT(A) s order in Assessment Year 2003-04 has been followed in Assessment Year 2004-05 and the addition of ₹ 14,05,175/- made by the Assessing Officer was thus deleted. 5. Hence, in both the years, the revenue has challenged the CIT(A) s order in deleting the aforesaid addition of disallowance of service charges. 6. We have heard both the parties and have carefully perused the orders of the authorities below. We have perused the various Papers placed in the Paper Book filed by the assessee. The AO has not disputed the fact that the payment of service charges by the assessee to CDSS was as per the service agreement. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rences and technical seminars. With regard to foreign travelling expenses, it was submitted that these expenses were incurred for business meetings, sales promotion activities, conferences and technical seminars in various countries. It was noticed by the AO that the travelling expenses incurred during the year as compared to the immediate preceding year, were excessive. The AO noticed that the assessee s turnover has increased by almost 40% in the current year as compared to the immediate preceding year. The AO further found that the travelling and conveyance expenses in the immediate preceding year were claimed at ₹ 1,25,80,104/-. The AO has taken a view that increase in travelling and conveyance expenses to the extent of 40% of the total expenses incurred in earlier year would only be justified as the assessee s turnover has only increased by 40%. He, therefore, allowed the travelling expenses only to the extent of ₹ 1,75,00,000/- as against ₹ 1,92,80,312/- claimed by the assessee and disallowed the balance sum of ₹ 17,80,312/-. 8. On an appeal, the learned CIT(A) deleted the addition after observing that the working made by the AO though looks attract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim on ad hoc basis. In this view of the matter, the disallowance made by the AO has been rightly deleted by the learned CIT(A). We, accordingly, upheld the CIT(A) s order and reject this ground raised by the revenue. 10. In the Assessment Year 2004-05, the next ground raised by the revenue is against the CIT(A) s order in deleting the disallowance of ₹ 4,50,000/- consisting of the following items:- (i) ₹ 1,50,000/- out of staff welfare; (ii) ₹ 1,00,000/- out of miscellaneous expenses; (iii) ₹ 2,00,000/- out of advertisement and publicity expenses. 11. Out of the staff welfare expenses of ₹ 37,98,439/-, miscellaneous expenses of ₹ 34,44,310/ and advertisement publicity, and sales promotion expenses of ₹ 7,71,22,088/-, a sum of ₹ 1,50,000/-, ₹ 1,00,000/- and ₹ 2,00,000/- has been disallowed by the AO by observing that the assessee has not furnished complete details to show that these expenses were incurred wholly and exclusively for the purpose of business. 12. On an appeal, the CIT(A) deleted the addition by observing as under:- 7.5 The Appellant had incurred the above mentioned expenditure for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- as detailed below:- Name of the Party Amount (Rs.) C F Cummins Auto Ser Ltd. (CASL) 5200000 Elgi Equipments Ltd. (Royalty) 3955440 Cummins Diesel Sales Services (CDSS) 9067708 Total 18223148 In support of the payment of service charges to CASL as well to CDSS, the assessee submitted that both these concerns were having a large infrastructure facilities and also excellent dealers net work, and with a view to take benefit and advantage of their large infrastructure and dealers network to facilitate the assessee s business activities, the assessee had entered into an agreement with them and copies of these agreements were furnished to the AO. The Assessing Officer then specifically asked vide letter dated 10.01.2006 to give the names and addresses of the dealers who were introduced by CASL and the total sales made by the assessee by using the dealers network of CASL. The assessee vide letter dated 23.01.2006, submitted that on perusal of the various Annexures attached ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s bogus and added back to the income of the assessee company. The undersigned is also satisfied that to the extent of ₹ 52,00,000/-, the assessee has concealed/furnished inaccurate particulars in respect of its income and for that penalty proceedings u/s 27(1)(c) have been initiated separately. (addition of ₹ 52,00,000/-) The AO thus disallow payment of service charges of ₹ 52,00,000/- to CASL, against which the assessee preferred an appeal before the learned CIT(A). 16. Before the CIT(A) the assessee submitted that the assessee made the payment of service charges to CASL to take benefit of the established dealers network of CASL and as a result of the services being rendered by dealers, the assessee s sales revenue were increased by a remarkable 40.68% which goes to prove that the payment was made wholly and exclusively on the principle of commercial expediency. It was further submitted that there was no material brought by the AO to establish that the payment made to CASL was bogus and non-genuine and the agreement was entered into with a view to reduce the tax burden of the assessee. Various decisions were also cited by the assessee in support of the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the fixed commission/service charges of ₹ 52,00,000/- was paid to CASL. 19. During the course of hearing of these appeals, the learned counsel for the assessee pointed out that the assessee by furnishing following documents before the AO, supported the payment of service charges to CASL:- Copy of sales commission agreement with CASL. Detail of dealer network of CASL including name and addresses of dealers. Copy of ledger accounts of dealers of CASL on sample basis. Details of payment made to CASL on account of service charges. Details of debit notes issued by CASL. Copy of sample invoices of sales made through the dealers of CASL 19.1 He further pointed out that the aforesaid documents were also filed before the CIT(A). It was clarified by the learned counsel for the assessee that the assessee was under bona fide belief that the aforesaid documents, if read as a whole, would be sufficient to prove and establish that the services were actually rendered by CASL, in consideration of which, service charges were paid by the assessee, and in view thereof, no further documents were filed by the assessee either before the AO or before the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en any evidence by which, it could be established that CASL has actually rendered services to the assessee. He, therefore, contended that since the assessee has failed to prove that any services have actually been rendered by CASL to the assessee in connection with the business activity of the assessee company, the payment made to CASL is prima facie disallowable as business expenditure under sec. 37(1) of the Act. 22. We have heard both the parties and have carefully gone through the orders of the authorities below. We have also carefully perused the material placed in the Paper Book filed by the assessee. We have also examined the various evidences filed by the assessee before the authorities below as well as before us. 23. From the perusal of the details filed by the assessee, it is not in dispute that a copy of agreement dated 01.01.2001 entered into between the assessee and CASL, was filed by the assessee before the AO. As per this agreement, it was agreed between the assessee and CASL that the assessee would use the marketing network and other related infrastructural services set up by CASL, in consideration of which, a fixed commission of ₹ 13,00,000/- for each c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considerably increased from year to year. 24. For the reasons given above and considering the totality of the facts, and circumstances of the case, including the various evidences filed by the assessee before the authorities below as supported by various additional evidences filed before us, copies of which were given to the learned DR for her comments, and in the absence of any material disputing genuineness of the various materials, and documents, and evidences filed before us, we hold that the assessee s claim of payment of ₹ 52,00,000/- in each year on account of service charges paid to CASL is to be allowed as a business expenditure. At this stage, it is pertinent to note that the agreement in question was entered into on 01.01.2001 and it was effective from that date. It is also seen that the quarterly payment was also paid during the Assessment Year 2001-02 for one quarter amounting to ₹ 13,00,000/- and the overall annual payment of ₹ 52,00,000/- was also paid in the Assessment Year 2002-03 and in the course of assessment made under sec. 143(3) for the Assessment Year 2001-02, the payment of ₹ 13,00,000/- claimed by the assessee as deduction was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee filed copies of bills in respect of all the said expenditures. The AO then stated that on perusal of the copies of the bills, it was noticed that all the expenditures were of capital in nature. Out of the total expenses of ₹ 8,03,490/-, the AO pointed out the expenses of ₹ 1,56,000/- incurred towards purchase of wooden pallets from one Sarvodya Timber Industries which were treated as capital expenditure by the AO. With regard to the balance sum of ₹ 6,47,490/-, the AO stated that the bills produced were towards purchase of new computers, furniture and fixture, and building constructions. The AO, therefore, treated the balance amount also to be of capital in nature. The AO then allowed depreciation of ₹ 88,129/- on ₹ 6,47,490/- and made the addition of the balance amount of ₹ 5,59,361/- out of the total expenses of ₹ 6,47,490/-. The AO also made the addition of ₹ 1,56,000/- on account of purchase of wooden pallets treating the same to be of capital in nature. Thus, total disallowance made by the AO was of ₹ 7,15,361/- after allowing depreciation of ₹ 88,129/- from total expenses of ₹ 8,03,490/-. 27. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased certain memory card for computers as well as some screen and mouse. We, therefore, hold that all these expenditures are incurred towards day-to-day maintenance and repairing of furniture, fittings and computer maintenance. We, therefore, direct the AO to allow the assessee s claim of expenses amounting to ₹ 8,03,490/- as revenue expenditure. However, the depreciation of ₹ 88,129/- allowed by the AO shall stand withdrawn. Thus, this issue raised by the assessee in Assessment Year 2003-04 is decided in favour of the assessee. 30. Next ground Nos.3 4 raised by the assessee in Assessment Year 2003-04 are directed against the CIT(A) s order in confirming the disallowance of ₹ 1,00,000/- out of the total ad hoc disallowance of ₹ 2,27,610/-, and ₹ 1,00,000/ out of the total ad hoc disallowance of ₹ 2,00,000/- on account of vehicle expenditure and telephone expenditure respectively. 31. The Assessing Officer disallowed the sum of ₹ 2,27,610/- being 1/10th of the total expenditure incurred on vehicle repair and maintenance by observing that the personal use of the vehicle cannot be ruled out. Similarly, the AO disallowed the sum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expenses of ₹ 28,65,214/- and thus, disallowed the sum of ₹ 7,16,300/-. 36. On an appeal, the CIT(A) confirmed the disallowance by saying that the assessee has not produced any records or minutes of board meetings and has not successfully demonstrated the purpose of foreign visits warranting the allowance of expenditure claimed. The learned CIT(A) further observed that there was no bar to disallow expenditure on estimate basis when there was a ground for disallowance of expenditure. 37. Hence the assessee is in appeal before us. 38. We have heard both the parties and have carefully gone through the orders of the authorities below. We have carefully gone through the material on record. It is not in dispute that the details of foreign travelling expenses including the names of the employees or persons concerned who visited foreign country, period during which the journey was undertaken, the purpose for which the concerned person visited the country and the name of the place or country where visited along with the amount of expenditure incurred, have been furnished before the AO, copies of which are placed at Pages 1 to 2 of the Paper Book filed by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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