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TMI Blog2017 (11) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... s as its members and in turn, societies become the members in the assessee-company. Subsequently, the assessee-company has been converted as Sri Vijaya Visakha District Milk Producers Mutually Aided Cooperative Union Ltd., under AP State Mutually Aided Cooperative Society Act, 1995, which was further been converted into Producers company in the year 2006 and registered under the Companies Act 1956 as M/s. Vijaya Visakha Milk Producer Company Ltd. The main objective of the company is to procure milk from farmers through the societies situated in village of Srikakulam, Vizianagaram, Visakhapatnam, East Godavari and West Godavari Districts of Andhra Pradesh. The suppliers are the members of the assessee-company, from which milk is being procured every day. The milk procured from farmers through their cooperative societies is primarily being stored in bulk coolers provided by the assessee at the places of milk societies. The assessee-company procures milk from the bulk coolers and transports the milk through milk tankers to the main factory at Visakhapatnam, where milk is processed. The processed milk is packed in pouches and supplied to the consumers of above five districts and also o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer noted that the price of milk procured debited to profit & loss account is much higher by an amount of Rs. 96,60,12,828/-. On query, it was explained to the Assessing Officer that in addition to the above procurement price the milk producers were also piaid additional price/withheld price on 28/03/2010 and the details of such additional price paid was submitted to the Assessing Officer vide letter dated 18/10/2013 as follows:- Withheld price Buffalo Milk Rs. 49,27,19,254/- Cow Milk Rs. 47,32,93,574/- Total Rs. 96,60,12,828 5. The Assessing Officer called upon the assessee to explain why such additional or withheld price was paid and what is the basis. It was submitted before the Assessing Officer that Board considers various factors such as; (i) Rate per kg on buffalo milk and total solids for cow milk paid by competitors, (ii) Rate per kg fat and total solids paid by cooperative dairies in AP and other states and (iii) Competition prevailing in the market and producers demand for prices before finalization of the final price for payment of milk price from farmers. In this regard, the assessee had also provided the comparative prices from website of NDDB. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required funds to meet the capital expenditure to acquire machinery and equipment and to meet expenditure on the extension activities under procurement and marketing of the milk. E: In view of the request made by the members and considering the authorization given by them it is resolved to deduct Rs. 5/per kg fat on buffalo milk and Rs. 2.75/kg total solids on cow milk out of the withheld price payable to milk producers in West Godavari, East Godavari, Visakhapatnam Vizianagaram and Srikakularn Dist. As contribution to M.P & E.E.H. & M.W. Trust, Sheelanagar, Visakhapatnam since the milk producers of these districts are availing education and health care facilities provided by the Trust and pay directly to the said Trust by way of Cheque /Demand Draft upon the unanimous request of the members present at the Annual General Meeting. F: Resolved that the remaining portion of the withheld price, after deducting value of equity shares allotted to shareholders and amount payable to Trust as contribution shall be paid to producers by way of crossed Demand Draft/Cheque/ transfer to their respective accounts. " The break up is as follows: Amount claimed to had been actually paid R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually paid to the milk suppliers and taken to the capital / contributed to the trust is not allowable and so hereby disallowed. Accordingly, assessment is completed. 9. On being aggrieved, assessee carried the matter in appeal before the ld. CIT(A). During the course of appellate proceedings, the assessee filed a petition for admission of additional evidence vide letter dated 29/11/2013, the same is extracted as under:- Additional evidences: 1. Copy of the Board Resolution with subject No.29 dtd,28.02.2007 for withheld price for the financial year 2006-07 both in Telugu and true translation of the same in English. 2. Copy of the Board Resolution with subject No.13 dated 06.02.2008 for withheld price for the financial year 2007-08 both in Telugu and true translation of the same in English. 3. Copy of the Board Resolution with subject No.20 dated 27.12.2008 for withheld for the financial year 2008-09 both in Telugu and true translation of the same in English. 4. Copy of the Board Resolution with subject No.8 dated 05.10.2009 for withheld price for the financial year 2009-10 both in Telugu and true translation of the same in English 5. Form No.2 filed with Registrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime to time. The assessee company also published the procurement price of milk in the local newspapers for information of all the concerned including the milk producers. The amount so fixed shall be the amount payable and such liability accrues at the time of supply of milk. However, the entire amount payable as per the procurement price would not be paid immediately at the time of supply. A part of the amount payable would be retained or withheld for the benefit for the suppliers. Such amount payable is known as withheld price and shall be dealt in separately with the concurrence of the suppliers. 13 It was further submitted that the Board of Management conducts meetings not only at its registered office but also in the villages, where milk societies are functioning so as to motivate and to encourage supply of milk to the assessee company. The assessee company explains the suppliers the need of participation of the milk producers. The assessee company also explained to the milk producers that the price paid at the end of the year, would bring in an advantage as it would amount to saving. The assessee also would explain the need of retaining a part of the price under „withhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such producers of milk would be continuously supply milk only to the assessee. If the producers are allotted equity shares, they will have the sense of participation and the assessee would have better liquidity. The milk producers would get a lump sum amount at the end of the year which can be utilized by them for purchase of buffaloes or for improvement of their infrastructure for the development of dairy. In other words, indirectly a habit of small savings is cultivated among the milk producers by payment of differential price/ withheld price at a time. Therefore, it is a win situation for both the assessee and the milk producers. 17 It was further submitted that assessee-company makes the payment to the member societies every fortnight through their bank accounts. In turn, the concerned societies would make the payments to the milk producers in proportion to their supply of milk depending on the rate of kg FAT & SNF contents. The balance of consideration would be retained and based on the resolutions passed the same would be either paid in cash or paid in kind. 18 During the appellate proceedings, the Authorized Representative for the assessee represented that the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the price due and payable for goods supplied by any member to the producer company; and as withheld by the producer company for payment on a subsequent date." 20 In this regard, the Authorized Representative for the assessee also referred to the definition of „Producer Company‟, and „withheld price‟ in the Companies Act. The Authorized Representative for the assessee also referred to section 581E and 581D of the Companies Act. The same is reproduced by the ld. CIT(A) as under:- MUTUTAL ASSISTANCE PRINCIPLES Sub-section (2) of section 581G provides that the Articles shall contain the following mutual assistance principles, namely: a. The membership shall be voluntary and be available to individual producers and producer Institutions who can participate or avail of the facilities or services of the producer company and are willing to accept the duties of membership. b. Each member shall have only a single vote irrespective of shareholding, unless other-wise provided. c. The Producer-Company shall be administered by a Board of Directors as per provisions of Par IXA (namely section 581A to 581 ZT of the Act) and the Board shall be accountable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld price and such other benefits as the Board may deem fit in the larger interest of members of the company. (a) Limited return The members shall receive limited return on the share capital contributed and the board, on basis of available profit will determine such return for each year at the end of each financial year. (b) Withheld price Each member shall receive initial payment of such amount as may be determined by the Board for the produce or products pooled and supplied by them. Every member shall receive withheld price (remaining price) which will be disbursed later in cash or kind or allotment of Equity Shares in proportion to the produce supplied to the company during the financial year to such extern in such manner or subject to such condition as may be decided by the Board. (c) Bonus Shares Every member shall be entitled to bonus shares as per the provisions of section 581 ZJ and subject to the requirements of Article 27 of the Articles of Association of the company as and when decided by the Board subject to approval of the members. (d) Patronage Bonus If any surplus remaining after making provision for payment of limited return and reserves a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , material. The provisions of Section 581ZH of the. Companies Act, 1956 shall apply to this company. 21 With reference to the above legislative provisions and its Articles of Association, it was submitted that the entire procurement price would not be paid immediately at the time of supply; part of the procurement price is withheld and paid at a later stage as per Board Resolution and this is authorized under the statute and under its Articles of Associatio; the payment of the withheld price through allotment of equity shares / donation is also authorized in the statute and the Articles of Association of the company. The Authorized Representative for the assessee also contended that the assessee has not adopted any tax evasion device in payment „withheld price‟ through equity allotment partly and through contribution to trust partly. 22 The Authorized Representative for the assessee has referred to the resolution passed by the Board regarding fixation of price, which reads as under:- Board of Directors Meeting held on 05/10/2009 Subject No.5 : Action taken by the Managing Director with prior permission of the Chairman in increasing the adhoc price for purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he various submissions and details filed. It is to be noted that out of the total withheld price of Rs. 96,60,12,828/-, the AO had disallowed Rs. 46,96,02,293/- which pertain to payment said to be capitalized of Rs. 41,23,18,509/- and contribution to trust of Rs,5,72,83,783/-. The AO had taken a view that these payments are not for commercial reasons, and that the amounts have been unilaterally capitalized without offering to taxation. However, the payments made to farmers/milk producers out of the withheld price of Rs. 49,64,10,534/- was found to be on commercial lines. In this background it has to be seen whether the disallowance of Rs. 46,96,02,293/- is justified. 7.18 At the outset, it is to be noted, from the documents and details filed, that the assessee-company is a producer company functioning on cooperative principles for the mutual benefit of the milk producers. It was formed as a company from its earlier status as a Mutually Aided Cooperative Society in terms of section 5813 of the Companies Act and pursues its earlier objectives. Its share holders are the producers cooperative societies in the three districts in which the milk producers are the members. 7.19 The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made initially is on a tentative/adhoc price. The AO also refers to such resolutions in his assessment order. Further the AR has filed details showing that procurement price was paid by way of initial payment and withheld price in the earlier years also. In the light of these discussions with reference to the details filed, I am of the view that there was no infirmity in the assessee's practice of procuring milk through initial payment and withheld price, and such practice is consistent with its Articles of Association and relevant statutory provisions governing the producer company. The payment of withheld price is also consistent with the principles of cooperative societies. It can also be said as seen from the assessment order that the AO has also accepted such practice adopted by the assessee-company; however the AO's objection relates to the mode of payment and the want of commercial element in such mode of payment. 7.21 The assessee has submitted that the fixation of procurement price or the final price is based on market conditions taking into account the comparative price position prevailing in the area, and prices paid by the competitors in the business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust, and also extract of bank statement of the MPEEAMWT-trust showing receipt of the said amount. It was also submitted that the amount is utilized by the trust to expand the hospital facilities and educational facilities rendered to the member of the assessee company. In the light of these details, I find that the genuineness of the payment is established. I have also perused the details submitted relating to the comparative price position in the industry in the nearby areas. The price paid by the assessee do not appear to be excessive or unreasonable. The payment of withheld price is authorized under the articles of association and is done as per resolution passed by the Board and hence it cannot be said to be a tax avoidance device. 7.23 The next issue for consideration would be whether the decision in the case of CIT Vs. Mehsana District Cooperative Milk Producers Union Ltd 282 ITR 24, would be applicable to the facts of the case or whether the decision relied on by the Assessing Officer in the case of Budhewal Cooperative Sugar Mills Ltd and Shahabad Cooperative Sugar Mills Ltd. would be applicable. The AR has filed a detailed comparative analysis to substantiate that the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave clearly mentioned that price is adhoc and provisional. In the assessee's case also, as already discussed some of the resolutions passed for price fixation have clearly stated that the price fixed was tentative. The AO also referred to such resolution in the assessment order. Further it is dearly stated in the articles of association that every member shall receive initial payment of such amount as determined by the Board and the withheld price shall be disbursed later in cash or kind or allotment of equity shares. In the assessee's case the additional price was paid only partly to the milk producers and partly by way of share allotment contribution to the MPEEHMWT Trust rendering educational and medical facilities to the members of the assessee company. It is noted as a matter of fact that shares were allotted to the individual milk producers in the immediate succeeding year in proportion to the withheld price. Thus the milk producers have become equity holders to the extent of such additional purchase price, which evidences that the amount has gone out of the coffers of the assessee-company. The contribution made to the Trust is based on the Mutual Assistance Principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the first time, it was not accepted by the Assessing Officer . It has further been submitted that the assessee company has paid some amounts to the suppliers, equity shares are issued and contribution towards trust, out of which cash payment made to the suppliers was allowed by the Assessing Officer. 30 It has further been submitted that it is not correct to allow some of the amount out of withheld price and disallowed other part of the amount. It is further submitted that the entire withheld price has to be allowed. He further submitted that the ld. CIT(A) by considering all the details and also by admitting additional evidence and calling the remand report from the Assessing Officer, the treatment adopted bfy the assessee company has accepted and directed the Assessing Officer to deleted the addition and therefore, prayed that the order passed by the ld. CIT(A) may be upheld. 31 We have heard both the sides, perused the material available on record and orders of the authorities below. 32 The assessee company M/s. Vijaya Visakha Milk Producers Company Ltd. incorporated under the Companies Act, 1956 as a producers company. The main object of the company is to procure milk fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has been considered by the Assessing Officer and observed that out of total withheld price of Rs. 96,60,12,828/-, the actual amount paid to the milk suppliers only of Rs. 49,64,10,534.61, the amount of Rs. 41,23,18,509.91 claimed as expenditure was in fact capitalized and the amount of Rs.5,72,83,783/- was taken as contribution to the trust. Accordingly, the Assessing Officer took the view that the amount actually paid by the assessee can be held as made on commercial line to ensure clamed supplies that thereby aid in furthering of the business of the assessee, the amounts not actually paid but debited to profit & loss account to be capitalized or contributed cannot said to have been based on commercial line. The Assessing Officer also took a view that the assessee is employing device to increase its capital without paying taxes which are due to exchequer. The Assessing Officer by considering the decisions of the Shahabad Cooperative Sugar Mills Ltd. Vs. CIT (226 ITR 582) and Budhewal Cooperative Sugar Mills Ltd. Vs. CIT (316 ITR 461) and held that the amount of Rs. 96,60,12,828/- which is debited to the profit & loss account, but not actually paid to the milk suppliers, tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the latter price may be paid in cash or in kind or allotment of equity shares as determined by the Board. The copies of resolutions filed by the assessee also show that the payment made initially is on a tentative/adhoc price and the ld.CIT(A) is of the opinion that there is no infirmity in the assessee‟s practice of procuring milk through initial payment and withheld price, and such practice is consistent with its Articles of Association and relevant statutory provisions governing the producer company. The payment of withheld price is also consistent with the principles of cooperative societies. The ld. CIT(A) has also considered that the equity shares allotted to the members, contribution to the M/s. Milk Producers & Employees Educational Health and Medical Welfare Trust, which provides educational and medical facilities to the members and employees of the assessee company and it is approved under section 12A of the Act and it cannot be said that the above payments made by the assessee from the withheld price not in commercial lines as decided by the Assessing Officer is not correct. The ld. CIT(A) has further observed that the assessee company has allotted the shares fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that it is a tax avoidance device adopted by the assessee to avoid the payment of tax. The ld. CIT(A) by considering all the details has correctly decided that out of withheld price, equity shares issued is in accordance with law. 34 Insofar as contribution paid to the trust is concerned, as per Memorandum of Association of Companies Act, it is under obligation of the assessee to establish schools, colleges, training centres & hospitals. Accordingly, the assessee has already established hospital and educational institutions and out of withheld price some portion is paid to the trust and same is received by the trust. Nowhere the Assessing Officer doubted the transaction. The only doubt expressed by the Assessing Officer is that the above payments are only made to avoid taxes. In our opinion, the assessee producer company running in the lines of mutuality basis for the benefit of the members, in the interest of the members instead of payment cash, some shares are allowed and established educational institutions and also hospitals for treatment of the members of the milk suppliers and certain payments made out of withheld price as per Companies Act and also Articles of Association ..... X X X X Extracts X X X X X X X X Extracts X X X X
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