2015 (7) TMI 948 - AT - Income Tax

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 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 due to various factors such as leakage, drying up, evaporation etc., particularly since the goods imported are chemicals. In such a scenario, wastage in transit appears to be common and loss of such shortage of goods delivered to the assessee particularly 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 to its sales and cost of goods sold, has to be allowed. - Decided in favour of assessee. Error in preparation of goods receipt and physical difference - disallowance of these items on the ground that the difference is due to the error committed by 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 - Held that - 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 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 made against the third party and the costs involved in processing such claims finds favour with us particularly since loss on account of these two items is only 0.01% and 0.02% on sales and cost of goods respectively. - Decided in favour of assessee. Disallowance of Breakage charger @ 50% - Held that - The only reason for making disallowance is that handling of these bottles is by a professional agency and therefore the loss should also have been claimed from them because the assessee 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 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.- Decided in favour of assessee. Management fee paid to Sigma Aldrich USA disallowed - Held that - Neither the AO nor the CIT(A) has brought out any details of the services rendered by the 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 requiring making available of the technology to the assessee. Therefore, we deem it fit and proper to remit this issue to the file of the AO for reexamination of the nature of the transaction and only if it falls within the definition of technical and consultancy services under the India- USA DTAA, the provisions of sec. 40(a)(ia) can be applied. Decided in favour of assessee for statistical purposes. Disallowance of staff welfare expenses - Held that - It the assessee has not furnished 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 observed that several of these are invoices drawn by Wipro towards SAP Functional Consultancy Charges rather than involving travel per se. He also observed that both the invoicing and invoiced parties are addressed at Bangalore and therefore they do not support the assessee s contention of having provided full and complete details of travel before the AO. The learned counsel for the assessee has not produced before us any other supporting evidence other than that filed before the AO and the CIT(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 purpose of business, the same cannot be disallowed. As rightly pointed out by the CIT(A), questioning the speed or validity of the SAP system for the assessee s business for purpose of disallowance of expenditure is beyond the scope of the AO unless he points to specific reasons to hold that the system is not used for business of the assessee. Therefore, we do not see any reason to interfere with the order of the CIT(A) - Decided against revenue. Payment towards logistic services, warehouse 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 for the business purpose of the assessee, an ad hoc disallowance of the same is not justified - Decided against revenue. Expired inventory disallowed @ 50% - Held that - On 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. - 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 file of the AO to verify the assessee s contention and if it is found to be correct, then no disallowance shall be made. - Decided in favour of revenue for statistical purposes. Quality rejects disallowed - Held that - Neither the AO nor the CIT(A) has doubted the genuineness of the expenditure and the CIT(A) has allowed 25% of the claim as allowable deduction by holding that the quality check measures are an integral part of any professionally managed company and it is not likely that 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 to grant full relief to the assessee on this issue - Decided in favour of assessee.

Summary

Issues Involved:
1. Short-landing
2. Error in preparation of goods receipt and physical difference
3. Breakage
4. Management fee paid to Sigma Aldrich USA
5. Staff Welfare
6. Travelling expenses
7. SAP costs
8. Payment to M/s Indelox
9. Shortage of receipt of goods (subsequent years)
10. Physical difference (subsequent years)
11. Expired inventory
12. Quality rejects
13. Miscellaneous stock write-off
14. Stock issued for Genosys production as consumables

Detailed Analysis:

I. Short-landing:
The assessee claimed Rs. 3,81,583/- for short-landing, which the AO disallowed due to lack of basis and deemed it not genuine. The CIT(A) confirmed this disallowance. However, the Tribunal found the short-landing to be negligible (0.05% on sales and 0.07% on cost of goods sold) and allowed the claim, appreciating the business rationale of not issuing credit memos for small amounts.

II. Error in preparation of goods receipt and physical difference:
The assessee claimed Rs. 96,444/- for errors in goods receipt and Rs. 4,91,533/- for physical differences. The AO disallowed these, suggesting the loss should have been claimed from the warehouse service provider. The CIT(A) upheld this disallowance. The Tribunal, however, allowed the claim, noting the errors were part of business operations and the amounts were negligible (0.01% and 0.025% on sales and cost of goods respectively).

III. Breakage:
The assessee claimed Rs. 5,67,832/- for breakage, which the AO partially disallowed (50%) and the CIT(A) further restricted the disallowance to Rs. 1,50,000/-. The Tribunal allowed the full claim, noting the breakage was a business expense and the loss (0.07% of sales) was negligible.

IV. Management fee paid to Sigma Aldrich USA:
The assessee claimed Rs. 21,28,791/- for management fees. The AO disallowed it due to lack of evidence of services rendered, and the CIT(A) upheld the disallowance under section 40(a)(ia) for non-deduction of TDS. The Tribunal remitted the issue back to the AO for reexamination of the nature of the transaction to determine if it falls under 'technical and consultancy services' as per the India-USA DTAA.

V. Staff Welfare:
The assessee claimed Rs. 14,33,180/- for staff welfare expenses. The AO disallowed 35% due to lack of supporting bills, which the CIT(A) reduced to 15%. The Tribunal upheld the CIT(A)'s decision due to the absence of necessary details from the assessee.

VI. Travelling expenses:
The assessee claimed Rs. 50,89,575/- for travel expenses reimbursed to Sigma Aldrich USA. The AO disallowed 20% due to lack of supporting bills. The CIT(A) confirmed this disallowance, noting discrepancies in the evidence provided. The Tribunal upheld the CIT(A)'s decision.

VII. SAP costs:
The assessee paid Rs. 1,25,46,254/- to Sigma Aldrich Germany and Rs. 5,23,930/- to Sigma Aldrich USA for ERP implementation. The AO disallowed 50% questioning the system's efficiency. The CIT(A) allowed the claim, which the Tribunal upheld, noting the expenditure was for business purposes.

VIII. Payment to M/s Indelox:
The assessee paid Rs. 1,13,84,956/- for logistic services. The AO disallowed Rs. 20 lakhs due to doubts about the contractor's presence during inspection. The CIT(A) allowed the claim, which the Tribunal upheld, noting the expenditure was for business purposes.

IX. Shortage of receipt of goods (subsequent years):
For subsequent years, the Tribunal allowed the claims for shortages in receipt of goods, noting the amounts were negligible compared to sales and cost of goods sold.

X. Physical difference (subsequent years):
The Tribunal allowed the claims for physical differences in stock for subsequent years, noting the amounts were negligible and part of business operations.

XI. Expired inventory:
The assessee claimed amounts for expired inventory due to oxidation and chemical reactions. The AO disallowed 50%, which the CIT(A) partially upheld. The Tribunal allowed the full claim, referencing judicial precedents supporting such write-offs as business expenses.

XII. Quality rejects:
The assessee claimed amounts for quality rejects, which the AO disallowed without reasoning. The CIT(A) granted partial relief. The Tribunal allowed the full claim, noting the amounts were negligible and part of business operations.

XIII. Miscellaneous stock write-off:
The assessee claimed Rs. 2,45,785/- for miscellaneous stock write-off. The CIT(A) confirmed the disallowance, noting it included other already dealt with claims. The Tribunal upheld the CIT(A)'s decision.

XIV. Stock issued for Genosys production as consumables:
The assessee wrote off Rs. 27,01,436/- for raw material supplied to its Genosys Production facility. The AO disallowed it, which the CIT(A) allowed. The Tribunal remitted the issue back to the AO for verification of the assessee's claim that the income from the sale of products was declared as the assessee's own income.

Conclusion:
The Tribunal provided relief to the assessee on various grounds, emphasizing the negligible amounts involved and the business nature of the expenses. The Tribunal also remitted certain issues back to the AO for further verification.