2022 (4) TMI 1073 - AT - Income Tax

Service charges for quality audit of the bottlers - allowable business expenditure u/s 37(1) - test of wholly for the purpose of the assessee s business - word of exclusively as a sine qua non for allowing deduction - HELD THAT - This very issue has been examined by the Tribunal in its order for A.Y. 1997-98 2019 (9) TMI 300 - ITAT PUNE and a decision has been rendered that such expenses are allowable in terms of section 37(1) of the Act. Albeit there is a massive force in the contentions of the ld. DR, but we do not wish to accord our imprimatur to the same by disturbing the consistency of the Tribunal s conclusion on the issue because the matter is already sub judice before the Hon ble High Court. Respectfully following the Tribunal order for the immediately preceding year, we hold that the disallowance of service charges paid by the assessee to CCI Inc. at 25% is unwarranted. The same is, ergo, directed to be deleted. The only issue raised in the cross appeals for the assessment year 1999-2000 is about the extent of deductibility of service charges paid by the assessee to CCI Inc. For this year also, the assessee claimed deduction of service charges after adjustment of certain debit notes with the gross amount - AO, following the parity of reasoning given for the earlier years, disallowed the full amount of service charges. The ld. CIT(A), however, restricted the disallowance to 30%. Both the assessee as well as the Revenue have come up in cross appeals on their respective stands. The rival parties fairly conceded that the facts and circumstances of the appeals for the instant year are mutatis mutandis similar to those of the preceding year, which was argued by them at length. In fact, the parties simply adopted their arguments made for the assessment year 1998-99 2019 (9) TMI 300 - ITAT PUNE . The only distinguishing feature brought to our notice was that the assessee did not carry out any bottling activity in the instant year. Having regard to the fact that there is no distinction in the facts and circumstances of the case qua the Service charges paid by the assessee to CCI Inc., following the view taken by the Tribunal for the preceding years, we direct to allow the deduction for service charges in full. At the cost of repetition, it is once again made clear that the deduction is being allowed so as to maintain consistency in the view of the Tribunal as the matter is sub judice before the Hon ble High Court notwithstanding the fact that the Department has a good arguable case. Appeal of assessee allowed.

Summary

Issues Involved:
1. Deductibility of `Service charges` paid by the assessee to CCI Inc.
2. Applicability of section 37(1) of the Income-tax Act, 1961.
3. Consistency of Tribunal's previous decisions.
4. Impact of new service agreements on the deductibility of expenses.

Detailed Analysis:

1. Deductibility of `Service charges` Paid by the Assessee to CCI Inc.
The primary issue revolves around the deductibility of `Service charges` paid by the assessee to CCI Inc. amounting to ?70.40 crore. The Assessing Officer (AO) initially disallowed 10% of the expenditure, considering it as `Royalty` paid indirectly to TCCC for the use of its trademark and technical know-how. However, the CIT(A) enhanced the disallowance to 25%, attributing it to services rendered to unrelated bottlers, which were not for the assessee’s business.

2. Applicability of Section 37(1) of the Income-tax Act, 1961
The assessee argued that the disallowed service charges were of revenue nature and incurred `wholly and exclusively` for the purpose of its business, as per section 37(1) of the Act. The assessee emphasized that the quality audit of bottlers' plants by CCI Inc. was crucial for increasing the volumes of the assessee’s business. The Revenue, however, contended that the services rendered by CCI Inc. were primarily for the benefit of the bottlers, not the assessee, and thus, did not qualify for deduction under section 37(1).

3. Consistency of Tribunal's Previous Decisions
The Tribunal had previously allowed similar service charges for the assessment year 1997-98. The assessee argued that the issue was covered in its favor by the Tribunal’s earlier decision. The Revenue, however, highlighted that a new service agreement effective from 01.04.1997 brought additional services exclusively for the assessee, which were not present in the earlier agreement. Despite these changes, the Tribunal decided to maintain consistency with its previous decision, allowing the deduction for service charges in full.

4. Impact of New Service Agreements on the Deductibility of Expenses
The Tribunal examined the new service agreement dated 01.04.1997, which included additional services exclusively for the assessee. The Tribunal noted that while the scope of services rendered to the assessee increased, the nature of services provided to the bottlers remained unchanged. Therefore, the Tribunal concluded that the facts for the year under consideration were similar to the preceding year, and the disallowance of service charges was unwarranted.

Conclusion:
The Tribunal directed the deletion of the disallowance of service charges paid by the assessee to CCI Inc. for the assessment years 1998-99 and 1999-2000, maintaining consistency with its previous decision. The Tribunal emphasized that the deduction was allowed to maintain consistency as the matter was sub judice before the Hon’ble High Court. The appeals of the assessee for the assessment years 1998-99 and 1999-2000 were allowed, and the appeal of the Revenue for the A.Y. 1999-2000 was dismissed.