9911796707
TMI Blog2006 (2) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... ial pronouncements, relied upon by the ld. counsel for the assessee we are of the view that the claim of the assessee that the expenses for the period 1-1-2000 to 31-3-2000 accrued as a liability to the assessee only during the previous year and the action of the revenue authorities holding that it is a prior period expenses cannot be sustained. The expenditure claimed for this period is therefore directed to be allowed as a deduction. Though the assessee did not receive any bill for this period from M/s. HIAI it had made an estimate of the amount payable to M/s. HIAI for this period on the basis of the bill that it had received from M/s HIAI for the period1-1-2000to31-12-2000. This was a reasonable basis on which the assessee could claim liability as having accrued. The liability of the assessee in the present-case has therefore to be held as accrued and arisen during the previous year relevant to assessment year 2001-02 and therefore, the claim made by the assessee for deduction deserves to be accepted. The Assessing Officer is directed to allow the same. We, therefore, hold that the claim of the assessee for deduction of the entire sum being administrative fee paid to M/s. HIAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs. 3 crores be made to the income of the assessee to cover the impact on profits on account of unverifiable discrepancies in stock records. The order of the CIT(A) is accordingly modified. The assessee partly succeeds on this count. In the result, the appeal of the assessee is partly allowed. - HON'BLE N.V. VASUDEVAN, J.M. AND G.S. PANNU, MEMBER (A) For the Appellant : Pawan Kumar, Adv. For the Respondent : K.C. Jain, Adv. ORDER 1. This is an appeal by the assessee against the Order dated 25-2-2005 of CIT(A)-XV, New Delhi relating to the assessment year 2001-02. 2. The first two grounds of appeal of the assessee are general in nature and does not call for any specific adjudication. The grievance projected by the assessee in ground Nos. 3 to 3.13 is with regard to action of the revenue authorities in disallowing an expenditure of Rs. 5.83 crores being administrative fee paid by the assessee to M/s. Herbalife International of America Inc. The facts in this regard are as follows. The assessee carries on business of trading and marketing of herbal products for use in weight management, to improve nutrition and enhance personal care. The assessee was incorporated as a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee but also to its various other subsidiaries across the world by maintaining its centralized staff and other resources. The cost so incurred is apportioned and claimed from the Assessee on a scientific basis. This agreement will hereinafter be referred to as Administrative Service Agreement ('ASA' for short). 5. As already noticed as per the approval of the Ministry of Industry, the Assessee was not permitted to import the products. It could get the products manufactured on a contract basis in India. For such manufacture the Assessee entered into an agreement called License and Technical assistance Agreement with a company called M/s. Herbalife International Inc. (hereinafter called 'HII'), a company incorporated in United States of America, which was the owner of the incorporeal right relating to the process of manufacture of the various products. As owner of the technical know-how regarding manufacture, HII permitted the Assessee as a licensee to manufacture the products. This agreement was also dated 10-11-1999. 6. This is the background of the assessee's nature of business. The assessee had claimed an expenditure of Rs. 5.83 crores as administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -9-2000, (M/s. HIAI had waived ASA fee from 11-9-2000 to 31-12-2000) there was no past precedent available which enabled the assessee to make a provision on an estimate basis also. The assessee further pointed out that an interim invoice was received by the assessee on June 30, 2000 for US $ 333,333. The second interim invoice for US $ 333,333 was raised on 30-9-2000 and the final invoice on 31-12-2000 for the same amount. The last invoice duly supported with cost allocation sheets was actually received by 31-1-2001 and the total amount payable to HIAI towards administration fee amounted to US $1,015,240. In terms of the approval granted by the RBI only an amount of US $ 1 million were remitted and the balance US $ 15,240 were waived by HIAI. This, however, formed a prudent basis for accruing of such expenses for the first quarter of the year 2001 (i.e. January to March 2001) in the assessee's books for the period ended 31-3-2001. 11. As far as the expenditure pertaining to the period 1-1-2001 to 31-3-2001 is concerned, the plea of the assessee was firstly that since the bills up to 31-12-2000 were received from M/s. HIAI, there was a precedent on the basis of which it could re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the same meaning as in Explanation 2 to clause (vi) of sub-section (a) of section 9; (B) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 13. The sum paid or payable by the assessee as consideration under the ASA to M/s. HIAI is payable outside India and therefore the aforesaid provisions are prima facie attracted. The question is whether the sum paid or payable by the assessee to M/s. HIAI under the ASA can be said to be fees for technical services or other sum , chargeable under the Act within the meaning of section 40(a)(i) of the Act. It is not in dispute that the assessee did not deduct tax at the time of making payment or credit nor did it pay tax in respect of the consideration payable to M/s. HIAI under the ASA. 14. In the assessment proceedings, the Assessing Officer held that under the ASA, M/s. HIAI provides data processing services, accounting services, marketing services, financial services as well as miscellaneous consultancy services and that as per the provisions of section 9(1)(vii), income by way of fees for technical services payable by a person who is resident utilized within India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical services rendered and was taxable in India. On the plea of the assessee that the payments were mere reimbursement of expenses, the CIT(A) held as follows: No doubt, on page-4 Para IIIA the Agreement uses the word 'reimburse' and goes on to say in para B-I that Herbalife USA shall determine the actual costs incurred for providing services, but later developments showed that the clement of reimbursement was retracted by the actions (billing system) of the appellant-company and Herbalife USA. It is noticed that for the period 10-11-1999 to 31-12-1999, no bill was raised by Herbalife USA on the appellant-company for the so-called reimbursement of costs. For the 5 quarters from 1-1-2000 to 31-3-2001, Herbalife USA raised a fixed billing of US $ 2,50,000 per quarter. This makes it abundantly clear that there is no element of reimbursement of real costs involved but a fixed lump sum payment. It is also seen in Exhibit A para 6 at page 4 that Herbalife USA is to provide consultation services. Exhibit A is an annexure to the Administrative Services Agreement. Further, this matter was considered by the Reserve Bank of India while granting permission for the remittance of Admini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services rendered by M/s. HIAI to the assessee within the meaning of section 9(1)(vii) Explanation 2 of the Act? (3) If the services rendered by M/s. HIAI are technical services as above, whether applying the source rule they can be said to have accrued or arisen in India rendering them taxable in India in the hands of M/s. HIAI? (4) If the answer to question No. 3 is in the affirmative, yet the sum in question cannot be brought to tax in view of the provisions of Article 12(4)(b) of the DTAA between India and USA the sum in question will not be fees for included service and therefore not taxable in India in view of the provisions of section 90(2) of the Act which lays down that in relation to an assessee to whom DTAA applies, the provisions of DTAA will override the provisions of the Act to the extent to which they are more beneficial to an assessee? (5) Can the alternative plea of the Revenue raised for the first time before the ITAT that provisions of Article 12(4)(a) will apply and consequently the sum in Question can be said to be fees for included services be entertained? If yes, is such a plea sustainable? (6) Can the alternative plea of the assessee that in any event in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has, in such proceedings, taken a plea that the payment in question is not chargeable to tax. In such proceedings, which is now pending disposal before the ITAT Bangalore Benches, the questions arising in this appeal, other than the applicability of Article 26(3) of DTAA between India-USA, is subject-matter for consideration. If applicability of Article 26(3) of DTAA between India and USA in the context of section 40(a)(i) is decided in favour of the assessee, the other questions can be decided in the appeal pending before the ITAT Bangalore Benches, which we feel is an appropriate forum to decide as to whether the payment by assessee to M/s. HIAI is chargeable to tax in India in the hands of M/s. HIAI and the assessee as a person responsible for making payment ought to have deducted tax at source. 21. We may also incidentally point out that Article 27 of the DTAA between India and USA contemplates a situation where a person considers that actions of one or both the Contracting States result or will result for in taxation not in accordance with the provisions of the DTAA, then he may, without prejudice to other remedies available to him under the local law, present his case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, which reads as follows: 90(2) where the Central Government has entered into an Agreement with the Government of any other country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation then in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee. 24. The payment in question by assessee to M/s. HIAI attracts the provisions of the Indo-US DTAA. The payment in question if at all will be taxable in the hands of M/s. HIAI in India only if it is a payment for included services within the meaning of Article 12(4) of the said DTAA and not taxable in India otherwise. The sum in question cannot be taxed as Business income, since M/s. HIAI admittedly does not have a permanent establishment in India. If the income is considered as having accrued or arisen to M/s. HIAI in India, yet they can be taxed in India only if they are fees for included services. Even if the payment is considered as 'fees for Technical Services' within the meaning of Income-tax Act, 1961, yet they cannot be taxed because 'fees for Technical Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OECD Model Tax Convention on Income and on Capital, 1992, Second Edition at page 396 to page 397 has the following to stay on Article 24(4): Article 24(4): Deduction of interest, royalties and other disbursements 24-18-Article 24(4) is not concerned with the discriminatory treatment of nationals etc. of one State in the other Contracting State, but the treatment of enterprises of a Contracting State under the tax law of that State. Subject to the position where a special relationship exists between the enterprise and the recipient, interest, royalties and other disbursements paid to a resident of the other Contracting State should be deductible to the same extent that they would be deductible if paid to a resident of the same State. Thus this prevents the indirect discrimination which would arise if the sums were not deductible. A similar provision is included in the Article relation to the deduction of debts owed to residents of the other Contracting State in determining the taxable capital of the enterprise. At page 411, the following commentaries are found on Article 24(4): This paragraph is designed to end a particular form of discrimination resulting from the fact that in cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessment year 2001-02. As far as this question is concerned, the plea of the assessee has been that since the agreement with M/s. HIAI is dated 11-9-2000 and since the period from 1-1-2000 to 31 -3-2000 was the first period for which A M/s. HIAI raised a bill for services rendered to the assessee, it was not possible for them to even make an estimate of the expenditure and make a claim for deduction on a notional basis in assessment year 2000-01. The assessee also pointed out that M/s. HIAI prepares its books of account on a calendar year basis and that only in June, 2000 it raised a bill on the assessee for the services it rendered to the assessee. The assessee further submitted that since the payments to M/s. HIAI without the permission of the RBI was contrary to the provisions of FERA, 1973 or rules prescribed under the said Act, no expenditure can be said to have accrued or arisen to the assessee till such time RBI grants permission for remittances to M/s. HIAI. The assessee pointed out that only on30th June, 2000the permission of RBI was received. The assessee therefore pointed out that the expenditure had accrued only in the previous year relevant to assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reversed the decision of the Hon'ble High Court and held that the liability arose only when the approval was given by the Central Government for appointment of the Managing Agent. In the case of John Flower India Ltd. the Hon'ble Bombay High Court has held that the liability towards royalty accrued only when the Government of India granted an approval to the agreement. The decision of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. relied upon by the ld. DR is in a different context. In the said case the Court held that the purpose of grant of an approval by the RBI for remittance is from the view point of the implications of Foreign Exchange out-flow and that it had no impact on the adjudication under the Customs Act as to whether the payment for which permission was granted by the RBI was for rendering services or for import of goods. Considering the law laid down in the aforesaid judicial pronouncements, relied upon by the ld. counsel for the assessee we are of the view that the claim of the assessee that the expenses for the period 1-1-2000 to 31-3-2000 accrued as a liability to the assessee only during the previous year and the action of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 30. The liability of the assessee in the present-case has therefore to be held as accrued and arisen during the previous year relevant to assessment year 2001-02 and therefore, the claim made by the assessee for deduction deserves to be accepted. The Assessing Officer is directed to allow the same. 31. We, therefore, hold that the claim of the assessee for deduction of the entire sum of Rs. 5,83,68,396 being administrative fee paid to M/s. HIAI should be allowed as a deduction. The Assessing Officer is directed to allow the deduction accordingly. The third ground of appeal of the assessee is allowed, to the extent and on the basis indicated above. 32. In ground Nos. 4 and 4.1 the assessee has challenged the action of the revenue authorities in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance made by the revenue authorities cannot be sustained. A similar issue had come up for consideration in assessee's o1vn case in the assessment years 1999-2000 and 2000-01 in ITA Nos. 3098 and 2664/Delhi/04. This Tribunal on identical facts had held that the claim for deduction made by the assessee had to be allowed. The Tribunal held that these expenditure were necessary for day-today working of the assessee smoothly and it was necessary and was to facilitate the carrying on the business of the assessee. In view of the above the disallowance made by the revenue authorities cannot be sustained, the same is directed to be deleted. 34. In the fifth ground of appeal the assessee has challenged the action of the revenue authorities in disallowing a sum of Rs. 5,97,184 on account of foreign exchange fluctuation loss. In the grounds of appeal the assessee has however mentioned the figure at Rs. 73,17,184 which is a mistake as admitted by the ld. AR before us. As far as this issue is concerned, the total of the loss on foreign exchange fluctuation is given at page 187 of assessee's paper book I which is as follows: Summary of foreign exchange loss transactions durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the finished goods were written off as there was huge pile up of inventory and the products had become unfit to be sold. However, the reconciliation of stocks did not tally inasmuch as the opening stock plus receipts less issues and write off did not tally with the closing stock. The quantitative reconciliation statement prepared by the assessee also differed from the quantitative-figures of opening and closing stocks shown in the audited Balance Sheet and P L A/c for the year under consideration. In this background the Assessing Officer concluded as under: I, therefore, based on the findings above, hold that the manufacturing and trading accounts of the assessee are not correct and complete. Its opening and closing stocks are not tallying are as per its own stock records. The production of each of the products is also not reflected correctly in the stock records, since only the balancing figure is taken. The sales in different statements submitted are varying and are not reliable. I, therefore, proceed to determine the trading income of the assessee to the best of my judgment. In the current year the assessee has debited manufacturing costs which is 28.8 per cent of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the same on merits. According to the ld. Counsel the approach of the CIT(A) was not guided by principles of natural justice and fair play. On merits, the ld. Counsel explained that the discrepancies in the stock statements were primarily on account of use of different softwares in maintaining the inventory transaction and the financial books of account. The inventory taken on the basis of oracle software accounting system was compared with the stock statements and the discrepancies noticed were attempted to be reconciled by the firm of Chartered Accountants appointed for carrying out this exercise. The ld. Counsel has vehemently submitted that the estimation made by the lower authorities was highly unjustified and the basis adopted was not justified, on facts. It was further submitted that the profit for the year, if at all, may be increased by an amount of Rs. 72,36,139 in terms of the report of an independent firm of Chartered Accountants. 39. The ld. DR has defended the orders of the lower authorities by placing reliance on the reasonings taken by them resulting in the addition based on an estimate basis. 40. We have considered the rival submissions. At the outset, we may s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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