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TMI Blog2014 (2) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of provision for cash discount – Disallowance of expenditure on repairs, maintenance - Held that:- The decision in ADDL COMMISSIONER OF INCOME TAX Versus M/s JOHNSON & JOHNSON LTD [2013 (6) TMI 286 - ITAT MUMBAI] followed – the matter remitted back to the AO for fresh adjudication to allow cash discount which has been actually paid by the assessee – The Tribunal has allowed the claim of the assessee because the assessee has successfully explained the nature of expenses by filing necessary details – the details have not been properly examined by the lower authorities – thus, the matter remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Disallowance u/s 80HHC of the Act - Liabilities/provisions written back - Gross rental income - Sundry receipts - Held that:- The decision in M/s. Johnson & Johnson Limited Versus The Addl. Commissioner of Income-tax [2013 (4) TMI 228 - ITAT MUMBAI] followed – the Tribunal has remitted the matter back to the AO for fresh adjudication in the light of the decision taken in earlier years following the direction of the Tribunal in assessee's own case – For rental income, the Tribunal directed that netting off of ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, it has already been held that the agreements between J&J India and J&J USA for payment of royalty has to be considered in the light of the approval of the RBI – there is no substance in the findings of the TPO that there is no need for paying royalty for technical/marketing know-how - The CIT(A) has rightly considered the relevant clauses of the agreement between J&J India and J&J USA – Decided against Revenue. Deletion on account of unaccounted production and sales –Deletion of publicity expenses being expenses on advertisement films – Held that:- The CIT(A) observed that the AO has not pointed out any mistakes or manipulations in the records maintained by the assessee nor he has invoked provisions of Sec. 145 for making the addition - As decided in assessee’s own case for the previous years - the production loss depends on number of factors and in absence of any comparable to show that the loss shown by the assessee is excess and decided the appeal in favour of the assessee - no evidence of purchase/sales outside the books of account have been brought on record – thus, there is no reason to interfere in the findings of the CIT(A) –Decided against Revenue. Disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The first three grounds relate to Modvat Excise Duty credit relating to the closing stock of raw material and packing goods. 3. The auditors in their note on the excise duty on the closing stock have mentioned that the assessee has reduced Excise duty from the sales. Meaning thereby that the Excise duty charged to Profit Loss account is relevant to sales made during the year. Excise duty paid on closing stock is part of Inventories in the Balance sheet. It was explained that the company follows exclusive method of accounting of Excise to determine the value of cost of goods sold. 3.1 During the course of the scrutiny assessment proceedings, the assessee was asked to explain as to why the value of Modvat credit balance available at the close of the accounting year should not be included in the closing stock. It was explained that the valuation of closing stock adopted by the assessee is in accordance with the accounting standard as prescribed by the ICAI and the company is consistently following the same since the introduction of Modvat credit available on purchase of materials. The AO was of the firm belief that as per Sec. 145(A), which is relevant for the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer is also directed to give corresponding benefit in the opening stock in view of the judgment of Jurisdictional High Court in CIT v. Mahalaxmi Glass Works P. Ltd. [2009] 318 ITR 116 (Bom) and the judgement of Delhi High Court in Mahavir Alluminium Ltd. (2008) 297 ITR 077 (Del). Thus, ground no.2, is allowed for statistical purposes." Respectfully following the decision of the Tribunal, we restore this issue back to the files of the AO. The AO is directed to decide this issue afresh in the light of the direction of the Tribunal mentioned hereinabove. Ground No. 1 to 3 raised by the assessee are allowed for statistical purpose. 8. Ground Nos. 4 and 5 relate to the disallowance of provision for Executive Retirement Scheme (ERS). 8.1 The AO has discussed this issue at page-10 para-6 of his order. During the course of the scrutiny assessment proceedings, the AO noticed that the assessee has debited a sum of Rs. 6,64,372/- towards provision for Executive Retirement Scheme. The AO was of the opinion that the claim of the assessee was only a provision and therefore in the nature of contingent liability and the assessee has not actually incurred any expense towards ERS, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er wherein the Ld. CIT(A) has followed the decision of his predecessor who has not allowed such expenditure on provision basis. 12. Before us, the Ld. Counsel for the assessee contended that identical issue has been considered by the Tribunal in assessee's own case for A.Y. 1999-2000 in ITA No. 2680/M/03. 13. The Ld. Departmental Representative could not bring any distinguishing fact in respect of this. 14. We have considered the submissions, perused the orders of the lower authorities and also the order of the Tribunal as mentioned by the Ld. Counsel. We find that the Tribunal has considered an identical issue at para 103 of its order and at para-108, the Tribunal has restored this issue back to the file of the AO with a direction to examine this matter afresh and allow such cash discount which has been actually paid by the assessee. Facts and circumstances being identical, respectfully following the decision of the Tribunal, we restore this issue back to the files of the AO to examine this matter afresh and allow such cash discount which has been actually paid by the assessee. Ground No. 6 7 are allowed for statistical purpose. 15. Ground No. 8 relates to disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails filed by the assessee after giving reasonable opportunity of being heard. Ground No. 8 is allowed for statistical purpose. 20. Ground No. 9 is not pressed therefore the same is dismissed as not pressed. 21. Ground No. 10 relates to disallowance of liabilities/provisions written back amounting to Rs. 24,11,000/- u/s. 80HHC of the Act. We find that an identical issue came up for hearing before the Tribunal in assessee's own case for A.Y. 2001-02 in ITA No. 9437/M/07. The Tribunal has considered this issue at para-32 on page-13 of its order as exhibited at page-761 of the Paper book wherein the Tribunal has restored the matter back to the files of the AO to be decided in line with the view taken in appeal for assessment year 2000-01. Facts and circumstances being identical, respectfully following the decision of the Tribunal in assessee's own case, we restore this issue back to the files of the AO to be decided afresh in the light of the decision taken in earlier years following the direction of the Tribunal in assessee's own case. Ground No. 10 is allowed for statistical purpose. 22. Ground No. 11 relates to disallowance of gross rental income amounting to Rs. 3,14,200/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... networking charges (7) Payment of professional service charges (8) Provision of technical services (receipts) (9) Reimbursement of expenses (payments) (10) Reimbursement of expenses (receipts)" 30. During the year under consideration, the assessee paid royalty at the rate of 1% of net sales amounting to Rs. 4,60,55,102/- J J US for the use of brands and trademarks as per the terms of the brand usage Agreement entered into between the assessee and J J US dt. 14th March, 2002 w.e.f. 1st July, 2001. The assessee also paid royalty at the rate of 2% to J J US amounting to Rs. 11,14,50,413/- for the technical/marketing know-how provided to the assessee as per the terms of the Know-how Agreement entered into between the assessee and J J US. 30.1 The assessee adopted the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) of its international transactions including, inter-alia, the international transaction relating to payment of royalty. The net operating margins earned by each segment of the assessee were compared with the net operating margins earned by companies engaged in similar activities. The TPO observed that there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [2013] 55 SOT 167. The Ld. Counsel for the assessee continued to argue that commercial arrangement for payment of taxes cannot be questioned for disallowing the same while calculating arm's length price. 33. Per contra, the Ld. Departmental Representative strongly supported the findings of the lower authorities. 34. We have heard the rival submissions, perused the orders of the lower authorities and also the copy of agreement submitted alongwith application to RBI as exhibited at pages 1143 to 1145 of the Paper book. We find that the application made by the assessee to RBI for brand usage agreement specifically mentions that the royalty to be remitted is net of taxes. Further, the approval was received from the RBI to remit the royalty on brand usage by the assessee @ 1% net of taxes. Considering the brand usage agreement vis- -vis the approval granted by RBI, it can be safely inferred that taxes were liability of J J India under the terms of agreement. The assessee has entered into a commercial arrangement with J J US and it has been so arranged that the payment of taxes have to be borne by the assessee being a commercial arrangement, the same should not be questioned while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment which was submitted by the assessee alongwith application to RBI on 10.8.2001. The assessee received approval from the RBI on 20.11.2001 and after receiving the approval from the RBI, the assessee entered into the brand usage royalty agreement with J J US by which it was agreed to pay the royalty from 1st July, 2001. The date being the same, as agreed in the draft agreement filed with the application made to RBI, therefore, the observations made by the Ld. CIT(A) that there was no tacit agreement does not hold any water. Assuming yet not accepting that there was no agreement, payments made having regard to the commercial expediency need not necessarily have their origin in contractual obligation. If the assessee, which carries on a business find that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal deed does not precede the incurring of such expenditure. For this proposition, we draw support from the decision of the Hon'ble Madras High Court in the case of CIT v. Associated Electrical Agencies [2004] 266 ITR 63. Considering the facts in totality in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J J USA whereas the royalty for technical services and know-how is paid apart from manufacturing rights on the know how relating to sale, distribution and marketing, therefore, it is incorrect to say that this royalty is included in Brand royalty. 46. After considering the facts and the submissions in the light of the agreement between the assessee and J J USA, the Ld. CIT(A) was convinced that payment of royalty on traded goods is an integral part of the agreement dt. 14.3.2002 between J J India and J J USA and accordingly deleted the additions made by the TPO. 47. The Ld. Departmental Representative strongly supported the findings of the TPO. 48. The Ld. Counsel for the assessee once again referred to the agreements entered into between J J India and J J USA for payment of technical/marketing know-how royalty. It is the say of the Ld. Counsel that the TPO cannot dictate to the assessee as to how it should conduct its business and the expenditure the assessee can incur. To substantiate, the Ld. Counsel relied upon the decision of the Mumbai Tribunal in the case of SC Enviro Ago India Ltd. v. Dy. CIT [2013] 143 ITD 195. 49. We have considered the rival submissions, perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO observed the issue relating to the production of various items division-wise. After considering each division, the AO considered the yield percentage for the year under consideration as exhibited at page 7 8 of his order and after considering the percentage of yield and consumption, the AO made an addition of Rs. 4,44,04,643/-on account of unaccounted production and sales thereof. 58. The assessee strongly agitated this addition before the Ld. CIT(A) and CIT(A) has considered this issue at para-8 on page 15 of his order. It was strongly submitted before the Ld. CIT(A) that regular books of account including stock register are maintained by the assessee in respect of each item of each group of each division. It was further submitted that the AO has not observed anything against maintainence of these records. No mistake identified and no manipulations have been pointed out. The books of accounts of the assessee have also not been rejected. 59. After considering the facts and the submissions, the Ld. CIT(A) observed that the AO has not pointed out any mistakes or manipulations in the records maintained by the assessee nor he has invoked provisions of Sec. 145 for making th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts have been brought on record, respectively following the decision of the Tribunal in assessee's own case, findings of the Ld. CIT(A) are confirmed. Ground No. 4 is accordingly dismissed. 68. Ground No. 5 relates to the disallowance on account of Modvat of Rs. 1,65,75,560/-. 69. This issue has been considered in the appeal filed by the assessee in ground No. 1 to 3. Following our own findings in assessee's appeal, this issue is restored back to the files of the AO to be decided afresh as per the directions given in assessee's appeal. Ground No. 5 is allowed for statistical purpose. 70. Ground No. 6 relates to the disallowance of provision made for Executive Retirement Scheme. This issue has been decided in assessee's appeal vide ground No. 4 5 wherein we have held that payment of ERS is to be allowed on payment basis. Following our own findings in assessee's appeal, we direct the AO to allow the claim of ERS on payment basis. This ground is partly allowed. 71. Ground No. 7 relates to disallowance of 10% of payment made to M/s. Crawford Bailey Co. amounting to Rs. 1,11,807/-. 72. Similar issue came up for hearing in assessee's appeal before the Tribunal in A.Y. 2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) that the disallowance made by the AO is done on adhoc manner without any sound basis. The Ld. CIT()A) observed that when the AO talks of personal expenses, he is talking of possibilities. The AO has not brought on record any instances of personal expenses. The Ld. CIT(A) was convinced that the AO is proceeding on hypothetical ideas and conjectures. The Ld. CIT(A) held that the expenses have been incurred for the purpose of business and accordingly deleted the entire addition. 76. The Ld. DR supported the assessment order. The Ld. Counsel for the assessee reiterated what has been submitted before the lower authorities. 77. We have considered the rival submissions and perused the orders of the lower authorities. The assessee is a company and therefore in such a case disallowance on account of personal expenses cannot be sustained. The AO has made an adhoc disallowance presuming that such expense have personal element. We do not find any logic/basis for making disallowance which are based on presumptions and surmises. We, therefore, do not find any reason to interfere with the findings of the Ld. CIT(A). Ground No. 9 is accordingly dismissed. 78. Ground No. 10 relates to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee relied on the decision of the Jurisdictional High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769The AO rejected the assessee's plea. The AO was of the firm belief that excise duty and discount form integral part of total turnover. 85. The assessee carried the matter before the Ld. CIT(A) and Ld. CIT(A) has considered this issue at para-22 on page-26 of his order. Before the Ld. CIT(A), the assessee once again relied upon the decision of the Hon'ble Jurisdictional High Court in the case of Sudarshan Chemicals Industries Ltd. (supra). The Ld. CIT(A) observed that in assessee's own case in A.Y. 2000-01 his predecessor has followed the decision of the Hon'ble Jurisdictional High Court. The Ld. CIT(A) accordingly followed the decision of his predecessor and deleted the additions made by the AO. 86. Before us, the Ld. DR supported the findings of the AO. 87. The Ld. Counsel for the assessee reiterated what has been submitted before the lower authorities. 88. We have considered the rival submissions. We find that identical issue has been decided in favour of the assessee by the Tribunal in assessee's own case in A.Y. 2000-01 and 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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