9911796707
TMI Blog2014 (2) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 year under consideration, the value of closing stock inventories would be determined after taking into account all the outgoings on account of tax, duty, cess or fees actually paid or incurred to bring the goods to the place of its location and condition as on the date of valuation. Accordingly, the AO went on to make an addition of Rs. 1,65,75,560/- being the Modvat credit balance at the end of the accounting period. 4. The assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A) has con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue 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 disallowed the entire provision of Rs. 6,64,372/-. 9. The Ld. CIT(A) has considered assessee's grievance at para-11 on page 18 of his order. The Ld. CIT(A) observed that in assessee's own case the Tribunal in ITA No. 6633 and 6634 of 1998 for A.yrs 1993-94 and 1995-96 had the occasion to consider identical issues wherein the Tribunal has followed its own decision for A.Y. 1985-86 to 1988-89. The Ld. CIT(A) accordingly directed the AO to follow the decision of the Tribunal in asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of expenditure incurred towards repairs, maintenance amounting to Rs. 44,35,997/-. 15.1 The AO has discussed this issue at para-8 on page-12 of his order wherein he has exhibited the details of expenditure and was of the firm belief that certain items of expenses are of capital nature. After calling for the details from the assessee, the AO disallowed a sum of Rs. 44,35,997/-. 16. The assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A) has considered this issue at para-13 on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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/- u/s. 80HHC of the Act. 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/04. We find that the Tribunal has considered this issue at para-33 on page-14 of its order as exhibited at page 762 of the Paper book wherein the Tribunal has held that the issue is similar to the one decided in assessee's appeal for A.Y. 2000-01 and considering the same, the Tribunal directed that netting off of rent paid against rent received should be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting 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 was no basis for payment of any royalty for use of trademarks/brand names as the products sold by J&J India have already acquired a reputation of quality before the conclusion of the royalty agreements. The TPO further observed that RBI/Government approvals cannot be considered to be an arm's length benchmark since the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-à-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 calculating arm's length price. Reliance by the assessee on the decision of the Tribunal in the case of Dresser Rand India (P.) Ltd. (supra) is well founded. Considering the entire facts in totality in the light of the brand usage agreement and the approval of the RBI, the findings of the Ld. CIT(A) is set aside. The AO is directed to delete the addition of Rs. 60,00,000/-. Ground No. 13 is allowed. 35. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the decision cited hereinabove, we do not find any merit in the enhancement made by the Ld. CIT(A). We, accordingly set aside the findings of the Ld. CIT(A). The AO is directed to delete the addition made by the Ld. CIT(A). Ground No. 14 is accordingly allowed. 40. Ground No. 15 is general in nature and need no adjudication. 41. Ground No. 16 relates to the disallowance of tax and R&D cess paid on technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the orders of the lower authorities and the material evidence brought on record in the form of paper book. In assessee's appeal, we have already 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. We do not find any substance in the findings of the TPO that there is no need for paying royalty for technical/marketing know-how. We also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 the addition. The Ld. CIT(A) further relied upon the findings of the Tribunal in assessee's own case for A.Y. 1991-92 and deleted the entire additions. 60. The ld. DR strongly supported the order of the AO. 61. The Ld. Counsel for the assessee reiterated what has been submitted before the Ld. CIT(A). 62. We have considered the rival submissions and perused the orders of the lower authorities. We have also perused the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ored 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. 2001-02 in ITA No. 9437/M/04 wherein the Tribunal has deleted the addition mentioning that in order to make any disallowance u/s. 40A(2)(b), it is for the AO to bring on record some material to indicate that the payment was in fact excessive having regard to the fair market value of goods or services for the legitimate needs of the business. We find that during the year under consideration, The AO has disallowed invoking provisions of Sec. 40A(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly 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 the deletion of addition made on account of Club Membership fees amounting to Rs. 40,11,000/-. 79. An identical issue came up for hearing in assessee's own case before the Tribunal in A.Y. 2001-02 in ITA No. 9106/M/04 wherein the Tribunal has decided this issue in favour of the assessee relying on the decision of the Jurisdictional High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682. Facts and circumstances being ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain 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 2001-02 in ITA Nos. 2774 & 9106/M/04 wherein the Tribunal has considered and followed the findings of the Hon'ble Supreme Court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667. Facts and circumstances being identical, respectfully following the decision of the Tribunal in assessee's own case, in the light of the findings of the Hon'ble Supreme Court in the case of Lakshmi Machine Works (supra), findings of the Ld. CIT(A) are confirmed. Ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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