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TMI Blog2015 (7) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and made various disallowances and consequential additions to the returned income of the assessee and brought them to tax. 3. Aggrieved, the assessee preferred an appeal before the CIT(A) who granted partial relief to the assessee. Against the confirmation of the additions by the CIT(A), assessee is in appeal before us while against the deletion by the CIT(A) of additions made by the AO, revenue is in appeal before us. 4. We shall now proceed with each of the additions confirmed by the CIT(A) for the assessment year 2005-06: I. Short-landing: The assessee had claimed an amount of ₹ 3,81,583/- on account of short-landing i.e. short receipt of goods. It is stated by the assessee that the assessee sources goods from its group company located overseas and while receiving these goods, there is shortage of goods in weight physically received and such shortage is claimed as business expenditure by the assessee. It was further stated that as a matter of policy, in respect of amounts less than USD 2500, no credit/debit note is issued. The AO disallowed the same holding that the assessee has not given any basis for such claim. Further considering the statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. This ground of appeal is accordingly allowed. II. Error in preparation of goods receipt and physical difference: As regards this issue, the assessee had claimed an amount of ₹ 96,444/- on account of error in preparation of goods receipt and ₹ 4,91,533/- on account of physical difference of goods received. During the assessment proceedings, the assessee had explained as under: T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the goods received or in shipping of certain items sold by the assessee. He, therefore, submitted that these errors are unintentional and was wholly and exclusively associated with the business of the assessee and is an allowable expenditure u/s 37(1) of the Act. As regards the difference in the physical stock, he submitted that the assessee ships approximately 21,000 bottles every month which is an average of 1000 bottles each day and due to the customers need and demand for faster deliveries, the warehouse personnel are hard-pressed to ship products as soon as possible due to which some extra shipping may have been made by these personnel resulting in difference. He further submitted that the percentage of error in preparation of goods received as well as physical stock is 0.01% and 0.025% on sales and cost of goods respectively. In support of his contention that such difference should be allowed as business expenditure. He relied upon the following decisions: i) Boston Scientific International BV India vs. ADIT (2010) 40 SOT 11(Mum.Tri.), ii) CIT vs. Wolkem India Ltd. (2009) 315 ITR 211 (Raj.), iii) CIT vs. Hotline Teletube Components Ltd. (2008) 175 Taxman 286 (Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises. The AO agreed with the assessee that breakage cannot be ruled out in the business of the assessee but held that since the assessee has employed professional agencies for handling, transportation and warehouse management, assessee should have recovered from them. The AO disallowed 50% of the claim of the assessee and made an addition of ₹ 2,83,916/-. (ii) Aggrieved, the assessee preferred an appeal before the CIT(A) who granted partial relief by restricting the disallowance to ₹ 1,50,000/-. Aggrieved, the assessee is in appeal before us. (iii) The learned counsel for the assessee submitted that although due care is taken at the time of packing of material, due to the inherent characteristics of the packing materials and since the materials are handled physically at various points like the airports, other transport areas, warehouses, etc., there is bound to be breakage of these materials and this results in erosion of commercial value of the product and therefore the same is scrapped at the premises. The learned counsel for the assessee further drew our attention to the fact that the CIT(A) has granted full relief to the assessee for assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acs to Sigma Aldrich, Germany and ₹ 32.81 lacs to Sigma Aldrich, USA towards cost of catalogues etc., and further that there is nothing on record to suggest that any management services were rendered by Sigma Aldrich, Germany or USA to the assessee-company. He accordingly brought it to tax. (ii) On appeal, the CIT(A) held that the transaction is an international transaction and that determination of the ALP was referred to the TPO and the TPO has not found the payments to be unreasonable and in fact observed that no adjustment was necessary u/s 92CA of the Act. Taking this fact into consideration, the CIT(A) held that the payment is reasonable. However, he held that since the payment in question is for technical or consultancy services which are made available to the assessee, provisions of sec. 40(a)(ia) are attracted. He observed that management fee is claimed to have been paid towards cost of time spent by persons in USA in marketing, publishing, graphics and catalogue printing and for marketing support analysis and activities which amounts to making available the technical know-how as per DTAA between India and USA. He therefore held that TDS ought to have been made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) that the AEs have made available technical knowledge to the assessee is without any basis. 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. In view of the same, this ground of appeal is treated as allowed for statistical purposes. V. Staff Welfare: The assessee had claimed a sum of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) however was not convinced with the assessee s contention and confirmed the addition made by the AO and the assessee is in second appeal before us. (iii) On perusal of the material on record we find that the 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. This ground of appeal therefore is rejected. (iv) In the result, the assessee s appeal is partly allowed. 5. For the very same assessment year, the revenue has filed an appeal against the reliefs given by the CIT(A) by deleting the additions made by the AO on the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 3 crores was incurred on such installation. He observed that this amount has apparently been paid on the basis of debit note raised by SAP, Germany and it is not clear as to how this amount has been worked out. Further he held that during the course of inspection on 29/5/2009 he found that ERP package was not working very smoothly and it was taking considerable time in generating simple reports etc. Therefore, he disallowed 50% of the same and brought it to tax. (ii) Aggrieved, the assessee preferred an appeal before the CIT(A) who granted relief to the assessee and the revenue is in appeal before us. (iii) The learned Departmental Representative, supported the order of the AO while the learned counsel for the assessee relied upon the order of the CIT(A). (iv) We find 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 expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Oil and Natural Gas Commission vs. ACIT (1999) 69 ITD 69 (Del Trib.), iii) ACIT vs. Arthur Anderson Co. (5 SOT 393)(Mum Trib.) and iv) Sonic Biochem Extractions P. Ltd. vs. ITO (2013) 35 Taxmann.com 463 (Mum Trib.) (iii) On examination of the material on record, we find that genuineness of the services rendered by M/s.Indelox is not doubted by the AO. 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 as held by various High Courts in the cases relied upon by the assessee (cited supra). We, therefore, agree with the findings of the CIT(A) and we see no reason to interfere with the same. The ground of appeal of the revenue is rejected. (iv) In the result, the revenue s appeal (IT(TP)A No.387/Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought it to tax. (ii) Aggrieved, assessee preferred an appeal before the CIT(A) who granted partial relief to the assessee and the assessee is in second appeal before us. (iii) The learned counsel for the assessee, while reiterating the submissions made before the authorities below, has placed reliance upon the following judgments: i. Alfa Laval India Ltd. vs. DCIT (2003)(133 Taxman 740) and ii. CIT vs. Wolkem India Ltd. (2009)(315 ITR 211)(Raj.) (iv) Having regard to the rival contentions and the material on record and the judicial precedents on the issue, we find that this issue is covered in favour of the assessee by the decisions relied on by the assessee cited supra. The Hon ble Bombay High Court in the case of Alfa Laval India Ltd. (cited supra) has observed at para.8 of its order as under: 8. In the present case, there is no dispute that the duly certified auditor's report placed before the AO clearly justified valuation of obsolete items at 10 per cent of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as obsolete stores and claimed in P L a/c altogether. It has come on record that the assessee has valued the inventories such as nut bolt glass fuse bearing bushes, lock pin, pipe, screw etc. which were rusted, non-moving and unusable on account of obsolescence/damage/deterioration by efflux of time at cost and net realization value, whichever is lower. It has also come on record that these items were 5-6 years old. It is also not disputed before this Court that the assessee had made the requisite efforts to dispose of the same. That apart, some of these items were actually sold in subsequent years at a price 8.43 per cent of the cost. Thus, considering the totality of the facts and circumstances, in our considered opinion the value of the stores inventory written down taken at 10 per cent of the cost by the CIT(A), cannot be faulted with. Taking the above into consideration and the 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the material on record and also on consideration of the rival contentions, we find that before CIT(A) the assessee has contended that the raw material supplied by the assessee to its own laboratory facilities of Genosys Production have been written off by the assessee but the goods manufactured by Genosys Production has been traded and income there-from has been declared as assessee s own income and therefore there is no necessity of making disallowance and the CIT(A) has accepted this contention of the assessee. (iv) Having regard to the rival contentions and the material on record we find 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. This ground of appeal is accordingly treated as allowed for statistical purposes. II. Payment to M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee scraps the entire batch as the same has not met the standard quality. It is further submitted that the AO has not doubted the genuineness of the said quality rejection but has disallowed the same without any reasoning and the CIT(A) has also not given any reasoning for confirmation of the disallowance. (iii) We find that the contentions of the assessee are correct. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of appeal of the assessee is allowed. IV. Expired Inventory: The assessee had claimed a sum of ₹ 11,51,822/- towards expired inventory which was disallowed by the AO and the CIT(A) has granted partial relief to the assessee against which the assessee is in appeal before us. On going through the chart filed by the assessee, we find that it accounts for 0.05% on sales and 0.07% on cost of goods sold. For the detailed reasons given by us for the assessment year 2005-06, this ground of appeal of the assessee is allowed. V. Quality rejects: The assessee had claimed a sum of ₹ 93,31,861/- on account of quality rejection of goods not meeting quality standard which was disallowed by the AO and on appeal, the CIT(A) had granted partial relief to the assessee. Both the assessee as well as the revenue is in cross-appeals before us. For the detailed reasons given by us against the same for the assessment year 2007-78 this ground of appeal is allowed and the ground of appeal of the revenue is rejected. VI. Management fee paid to Sigma Aldrich, USA: The assessee has claimed a sum of ₹ 8,34,544/- as management fee paid to Sigma Aldrich, USA. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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