9911796707
TMI Blog2010 (7) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the disallowance of ₹ 14,05,175/- out of the service charges paid to CDSS. 3. In the Assessment Year 2003-04, during the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has paid service charges of ₹ 90,67,708/- to CDSS, in respect of which, the assessee submitted a copy of service agreement to the AO. From the service agreement it was noted by the AO that in consideration of services rendered, CDSS was entitled to receive service charges @ 0.7% of its net sales. The AO was of the view that net sale would mean gross sales as reduced by sales returned during the relevant period. The assessee was then asked to furnish working of amount of ₹ 90,67,708/- paid to CDSS which working as submitted by the assessee is as under:- "Gross Sales 1557840256 Less: Car Care 5599689 Base Oil 2695038 Empty Barrels 799392 Other Traded Items 2064424 Export Sales 11377678 FOC provision (net of last year) (1320221) 21216001 Sale of Lubricants 1536624256 Less: Discount 241237387 Net Sales 1295386868 Service Charges @ 0.7% on net sales 9067708" From the aforesaid working it was noticed by the AO that the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the years, the revenue has challenged the CIT(A)'s order in deleting the aforesaid addition of disallowance of service charges. 6. We have heard both the parties and have carefully perused the orders of the authorities below. We have perused the various Papers placed in the Paper Book filed by the assessee. The AO has not disputed the fact that the payment of service charges by the assessee to CDSS was as per the service agreement. The AO has also not disputed the services rendered by CDSS to the assessee. The disallowance has been made by the AO only by reducing the sales figure by taking the amount of discount at the amount more than the amount shown by the assessee, because of the fact that according to the AO, the amount of discount shown by the assessee was more while computing the amount of royalty payable to M/s. Valvoline Inc. The AO has not gone into to verify the reason as to why the difference in the amount of discount had occurred. It has been explained by the assessee that for the purpose of quantifying service charges, net sales was taken while for the purpose of quantifying royalty, net sales was that of net ex factory sales price. This distinction was not noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred in earlier year would only be justified as the assessee's turnover has only increased by 40%. He, therefore, allowed the travelling expenses only to the extent of ₹ 1,75,00,000/- as against ₹ 1,92,80,312/- claimed by the assessee and disallowed the balance sum of ₹ 17,80,312/-. 8. On an appeal, the learned CIT(A) deleted the addition after observing that the working made by the AO though looks attractive but is without any legal basis, and such an approach of the AO cannot be approved. The CIT(A) further observed that no discrepancies or mistakes were pointed out in the details furnished by the assessee. The CIT(A)'s order in this regards reads as under:- "24. The increase in sales over last year was 40%. The AO worked out the traveling & conveyance expenditure in the same proportion and found that excess amount works out to ₹ 17,80,312/- as detailed below which was disallowed. Expenditure in A.Y. 2002-03 - 1,25,80,104 40% increase - 56,00,000 Probable expenditure 1,75,80,104 Rounded off 1,75,00,000/- Incurred Expenditure 1,92,80,312/- Excess expenditure disallowed 17,80,312/- 25. The working looks attractive without any legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sively for the purpose of business. 12. On an appeal, the CIT(A) deleted the addition by observing as under:- "7.5 The Appellant had incurred the above mentioned expenditure for the purpose of its business and the same is evident from a perusal of the ledgers that were submitted in case of staff welfare expenditure and advertisement publicity and sales promotion expenditure. 7.6 It is respectfully submitted that these ad-hoc disallowances be deleted. Reliance in this regard is placed on the judicial precedents referred in ground no 4 above which have held that ad-hoc disallowance should be deleted. The same are mentioned below for ease of reference: • Good Year India Ltd. v ITO 73 ITD 189 (Del) • Express Movers (P) Ltd. v DCIT 61 ITD 528 (Del) • Raman and Raman v CIT 46 ITR 400 (Mad) • Sanjeevi and Co. vs. CIT 62 ITR 156 (Mad) • Amarjothi Pictures vs. CIT 69 ITR 755 (Mad) 33. Since the AO has not pointed out any mistake/discrepancies in the details furnished and in absence of detailed reasoning for the said disallowance, the action of AO cannot be approved. (Relief: ₹ 4,50,000/-)" 13. We have heard both the parties and the orders of the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was evident that CASL and CDSS had a wide network across the country which had assisted the assessee in promoting its marketing activities. The AO again asked the assessee to give details of the sales made through dealers appointed by CASL. In reply thereto, the assessee submitted that the assessee made the payment to CASL under contractual obligation for availing their facilities and it was very difficult to calculate the amount of total sales made by each dealer appointed by CASL or the amount of sales made by using the dealers network of CASL as no such dealer-wise report was ever prepared or maintained by the assessee. The Assessing Officer then examined the copy of agreement dated 01.01.1001 entered into between the assessee and CASL and stated his findings in that regard as under:- "From the above it is clear that the assessee will pay service charges/sales commission (the agreement is termed as Sales Commission Agreement) as per the agreed terms of the agreement i.e. if quantum of sales made using dealers network of CASL or through dealers appointed by CASL exceeds a particular/specified limit then over and above the fixed charges of ₹ 13,00,000/- a further sum will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the assessment order and the written submissions of the assessee, the learned CIT(A) confirmed the addition made by the AO. The learned CIT(A) observed that except agreement no other evidence was produced by the assessee. The learned CIT(A) further observed that in the light of the provisions contained in sec. 37(1) of the Act, the assessee had an onus to prove that a particular expenditure was laid out or expended wholly and exclusively for the purpose of business. The CIT(A) further observed that mere filing certain details and making payment by itself would not entitle the assessee to claim deduction of expenditure unless the same was proved to be paid for commercial consideration and commercial expediency. The learned CIT(A) has therefore, taken a view that the assessee has not successfully demonstrated that services were received from CASL warranting any payment and to be claimed as business expenditure. Still aggrieved, the assessee is in appeal before us. 18. The learned counsel for the assessee Shri Ajay Vohra assisted by Shri Gaurav Jain and Ms. Neha Khemka, has submitted that the assessee company was engaged in the business of, inter alia, manufacturing, marketing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, submitted that the assessee has now placed before the Tribunal further evidences to establish that CASL had rendered certain services to the assessee in lieu of which, the service charges were paid by the assessee to them. Further evidences produced by the assessee before us are as under and copies of which have been given to the learned DR:- • The copy of miscellaneous correspondences between the applicant and CASL placed as additional evidence at pages 22 to 69 establishes that - (i) applicant had negotiated sales price, quantity of sales, mode of transport, etc. of its products, sold through dealer/distribution network of CASL, with CASL only; (ii) complaints with respect to products sent by applicant to dealers of CASL, were negotiated and settled between CASL and applicant only. • Further, the applicant had initiated training programs for its customers, viz., mechanics, etc. using the automotive products in order to increase the awareness of its products and company's brand image. Pursuant to the aforesaid initiative, the applicant company availed services of CASL, which had the capabilities of providing the aforesaid training. The aforesaid services were r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was payable subject to a further commission provided the sales exceeds the specified limit. Before the authorities below, the assessee has also submitted the details of the dealers network of CASL including names and addresses of the dealers. Copy of ledger account of dealers of CASL on sample basis was also filed before the AO. It is not in dispute that the payment was actually made to CASL against the debit note issued by CASL to the assessee. The assessee also produced copy of sample invoices of sales made through the dealers of CASL. The specific requirement of the AO was only to submit the details of sales dealer-wise. The Assessing Officer has not made any enquiry either from CASL or its appointed dealers or its overall network to find out as to whether the assessee had used the marketing network and other related infrastructural services of CASL as so agreed by the parties vide agreement dated 01.01.2001. The AO has also not made any enquiry in this regard to disprove the assessee's claim that the assessee used the marketing network and other related infrastructural services of CASL with a view to increase or promote the assessee's sales of various items such as lubricant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the AO. It is further noticed that in the Assessment Year 2002-03, the assessee also made a claim of ₹ 52,00,000/- in the return of income and the return of income for that year was merely processed under sec. 143(1), and was not selected for scrutiny with a view to disallow the assessee's claim on account of service charges paid to CASL and not to reopen the assessment under sec. 263 or sec. 147 of the Act. We find that the identical payment of ₹ 52,00,000/- was also paid in the Assessment Year 2005-06, and the amount of ₹ 26,00,000/- has been claimed in the Assessment Year 2006- 07, during which year a service agreement stood terminated on and from 30.9.2005. Therefore, from this point of view that the department has accepted the assessee's claim in earlier Assessment Years i.e. 2001-02, 2002-03, and there being no fresh material rebutting the assessee's claim, the claim of the assessee in Assessment Years 2003-04 and 2004-05 is not liable to be rejected. We, therefore, allow this ground raised by the assessee with a direction to the Assessing Officer to modify the assessment order by allowing the claim of the assessee on account of payment of service charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) confirmed the AO's order. With regard to the addition of ₹ 1,56,000/- the learned CIT(A) has stated that the assessee has not been able to explain as to why some expenditures were claimed as capital expenditure and others are as revenue expenditure. With regard to the balance amount of ₹ 6,47,490/-, the CIT(A) observed that these expenditures were incurred for purchase of new computers, furniture and fixtures. The assessee's explanation that these expenditures incurred for only to maintain the existing assets, was rejected. 28. Still aggrieved, the assessee is in appeal before us. 29. We have heard both the parties and have carefully gone through the orders of the authorities below. We have perused the material on record. In so far as the expenses of ₹ 1,56,000/- towards purchase of wooden pallets (Two way double deck reversal type size 48" x 48" running into 100 numbers), we find that there is no finding that these wooden pallets were utilized in creating any new assets. These were used for the purpose of transportation of barrels of oil from factory to the company owned depot and storing the same till the time the goods are transported to various part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elephone expenses on the ground that the same were personal in nature. 32. On an appeal, the learned CIT(A) reduced the disallowance to ₹ 1,00,000/- under each head. With regard to the vehicle expenditure, the CIT(A) has observed that the assessee already taken car allowance as perquisite in the hands of some of its employees. Still, the CIT(A) considered it fit to restrict the disallowance to ₹ 1,00,000/-, which in our considered opinion, is totally based on surmises and presumptions. The CIT(A) has not given any justifiable basis to upheld the disallowance to the extent of ₹ 1,00,000/- under the head "Vehicle expenses". Similarly under the head "Telephone expenses", the CIT(A) has reduced the disallowance to ₹ 1,00,000/- without there being any material to support the disallowance. 33. After considering the totality of the facts and circumstances of the case and having regard to the admitted position that the disallowance has been made purely on ad hoc basis, without there being any material to support the same, we delete the disallowance of ₹ 1,00,000/- each under the head "Transport Expenses" and "Telephone Expenses" respectively as upheld by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral Manager (F&A), V.P. (Marketing), V.P. (Sales), CEO, V.P. (Technical & Industry), Director, Manager (Technical & Industry), were amongst the persons who had gone to foreign country for the purpose of attending seminars, paying marketing visits and to promote the business of the assessee. Certain visits were also made to attend distributors meeting organized abroad. From the details, it is thus clear that the assessee has furnished the purpose for which the visit was undertaken. The assessee has also produced copy of ledger account of traveling - foreign expenses. All the payments were made through banking channel. The names of the concerned employees or persons are mentioned against the relevant payment. The AO has not been able to point out any item which could be said to have not been incurred by any employee or director of the assessee company for the purpose of assessee's business. The AO has disallowed the part expenses on estimated basis by applying rate of 25% of total expenses. The AO has not given any basis or reason for applying the rate of 25% for the purpose of disallowing part of the foreign traveling expenses. It is not the AO's case that the visit to foreign cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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