Schott Glass India Pvt. Ltd Vs. ITO (ITAT Mumbai)
We notice that assessee is in the business of manufacturing glass tubes and in the manufacturing, the melted glass has to pass thru feeder/nozzles in the furnaces. The temperature in which the melted glass is passed through feeder or nozzles at 1600 degree or more. It is not disputed that the assessee has to use the special metals like rhodium and platinum in the production process. In order to reduce the cost of utilization of precious metals, assessee entered into lease agreement to utilize the leased feeder/nozzles from the M/s Schott AG, its parent company. Assessee has accordingly utilized the machineries leased from the parent company and as per agreement, assessee has to reimburse the loss of precious metals in production process. During this AY, it was quantified and reimbursed to its parent company. There is no dispute on this account. However, assessee also purchased precious metals from M/s Ravindra Heraeus Pvt Ltd and replaced the eroded metals in the production process. We notice that AO has rejected the purchase of metals with the observation that the vendors has raised the bill as sale of precious metals rather than raising bill for refurbishment of the nozzles or feeder. Further he observed that the loss of precious metals were quantified by the assessee and as per agreement, it was reimbursed to its parent company. There is no other loss incurred by the assessee during this year. Therefore, assessee cannot claim any loss during this year.
We observe from the certificate issued by technical engineers from the company that assessee has purchased these precious metals and the internal technical department has carried out the respective work of re-fabrication of damaged feeders/nozzles. Therefore, in our considered view we do not notice anything wrong in purchasing of the precious metals and carrying on repair work of the machineries internally by the assessee. Accordingly ground No. 2 raised by the assessee is partly allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by the assessee is against the final order of assessment passed u/s 143(3) r.w.s. 144C(1) of I.T. Act, 1961 in pursuance of the directions issued by the Dispute Resolution Panel (in short ‘DRP’) u/s 144C(5) of the Act vide order dated 22.12.2015 for AY 2011-12.
2. At the time of hearing, Ld AR submitted that assessee prefers to press only ground No. 2 and 3 and not pressed ground No. 4. Accordingly ground No.1 (being general) and 4 are
3. Brief facts relating to Ground No. 2 and 3 are, assessee filed the return of income for assessment year 2011 – 12 on 29.11.2011 declaring total income at Rs. Nil and book profit of ₹ 11,19,51,325/–. Subsequently, the case was selected for scrutiny and notice under section 143 (2) and 142 (1) were issued and served on the assessee. In response, assessee filed the relevant information as called for. During assessment proceedings, AO noted that assessee has claimed ₹ 1,92,30,918/– in its profit and loss account on loss of precious metal. When the assessee was asked to give the details for such claim and assessing officer observed that assessee has never claimed the expenditure to such extent in the earlier assessment year and the assessee has claimed the maximum amount of ₹ 14,44,477/– in the assessment year 2007 – 08. In the detail, assessee submitted that assessee has paid to its parent company M/s Schott AG for the loss in the precious metal leased from them amounting to ₹ 46,57,540/– and an amount of ₹ 1,45,73,378/– paid for replenishing the loss in precious metal on account of wear and tear.
4. Further assessee vide letter dated 25.02.2015, explained the reasons of climbing the loss that the assessee is engaged in the business of manufacturing of specialized glass tubes used for ampoules, vials manufacturing. In the manufacturing process, the assessee uses following specialized machinery/equipment made of platinum and rhodium alloy for producing defect free glass products like Stirrer, Feeder, Nozzle etc. These machineries are made of precious metals like platinum and rhodium alloy. These metals enable the aforesaid specialized machineries to withstand high temperature of molten glass passing through it during the course of production. Assessee further submitted that most of the previous metals machineries are obtained on lease from Schott AG. This is because the precious metals or extremely costly and therefore it is more economical to obtain the same on lease. These metals are spread across the surface of the specialized machineries by the parent company at its workshop in Germany. During the course of usage of these machineries, there is a physical loss of the precious metals as a result of corrosion and erosion. It submitted that the precious metals need to be changed between 10 to 15 months.
5. Under the terms of lease with parent company, assessee required to replenish the precious metals lost during the production or compensate the parent company for precious metals loss. This exercise is undertaken on a quarterly basis. It submitted that during the year, assessee has compensated to its parent company for loss in the precious metals to the extent of ₹ 46,57,540/– and it has paid to M/s Ravindra-Heraeus Private Limited for replenishing the precious metals for ₹ 1,45,73,378/–. This payment was made to above company for remaking and refining the precious metals and making sheets/cones et cetera of precious metals to be used again in specialized machineries. The assessee submitted that the above expenses constitute repairs to plant and machinery under Section 30 of the Act and hence allowable under Section 31 of the Act. The assessee further submitted that it had incurred expenditure towards loss of precious metal every year and the quantum of the expenditure increased during the year on account of specific operation losses in terms of leakage in the feeder.
6. After considering the submissions of the assessee, AO rejected the contention of the assessee by observing as under:-
6.3.1. On perusal of the agreement for lease entered into between the M/s. Schott AG and the assessee company it was observed that as per the agreement M/s A.G. Schott was to provide the precious metals to the assessee company on lease and it was stated that the actual loss of precious metal on account of corrosion shall be reimbursed by the assessee to M/s Schott A.G.
The assessee has submitted copies of documents received from M/s. Schott AG dated 2007.2010, 03.02,2011 and 23.09.2010 wherein M/s.Schott AG has given the details of the loss of precious metals incurred due to erosion and corrosion being the amount of Rs.27,77,873/-, Rs.8,72,6561- and Rs.1007,011/- respectively. The total amount of loss in precious metals worked out by M/s Schott A.G. amounted to Rs. 46,57540/-. The assessee has claimed that the amount of Rs. 1,45,75,945/- represents the charges paid for refining and melting of precious metals and the same were replenished on account of loss of precious metals. The assessee had submitted Invoices raised by M/s. Ravindra Heareus Pvt. Ltd. invoice no.1513/10-11 dated 16.03.2011 amounting to Rs.1,00,21,801/-, invoice No.0998/10-11 dated 10.12.2010 amounting to Rs.24,67,935/-and invoive No.0874/10-11 dated 10.11.2010 amounting to Rs.20,86,209 pertaining to actual purchase of precious metals sheets viz. Rhodium and Platinum. The total amount of purchase of sheets of precious metal from M/s. Ravindra Geraeus Pvt. Ltd. amounted to Rs. 1,45,75,945/-.. The total amount of losses of precious metal determined by MIs.Schott AG is to the extent of Rs.46,57,540/-. The assessee has debited a sum of Rs,1,92,30,918/- on account of loss of precious metals as against the actual loss of precious metal determined by M/s. Schott AG of Rs.46,57,540/-. As regards the difference being amounting to Rs.1,45,75,945/-, the same is not allowable since as the agreement for lease entered into between the assessee and Ms. Shott AG specifically stated that only the actual loss of precious metal shall be reimbursed by the assessee. The claim of the assessee that the payment made to M/s. Ravindra Heraeus Pvt. Ltd. was for re-melting and refining the precious metals and making sheets/cones is not acceptable as on perusal of the bill of M/s. Ravindra Heraeus Pvt. Ltd., it is observed that these are the Sale bills issued to the asseessee for sale of Rhodium/Platinum sheets at a rate ranging from Rs.2,700/- to Rs.2,800 per gram of precious metal and these are in fact actual market rates of such precious metals. This fact shows that the amount paid to M/s.Ravindra Heraeus Pvt. Ltd. is for the purchase of precious metal and not for refining/re-melting of the precious metal. The bills of M/s. Ravindra Heraeus Pvt. Ltd. do not indicate anything about refining/re-melting of precious metals. The market rate of precious metal specified in the obtained on lease is also in the similar range. This shows that the assessee has actually purchased the precious metals from M/s. Ravindra Heraeus Pvt. Ltd. and payment is refining/re-melting of precious metal. Had the bills been raised for the refining or re-melting purpose, the bills would have been raised for the labour charges/ refining or melting charges and not as the sale of precious metals.
Since the actual loss of precious metal occurred to the extent of Rs. 46,57,540/- and the same was also determined by M/s Schott AG, therefore the claim of loss of precious metal in excess of Rs. 46,57,540/- is incorrect. Thus the claim of the assessee that the amount of Rs. 1,45,75,945/- represented replenishment of precious metals for loss of precious metals is not allowable as the same is not an actual loss as the loss has been determined by M/.s Schott AG for the previous year to the extent of Rs.46,47,540/-. Thus, the same is not allowable u/s.37 of the Act. A sum of Rs. 145,75,945/- is added to the total income of the assesse. Penalty proceedings u/s 271(1)(c) of the I.T. Act is initiated for furnishing of inaccurate particulars of income.
6.3.2 Without prejudice to the above, the claim of the assessee that the expenses are incurred i.e. loss on precious metals is of the nature of repairs to plant and machinery due to the following reasons:
a. In the past four years the amount of loss of precious metal was never claimed in excess of Rs. 15,00,000/-. During the year the assessee has claimed the loss of precious metal on account of replenishment of metals corroded to the extent of Rs.1 .92 crores.
b. As discussed above, the assessee has purchased precious metals to the extent of Rs.1,45,75,945/-. The assessee company and M/s. Schott AG have entered into an agreement of lease of precious metals whereby M/s. Schott AG will provide precious metals to the assessee company on lease and in case of any loss on precious metal the assessee company will repay the loss. In this case, the assessee has purchased precious metal sheets amounting to Rs. 1,45,75,945/- and the same were claimed to have been given to M/s Schott AG for replenishing of loss of precious metal. However, as discussed above the actual loss raised by M/s. Schott AG was only of Rs.46,47,540/-. Thus, the amount paid by the assessee of Rs.1,45,75,945/- in excess of actual loss represents the purchase of precious metal sheets. The assessee in the past 4-5 years has not incurred expenses for purchase of precious metals or loss in precious metals exceeding about 15 lacs. Thus expenses incurred in respect of purchases of rhodium and platinum are not incurred for the purpose of day to day maintenance. The assessee has not incurred such expenditure every year in routine course of business. It is a one-time expenditure which will result in enduring benefit for the several years and therefore the same is treated as capital expenditure and hereby disallowed.
7. Further, AO observed that assessee has claimed repairs and maintenance expenses relating to repair works to RCC road at its factory at Ankhi, Taluka Jambusar, assessee paid ₹ 15,94,003/– to M/s Shivanjali projects and ₹ 15,78,762/– paid to Mr. Ramanlal Ranchodlal Shah. The details of work undertaken are:-
