ACIT Vs Swastik Pipes Ltd. (ITAT Delhi)
The assessee produced documentary evidences in support of its contention which had not been rebutted by AO and since impugned payments were in the form of reimbursement and no payments were made by assessee directly to shipping companies, therefore, assessee was not liable to deduct tax under section 194C. Since the amount in question were towards the reimbursement of the exact amount which had been paid to the shipping companies and others, therefore, assessee was not liable to deduct tax under section 194C.
FULL TEXT OF THE ITAT JUDGMENT
This order shall dispose-off all the above departmental appeals and the cross objections filed by the assessee on identical issues.
2. We have heard the learned Representatives of both the parties and perused the material on record. The appeals are decided issue-wise as under.
ITA.No.4638/Del./2013 – Revenue Appeal
&
C.O.No.30/Del./2014 – Assessee
(A.Y. 2007-2008)
3. The Departmental Appeal as well as Cross Objection by assessee are directed against the order of the Ld. CIT(A)- 1, New Delhi, dated 27th May, 2013, for the A.Y. 2007-2008. The Learned Counsel for the Assessee did not press ground Nos. 1 to 5 of the cross objection, the same are dismissed as not Ground No.1 in departmental appeal is general and need no adjudication.
ISSUE No.1:
4. On ground No.2, the Revenue challenged the order of the Ld. CIT(A) in deleting the addition of Rs.29,03,991/- made by the A.O. on account of disallowance of Inland Haulage for export consignment, on which, TDS was not deducted. The assessee on ground No.6 of the cross-objection challenged the sustaining of addition of Rs.3,22,666/- on the same issue.
4.1. The A.O. made the addition of Rs.32,26,657/- on account of Inland Haulage on export consignment because the assessee has not deducted TDS on the same payment as per Section 194C of the I.T. Act.
4.2. The assessee challenged the addition before Ld. CIT(A). The submission of the assessee is reproduced in the appellate order in which the assessee briefly explained that all these Inland Haulage charges are in the nature of reimbursement of expenses paid to the Clearing and Forwarding Agents on behalf of assessee to the Shipping Company and thus, Inland Haulage charges are not liable to TDS. The A.O. disallowed the same by stating that these payments are made against the bills of Clearing and Forwarding Agents towards Inland Haulage and was of opinion that these expenses are not mere reimbursement of expenses. The A.O. has ignored the fact that assessee is in the business of export of various items of iron and steel. The services of carrying and forwarding agents are important in the business of export so as to make the goods which in the instant case is H.R. coils available to the buyers in a short span of time as these agents possess the required expertise in shipping the consignment to far reached places. These agents utilised the services of various shipping companies and other facilitators to whom the payments are made for respective services rendered by them. All these expenses incurred by such Agents are taken from the assessee in the form of reimbursement of expenses and thus, Haulage charges paid are in the nature of reimbursement of expenses made by Clearing and Forwarding Agents on behalf of the assessee to the shipping companies. Since, these are reimbursement and no payments have been directly made by assessee to shipping companies, the assessee is not liable to deduct TDS. The liability is upon the Clearing and Forwarding Agents and not upon the assessee. The assessee had drawn attention to the bills received from various parties to whom Inland Haulage charges has been paid which is specifically mentioned in the bills and charged separately. It is not the case that the said amount has been clubbed to the total charges of the shipping agent. The Ld. CIT(A) noted that assessee has paid Rs.32,26,657/- to its C & F Agent for transportation of the steel pipes by freight trains from ICD Tuglakabad to Sea Port at Mumbai for onward export by ship to different countries. The goods were transported in containers owned by the Container Corporation of India Ltd., or CONCORD. The assessee submitted that both these charges were contained in the bills raised by C & F Agents and it would not be possible to ascertain the exact break-up as it was confidential financial information that the C & F Agents would not like to part with, but, bulk of the payments are reimbursed by the assessee to C & F Agents. The Ld. CIT(A) noted that assessee did the same on bonafide belief that such payments are not covered by the provisions of Section 194C of the I.T. Act. The assessee used different C & F Agents and in subsequent year, assessee started deducting TDS. Payments to C & F Agents are made who have made further payments to shipping agents. The Ld. CIT(A) also held that Rail Freight Charges are not exigible to TDS as per Notification of CONCORD. Therefore, Ld. CIT(A) deleted the addition by restricting the addition to 10%. The addition was, therefore, restricted to Rs.3,22,666/- and assessee was granted relief of Rs.29,03,99 1/-. Both parties are in appeal and cross objection.
5. After considering the rival submissions, we are of the view that entire addition is liable to be deleted. Learned Counsel for the Assessee reiterated the submissions made before the authorities below. He has submitted that expenses are in the nature of reimbursement, therefore, assessee is not liable to deduct TDS. He has relied upon the decision of Hon’ble Gujarat High Court in the case of CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd., (2014) 361 ITR 192 (Guj.) in which it was held that no disallowance under section 40(a)(ia) related to reimbursement of expenses to C & F Agents can be made. He has submitted that SLP of the Department has been dismissed vide order dated 14th January, 2014. Copies of the same are filed on record. He has submitted that same view have been taken by the Hon’ble Delhi High Court in the case of CIT vs. ONS Creations Pvt. Ltd., in ITA.No.1279/201 1 vide order dated 14.12.2011, Order of ITAT, Delhi Bench in the case of Surinder Kumar vs. ACIT dated 16th June, 2015, order of ITAT, Mumbai Bench in the case of ACIT vs. Paramount Forge dated 24th February, 2015 and Order of ITAT, Ahmedabad Bench in the case of Prayas Engineering Ltd., vs. Addl. CIT dated 29th April, 2014. Copies of the same are filed on record. Learned Counsel for the Assessee also submitted that CIT(A) disallowed 10% of such expenses merely on presumption.
6. The Ld. D.R. on the other hand relied upon the orders of the A.O. and submitted that since no TDS was deducted, therefore, addition should be maintained.
7. Considering the facts of the case in the light of submissions of the parties and case law cited by Learned Counsel for the Assessee, we are of the view that the entire addition is liable to be deducted. It is a fact that assessee paid the entire amount to its C & F Agents for transportation of goods for onward export by shipping to different countries. The goods were transported through Container Corporation of India Ltd., or CONCORD. The assessee made payments to the C & F Agents who have made further payments to the shipping companies. All these expenses were incurred by the Agents who have then taken it from the assessee in the form of reimbursement of Since, these payments are in the form of reimbursement and no payments have been made directly bythe assessee to shipping companies, therefore, assessee is not liable to deduct TDS. The assessee produced documentary evidences in support of the same contention which have not been rebutted by the authorities below. Since the amount in question were towards the reimbursement of the exact amount which have been paid to the shipping companies and others, therefore, assessee is not liable to deduct TDS. The issue is covered by the judgments relied upon by the Learned Counsel for the Assessee. Therefore, Ld. CIT(A) was not justified in making adhoc addition of 10% merely on presumptions. The entire addition is liable to be deleted. We, accordingly, confirm the order of the Ld. CIT(A) in deleting the substantial addition. Further, order of Ld. CIT(A) is also set aside to delete the addition of Rs.3,22,666/-. The departmental appeal fails and cross objection of assessee is allowed. Issue No.1 decided in favour of assessee.
ISSUE No.2:
8. On ground No.3 of the departmental appeal, Revenue challenged the deletion of addition of Rs.2 1,05,632/- made by A.O. on account of disallowance of freight payments to Consignment Agents without deduction of TDS.
8.1. The A.O. made the addition of the above amount on account of freight reimbursement to Consignment Agents. The assessee challenged the addition before the Ld. CIT(A) and written submissions of the assessee were reproduced in the appellate order in which the assessee briefly explained that assessee is engaged in the business of manufacturing of steel pipes, tubes and trading of H.R. Coils etc., The trading of H.R. Coils and various other items is done majorly by way of exports. Considering the quantum of export sales made during the year under consideration, services of various Consignment Agents are undertaken. In Consignment, the Agent incurs all the expenditure in connection with sales which were then either reimbursed to them or deducted from the gross amount of sales. In the instant case, the material for sale is supplied to these Agents. It is the duty of the Consignment Agent to incur all expenses as and when required to make the sales like freight expenses, insurance charges etc., and after deducting various expenses incurred on its own, the remaining amounts is remitted back to the assessee. The actual payment of freight had been made by the Consignment Agents and not by the assessee. The assessee produced sufficient evidence before the authorities below to indicate the sale proceeds net of freight payment made by Agent on behalf of the assessee. It would show that assessee simply interested with the net amount that have been received for the sale made by Consignment Agents. There is no control of assessee on the expenditure incurred by the said Consignment Agents. On the basis of the invoices raised by the Agents towards freight payment, the amount would be paid to the Consignment Agents. Therefore, assessee is not liable to deduct TDS on payments made by Consignment Agents to various parties. The bills specifically highlight the quantum of expenses incurred by the Agents on behalf of the assessee. The documentary evidences have not been disputed by the authorities below.
8.2. The Ld. CIT(A) noted that assessee used the services of Consignment Agents to sell its bulk products Abroad. The assessee raises bills on the Consignment Agents and in turn, the Consignment Agents raises sale invoices showing total sale proceeds and its other expenses included freight and remit to the assessee’s sale proceeds net of its expenses. The case of the Revenue is based on the fact that the expenses charged by the Consignment Agents have an element of freight/shipping charges and the fact that assessee was not in possession of documents to support these payments. The case of the assessee has been that it has no control over the reimbursable expenses incurred by the Consignment Agents. The Ld. CIT(A), therefore, held that payment of the freight are made by the Consignment Agents and not by assessee. The assessee even does not know the transporter or the shipping Agent. It is arranged by the Consignment Agent only. There is no contact between the assessee and different transporters/shipping Agents. The Ld. CIT(A), therefore, held that assessee need not to deduct TDS. Addition was accordingly, deleted.
8.3. After considering the rival submissions, we do not find any merit in this ground of appeal of the Revenue. The Ld. D.R. submitted that assessee has incurred the expenses and documents have not been considered by the Ld. CIT(A). it is obligation of the assessee to deduct TDS on freight payment.
8.4. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that it was an obligation on the Consignment Agent to pay the freight charges, therefore, assessee is not liable to deduct TDS. Considering the facts of the case in the light of submissions of the parties and material on record, it is clear that these payments are freight payments to Consignment Agents. The services of various Consignment Agents are undertaken by assessee who incurred the expenses in connection with sales which are then reimbursed to them or deducted from the gross amount of sales. The actual payment of freight charges are made by the Consignment Agents. The assessee would get the sale proceeds net of these expenses. The Ld. CIT(A) was, therefore, justified in holding that freight payments are made by the Consignment Agents only and even the assessee may not aware of different transporters, shipping agents, therefore, it would impossible for assessee to deduct TDS on such payments. Ld. CIT(A), therefore, correctly deleted the addition. This ground of appeal of Revenue fails and is dismissed.
ISSUE No.3:
9. On ground No.4, Revenue challenged the order of the Ld. CIT(A) in deleting the addition of Rs.8,54,52 1/- on account of disallowance of certain expenditure claimed as revenue expenditure by the assessee.
9.1. The A.O. made the above addition holding the expenditure to be capital in nature. The assessee submitted before the Ld. CIT(A) that amounts were paid to three parties, details of which are noted in para 8.1 of the appellate order. The packing expenses were paid to Wood Group Industry, ERP Maintenance expenses are paid to M/s. Trident Information System and M/s. Tulip Information System and Computer repairs and expenses are paid to M/s. Trident Information System.
9.2. The assessee has purchased D.G. set for cost of Rs.56 lakhs. These generator sets were imported from the Company situated in France. These generator sets being of special nature and of high value items required specialized packing. The cost of these specialized packing was not part and parcel of generator set. The A.O. disallowed packaging charges holding the same to be capital expenditure, though, no capital have been generated. The assessee made further payments because the assessee has installed ERP system on which, complete business process is done. It integrates all data and processes of an organisation into one single and centralized system. It was installed in F.Y. 2004-2005 when it was initially purchased. Thereafter, as and when number of user increases, the fresh licenses/access are brought. This system also requires regular maintenance. In this era of modernization, where there are regular innovations in technology, regular keep-up and upgradation of technology is essential. The A.O. disallowed license-fees paid for upgradation of the system. It was submitted that these are revenue expenditure. Further, payments were made for internet connectivity for linking Pune Office with Head Office. The A.O. failed to understand that installation of 32 KBPS connectivity has not resulted in the existence/acquisition of any asset or equipment. These are not capital expenditure. The Ld. CIT(A), considering the material on record held that expenditure of packaging and transportation cannot be considered as cost of acquisition of capital asset and are allowable as revenue expenditure. Further, expenses were incurred for acquisition of software or installation charges for leased line connectivity etc., for the purpose of upgrading the existing ERP Solution and, in view of high attrition and obsolescence of the technology, the same are allowable as revenue expenditure. The Ld. CIT(A), accordingly, deleted the addition.
9.3. The Ld. D.R. relied upon the order of the A.O. and submitted that ERP is capital expenditure. So, the expenses were capital in nature.
10. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that there is only improvement in the year. Software expenses are allowable expenditure. In case the expenses incurred on DG set are disallowed, depreciation may be granted to assessee. He has submitted that software expenses are revenue expenditure and relied upon decision of Hon’ble Delhi High Court in the case of CIT vs. Asahi India Safety Glass Ltd., (2012) 346 ITR 329 and CIT vs. Amway Enterprises (2012) 346 ITR 341.
11. After considering the rival submissions, we are of the view that no interference is called for in the matter. Learned Counsel for the Assessee relied upon the decision of the Hon’ble Delhi High Court above in which it was held that expenses incurred by assessee on account of software and professional expenses are revenue expenditure in nature. The assessee further explained that assessee purchased D.G. set costing Rs.56 lakhs which was imported from France. Since, generator sets were special in nature and of high value items, required specialized packing, the cost of the packing was thus not part and parcel of the generator set. The explanation of assessee have not been disputed by the authorities below. Since the cost of the packing was not included in the cost of D.G. set and it was spent for bringing the generator set to the premises of the assessee, it was incurred wholly and exclusively for the purpose of business. Therefore, it was rightly held to be revenue in nature. Further, out of packing no assets have been created in favour of the assessee. The other amount was incurred by assessee for upgradation of software or installation charges or better internet connectivity for business purposes. Therefore, same are revenue in nature. The Ld. CIT(A) on proper appreciation of facts and material on record, correctly deleted the addition. This ground of appeal of Revenue is fails and accordingly dismissed.
ISSUE No.4:
12. On ground No.5, the Revenue challenged the order of the Ld. CIT(A) in deleting the addition of Rs.7,63,248/- on account of disallowance of prior period expenses. The assessee submitted before the Ld. CIT(A) that it is maintaining its accounts on the principal on “going concern”. Liabilities/expenses are recorded as and when same gets crystalized i.e., when the bills are finally received. In certain cases, the clearance of bills takes time due to some corrections, disputes, clarifications and additional services etc. The same are cleared only after the pending issue is finally decided and are recorded in the books of account. The assessee has been following the same system which have been accepted by the department. The liabilities of the bills crystalized in assessment year under appeal, the details of same is reproduced at page-24 of the appellate order. The Ld. CIT(A) accepted the explanation of assessee that many times dispute arise between the parties as to their respective rights and are liabilities and the cost relating there to. The expenses are booked on crystallization of liability/when disputes are settled. In earlier year, same method have been accepted by the department. The Ld. CIT(A) accordingly deleted the addition.
13. The Ld. D.R. relied upon the order of the A.O. and submitted that the expenses pertain to F.Y. 2005-2006 which have been rightly disallowed by the A.O.
14. Learned Counsel for the Assessee, however, reiterated the submissions made before the authorities below. He has submitted that liability has actually crystalized during assessment year under appeal. Rate of tax is same. Therefore, it is a mere tax neutral exercise and relied upon decision of the Hon’ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goel (2011) 331 ITR 10.
15. After considering the rival submissions, we do not find any merit in the departmental appeal. The assessee has given details of entire expenses which is reproduced in the appellate order which shows that the bills have been received in assessment year under appeal and settled. The liabilities to pay these expenses have, therefore, crystalized during assessment year under appeal. Same practice has been followed in earlier year, on which, expenses have been allowed by the Department. Therefore, rule of consistency also applies against the Revenue. Further, whether expenses are allowed in this year or in earlier year, it is not reported as to if revenue has been deprived of any tax. Therefore, it is a mere tax neutral exercise and such expenditure are allowable in assessment year under appeal. We, rely upon the decision of Hon’ble Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd., (1958) 33 ITR 681. Ground No.5 of appeal of Revenue is accordingly dismissed.
ISSUE No.5:
16. On ground No.6, Revenue challenged the addition of Rs. 14,64,445/- made on account of disallowance of general repair and maintenance expenses. The assessee explained before Ld. CIT(A) that it has incurred expenses for various types of electrical, mechanical and engineering type of activities which were got done from labour on regular basis. Local/casual labour is hired on regular basis for execution of various types of electrical, mechanical and engineering works. They are being paid small amounts for carrying out these activities. The details of the same are maintained and assessee had produced the payment sheet. The Ld. CIT(A) accepted the contention of assessee on the basis of documents produced before him which are wage rolls for the wages paid by the assessee in assessment year. The services were hired on rate contract basis and payments are relating thereto. The quantum of expenditure pointed out by the Revenue is also not in any consequence keeping in view the fact that assessee runs several steel and coil manufacturing units and such expenses on repairs and maintenance of the factory premises are naturally running into lakhs of rupees. Ld. CIT(A) accepted the explanation of assessee and deleted the addition.
17. The Ld. D.R. relied upon the order of the A.O. and submitted that no supporting documents have been filed.
18. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below.
19. After considering the rival submissions we do not find any merit in this ground of Revenue. the Ld. CIT(A) correctly appreciated the fact that for repair and maintenance, assessee has to engage labour for which details are maintained. Learned Counsel for the Assessee pointed out to various documents in the paper book to show that same are properly vouched. Since the expenditure were incurred wholly and exclusively for the purpose of business, therefore, the same were correctly allowed as deduction. Ground No.6 of appeal of Revenue is dismissed.
ISSUE NO.6:
20. The Revenue on ground No.7 challenged the deletion of addition of Rs. 1 lakh on account of disallowance of bad debts. The assessee submitted before the Ld. CIT(A) that A.O. had disallowed a sum of Rs. 1 lakhs on account of bad debts written off which were receivable from Mr. Satyanarayana Gupta. It was submitted that the amount was written off in the books of account as same were outstanding for more than 4-5 years and hence, were irrecoverable. Copies of the accounts for this year and earlier years were filed in support of the contention. Ld. CIT(A), however, noted that the amount does not qualify as bad debt because it was advance paid for acquisition of capital However, the amount is only loss to the assessee and would be an allowable expenditure under section 37 of the I.T. Act. This ground was allowed and addition was deleted.
21. The Ld. D.R. relied upon the order of the A.O. and Learned Counsel for the Assessee reiterated the submissions made before the authorities below.
22. After considering the rival submissions, we don’t find any merit in this ground of appeal of Revenue. It is claimed that assessee has given advance of Rs. 1 lakhs to Shri Satyanarayana Gupta in the course of business. He did not carry out his obligation and assessee could not recover the amount in question. Therefore, it were written off in assessment year under appeal. This amount was paid earlier during the course of business, therefore, it is allowable as business loss. Learned Counsel for the Assessee relied upon the decision of Hon’ble Supreme Court in the cases of Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) and CIT vs. Nainital Bank Ltd., (1965) 55 ITR 707 (SC) in which it was held that as a result of misappropriation or loss of cash by dacoity is an admissible deduction. Considering the facts of the case in the light of decisions cited above, it is clear that the loss is incidental to the business of the assessee which were written off in the books of account as irrecoverable. Therefore, it was correctly allowed as business loss by the Ld. CIT(A). Ground No.7 of the appeal of Revenue is dismissed.
ISSUE NO.7:
23. On ground No.8, Revenue challenged the deletion of addition of Rs.2 1,50,000/- on account of unexplained, unsecured loans/trade deposits received by assessee and disallowance of interest relating thereto amounting to Rs.7,78,344/-. The A.O. made addition of the above amount on account of unsecured loans creditors/trade deposits treating the same as unexplained and disallowed interest of Rs.7,78,343/-. The assessee submitted before the Ld. CIT(A) that addition has been made in respect of following loans/trade deposits.
