Commissioner of Income Tax-Iii v. M/S Socomec Hpl Pvt. Ltd

ORDER %

16.09.2015 ITA 503 & 504/2014 Page 1 of11

7.

1.Theseare two appealsby the Revenueagainstthe commonorderdated 6"^ December,2013 passedby the IncomeTaxAppellateTribunal(TTAT') in ITANo. 983/Del/2011(Revenue'sappeal)andITANo. 694/Del/2011 (Assessee'sappeal)for theAssessmentYear('AY') 2007-08.

¶2The AssesseeisajointventurecompanyofHPL IndiaLtd. (HIT,)witha FrenchCompanySocomecSA France(SSA).It is engagedinthe business of manufacturingswitchgears,energymetercomponentsand UPS.

¶3The Assesseefiled a returnof incomeon 31'' October,2007 forAY2007-08 declaring an income of Rs. 3,12,84,020/-. The case of the Assessee was picked up for scrutiny. The Assessing Officer ('AO') noted that the Assessee had debited a sum of Rs.3,56,12,515 in its Profit and Loss Account (P&L A/c) underthe headof 'Sellingand DistributionExpenses'.On further enquiry,the AO foundthata sum ofRs.3,00,00,000/-had beenpaidto HIL as expenses under this head.

¶4A copy of an Agreementdated 18^'' March, 2006 entered into by the Assesseewith HIL was produced.Copiesof the invoicesraisedby the HIL and evidence of payments made by Assessee were produced. The AO observedthat no TDS had been deductedon the payment made. The AO ITA 503 &504/2014 2of11 ^ • held that apart from the copy of the agreementfiled and the bills generated by HIL, there was no other evidenceto show that any servicewas actually provided by HIL to the Assessee. The expenses of Rs.3 crores was disallowed and added to the income of the Assessee. Disallowance was also made with reference to Section 40 (a) (ia) of the Act for failure to deduct tax at source while making such payments.

¶5The AO also held that the expenditure of Rs.17,76,275/- debited on account of payment towards 'commission on sales' was not genuine since the Assesseehad furnishedinaccurateparticulars. Furtherthe said payment was also made without deduction of tax at source. The said amount was accordingly added to the income of the Assessee.

¶6The third itempicked up for scrutinywas a sum of Rs.l 1,89,454/-which was disallowed by the claim as business promotion expenses. The AO allowed Rs.2 lakhs and disallowed the balance of Rs. 9,89,454 on the groundof the absenceof sufficientdocumentaryevidence.

¶7The fourth item picked up by the AO was Rs.21,02,774/-claimed as expenditure under the head 'incentive in the selling and distribution expenses'. This amount too was disallowed since the Assessee had not filed ITA 503&504/2014 Page3ofII any document to prove the genuinenessof the expense.

¶8The Assessee had claimed an expense of Rs.55,16,840/- on account of paymentof 'technicalknowhowfee' to SSA. The Assesseeencloseda copy of the Agreemententeredinto by it with SSA to substantiateits pleathat it was a revenue and not a capital expenditure.The AO, however, rejected the plea and capitalizedthe amount. After allowingdepreciationat 12.5%, the AO disallowed a sum of Rs.48,27,235/- and added it back to the total income of the Assessee. Liabilities to the tune of Rs, 13,15,648 were disallowed on the ground that they were not genuine since there was no evidentiary support.

¶9In the appeal filed by the Assessee, the Commissioner of Income Tax (Appeals)[CIT (A)] asked the Assesseeto substantiateits claim of 'selling and distributionexpenses'. The Assessee produced photocopiesof some pamphlets which showed that its products were marketed by HIL. In its orderdated 11 November2010,theCIT (A):

(i) Confirmedthe disallowanceand consequentaddition of Rs.3 crorespaid to HIL towardssellingand distributionexpensesby holdingthat the agreementwith HIL was sham and an attempt ITA 503 &504/2014 Page4of11 u to divert funds.

(ii) Confirmed the disallowance and consequent addition of Rs.9,89,454/- incurred as 'business promotion expenses'.

(iii) Confirmed the disallowance and consequent addition of Rs.21,02,774/- incurred as 'incentive in selling and distribution expenses' by holding that credit notes produced by the Assessee were not counter-signed by the recipients.

(iv) Confirmed the disallowance and consequent addition of Rs.l3,15,648/- on account of liabilities not being genuine by holding that the reversal of the entries in the subsequent years did not absolve the Assessee for having made a false claim in the first instance.

¶10As regards the disallowance of the capitalized portion of the technical knowhow fee of Rs.55,16,840/-, the CIT(A) held that that 50% of the expenditure should be treated as a capital expenditure and 50% as revenue expenditure. As regards, the disallowance of Rs. 17,76275/- paid towards commission on sales, the CIT(A) disagreed with the AO and remitted the issue to the AO for deciding afresh whether the expenditure had to be allowed. ITA 503 & 504/2014 Page 5 of11

¶11In the further appeals filed both by the Assessee and the Revenue,the ITAT has impugned by the common order remanded two issues to the AO for re-determination: one regarding the addition of Rs.13,15,648/- on accountof liabilitiesnot beinggenuineandthe otherconcerningthe addition of Rs. 17,76,275/-towardscommissionon sales. As regardsthe otheritems of expenditure, the ITAT:

(i) Deleted the addition of Rs.3 crores on account of 'selling & distributionexpenses'on the principlesof consistencysince in the earlier AYs a similar expense had been allowed. It was also noticed that on subsequentpayments of TDS by the Assessee, the AO had in the earlier AYs allowed similar claims.

(ii) Restricted the disallowance of Rs.9,89,454/- on account of business promotion expenses to 20% i.e. Rs.2 lakhs.

(iii) Deletedthe disallowanceof Rs.21,02,774/-paid as 'incentivein selling & distribution expenses', on the ground that the Assessee had floateda scheme for providing incentivesand had also filed creditnotesgivento variousparties. ITA 503 &504/2014 Page6of11 10^

(iv) Deleted the addition of Rs.55,16,840/- on account of technical knowhow fee by holding that the payment was in the nature of product royalty for use of name and technicar information and had to be treated as revenue expenditure.

¶12Aggrieved by the aforementioned order of the ITAT, the Revenue has filed the present two appeals. ITA No. 504/2014 concerns the issues of 'selling & distributionexpenses', 'business promotionexpenses', 'incentive in selling and distribution expenses' and 'liabilities not being genuine.' ITA No. 503/2014 concerns 'commission on sales' and payment of the 'technical knowhow fee'.

¶13As far as the issue concerning liabilities not being genuine is concerned, the Court notices that the ITAT has itself remanded the issue to the AO for re-determination. Likewise, on the question of the payment of commission on sales, the ITAT has remanded the issue to the AO to examine the additional evidence filed by the Assessee. The Court finds no reason to interfere with the order of the ITAT on these two issues.

¶14As regards the disallowance of 'selling & distribution expenses', the Court notices that what weighed with the ITAT was that the assessment for ITA 503 & 504/2014 Page 7 of11 AY 2004-05 was reopened by the Revenue on 31®^ March, 2011 under Section 148 of the Act. Yet, the reopening did not happen on the issue of genuineness of the selling and distribution expenses but on the ground of the payment of technical knowhow fee. The re-opening of the assessment was not upheld by the CIT (A). The ITAT also dismissed the Revenue's subsequent appeal. For AY 2010-11, after scrutiny, an assessment order was passed under Section 143 (3) of the Act in which a similar claim was allowed.

¶15The Court further notes that even in AYs 2004-05 to 2006-07, the Assessee had justified the payments with reference to similar Agreements with HIL dated 18^ March, 2004 and 26'*^ March, 2005 where the only change was as regards the monthly remuneration figures. The remuneration in the first agreement was Rs. 12,54,996/- per month and in the second Rs.l7 lacs per month. In the Agreementdated 18^*^ March, 2006, relied upon for the AY in question, the remuneration was Rs.25 lakhs per month. No attempthas been made by the Revenueto questionthe correspondingreceipt of the amounts in the hands of HIL. On the other hand, learned counsel for the Assessee informed the Court that HIL had offered the said amounts to tax and that was also accepted by the Department. ITA 503 &504/2014 ^ \H

¶16In the circumstances,the Court does not find any legal infirmitythat the conclusion drawn by the ITAT on the principle of consistencythat the above claim could not be held to be bogus and non-genuine. The Court, therefore, declines to fi-amethe question of law as regards this issue.

¶17On the issue concerning 'business promotion expenses', the ITAT has restricted disallowance to Rs.2,00,000/- and has explained the basis for arriving at such a conclusion. The Assessee had stated that the expenses were incurred through debit card and credit card towards fuel, hotel bills and some instances for which supportingbills could not be produced.The ITAT observedthat there could be an inflationof expenditureand the possibility of use of certain facilities for personal purposes could not be ruled out. Therefore,the disallowancewas restrictedto 20%. The view taken by the ITAT is a plausible one. In the facts and circumstances, the Court is not inclined to frame a question of law on this issue.

¶18On the issue of 'incentivein sellingand distributionexpenses',the ITAT has referred to the details provided by the Assessee of the various dealers, customers in respect of whom paymentswere made by issuing credit notes. The ITAT has also examined the scheme floated by the Assessee for ITA 503 &504/2014 Page9of11 grantingspecialincentivesfor achievingcertaintargets.It was noticedthat the AO did not issue notices to the parties whose details were furnished. The ITAT was satisfiedthat in the absence of any exerciseundertakenby the AO to verifythe paymentsto such parties,there was no justificationfor the disallowance.The Courtfinds nothinglegallyerroneousin the approach ofthe ITAT in the matter.Ifthe detailswere furnishedby the Assesseewere not verifiedby the AO for theirgenuinenessby makingenquiries,there was no basis for disallowingthe expenses.The Court, accordingly,declinesto fi-ame a question of law on this issue.

¶19On the question of the technical knowhow fee, the ITAT has examined the technicalcollaborationagreemententeredinto by the Assesseewith the SSA. It was notedthat what was beingpaid was a runningroyaltyon fixed percentage of turnover for the use of the name and technical information. The same payment was allowed as revenue expenditurein the earlier AYs. The AO had failed to demonstratewhat capitalasset had been acquiredby the Assesseein the process.The Court concurswith the view expressedby the ITAT that in the context of the Technical Collaboration Agreement, the claim by the Assessee of royalty paid as revenue expenditure could not have been disallowed. The Court accordingly declines to frame question on this ITA 503 & 504/2014 Page JO of11 issue.

¶20No substantial question of law arises for determination. The appeals are dismissed. SEPTEMBER 16, 2015 MK ITA 503 & 504/2014 S.MURALIDHAR, J VIBHU BAKHRU, J Page 11 of11

!o * IN THE HIGH COURT OF DELHI AT NEW DELHI 2. + ITA 503/2014 COMMISSIONER OF INCOME TAX-III Appellant Through: Mr Kamal Sawhney, Senior Standing Counsel with Mr Raghvendra Singh, Junior ^ StandingCounsel. ^ versus M/S SOCOMEC HPL PVT. LTD. ..... Respondent Through: Mr Gajendra Maheshwari and Ms Swati Thapa, Advocates. WITH ITA 504/2014 COMMISSIONER OF INCOME TAX-III Appellant Through: Mr Kamal Sawhney, Senior Standing Counsel with Mr Raghvendra Singh, Junior Standing Counsel. versus M/S SOCOMEC HPL PVT. LTD. Respondent Through: Mr Gajendra Maheshwari and Ms Swati Thapa, Advocates. CORAM: HON'BLE DR. JUSTICE S.MURALIDHAR HON'BLE MR. JUSTICE VIBHU BAKHRU