TaxTMI 
TaxTMI 
2015 (7) TMI 948
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....nd inorganic chemicals, radio-labelled chemicals, diagnostic reagents, chromatography products, laboratory chemicals and related products. The assessee-company field its return of income for the assessment year 2005-06 declaring an income of Rs. 8,18,54,315/- on 28/10/2005. During the assessment proceedings u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] Assessing Officer (AO) called for various details and the assessee produced such details which include books of account, bills and vouchers and bank statements etc. AO also visited the premises of the assessee-company on 29/05/2008 and the statement of one of the directors of the company i.e. Ms.Vanja Krishnan, was recorded on oath u/s 131 of the Act on 29/05/2008 and 5/6/2008. On perusal of the profit and loss account, AO observed that the assessee had disclosed a total turnover of Rs. 78,10,85,435/- on which the assessee has shown net profit of Rs. 6,87,47,804/- and gross profit of Rs. 19,87,28,822/-. He accordingly worked out the net profit at 8.8% and GP rate at 25.44%. He observed that in the immediately preceding year, net profit rate of the assessee-company was 8.97% and theref....
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....2500 (approximately INR Rs. 150,000/-). It is submitted that also from the cost benefit perspective, the cost entailing processing of the credit or debit notes would be higher than the cost recovered. He, therefore, prayed that the disallowance of the sums written off by the assessee towards shortage in receipt of goods be deleted. (iii) The learned Departmental Representative, on the other hand, supported the orders of the AO as well as the CIT(A) and submitted that the shortage of goods should have been claimed by the assessee from the principal suppliers and should not have written off the same as expenditure. (iv) At the time of hearing, the learned counsel for the assessee has filed Notes on arguments and also a chart showing the summary of ratios of the disallowances made by the AO to the sales and cost of goods traded by the assessee. Upon perusal of the material on record and in the light of averments of both the parties, we find that during the relevant financial year, the short-landing is only 0.05% on sales and 0.07% of the cost of goods sold by the assessee. It is also worth mentioning that the loss is not pertaining to a single item but is the total of many items imp....
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....nts. At this stage, there is no other recourse except to write off the inventory from the system. " The AO, however, did not agree with the assessee and held that the assessee should have claimed this loss from the warehouse operations service provider i.e. Ondolex Corporation and they should be asked to pay for it. He accordingly disallowed the same and brought it to tax. (ii) Aggrieved, the assessee preferred an appeal before the CIT(A) who upheld the disallowance and the assessee is in appeal before us. (ii) The learned counsel for the assessee submitted that the assessee has written off the expenses under the head 'error in preparation of goods receipt' as a rectification entry on account of documentation error in accounting of goods received. Further it was submitted that the value of the difference in physical stock in the inventory determined during the physical inventory verification was also written off as such difference was due to oversight of certain floor workers in shipment of certain items. He submitted that the discrepancies in the stocks was on account of outsourcing of its warehouse operations to an external service provider and due to huge turnover of the ass....
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.... 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 with the decisions relied upon by the assessee (cited supra). The argument of the assessee that write off of negligible amount of loss on account of above error is cost effective as compared to claims to be made against the third party and the costs involved in processing such claims finds favour with us particularly since loss on account of these two items is only 0.01% and 0.02% on sales and cost of goods respectively. Therefore, we allow this ground of the assessee. III. Breakage: The assessee had claimed an amount of Rs. 5,67,832/- under the head 'breakage' and on query by the AO, assessee explained as under: "Most of the products dealt by Sigma are packed in Glass bottles. Although due care is taken at the time of packing of the materials, due to the inherent characteristic 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. This results in the erosion of the....
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....e assessee is making payment to the professional agency for the services rendered by them but the breakage is not attributable to the employees of the professional alone. In such a situation, we do not agree with the observation of the AO that the assessee should have claimed the loss from the professional agency only. As long as the loss is on account of business activity carried on by the assessee, it cannot be disallowed. Therefore, the ground of appeal relating to this issue is allowed. IV. Management fee paid to Sigma Aldrich USA: The assessee has claimed an amount of Rs. 21,28,791/- as paid to Sigma Aldrich USA towards management fee as business expenditure. The assessee gives the following explanation justifying such expenditure: "During the year an amount of Rs. 21,28,791/- has been accounted as management fees paid to Sigma Aldrich Inc. USA. The management fees is primarily towards the cost of time spent by people in marketing, publishing, graphics and catalog printing department towards various marketing support activities like product catalog/brochure designing and printing, competition analysis etc." The AO disallowed the same holding that the assessee had already....
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.... the material on record, we find that the CIT(A) has observed that the assessee had made similar payment in the earlier assessment year i.e. 2004-05 under the head 'legal and professional charges' but for the assessment year 2005-06, the assessee has claimed it as 'management fee'. Therefore, according to the CIT(A), the nomenclature given in the earlier assessment year indicated that technical knowledge was made available to the assessee. He also observed that in the very next year these companies are stated to have been paid for brochures, printing materials etc., which services are easily available at reasonable price with international quality within the country. Therefore, the CIT(A) has held that it is 'made available' of technical knowledge to the assessee and that the provisions of 40(a)(ia) are applicable. As the payment of management fee to its AEs was referred to the TPO for determination of ALP and the TPO has accepted the reasonableness of the payment, we find that the order of the AO holding that there is no evidence that management services were rendered by Sigma Aldrich, Germany or Sigma Aldrich, USA to the assessee-company is not sustainable. However, as regards th....
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....: The assessee has claimed a sum of Rs. 50,89,575/- as reimbursement by the assessee-company to its holding company Sigma Aldrich, USA towards expenses of its employees and directors. The AO observed that the assessee has failed to furnish supporting bills and vouchers in respect of this expenditure and also that the same has been incurred towards travelling expenses of the visitors. Therefore, the AO disallowed 20% of the claim and added it back to the total income of the assessee. (ii) The assessee filed an appeal before the CIT(A) stating that the expenditure under this head is primarily incurred for travelling of personnel to India for supporting SAP implementation for selective overseas projects for various technical discussions and project implementation plan of the New India Laboratory Project. It was also clarified that the assessee had submitted all the supporting bills and vouchers with the AO but the AO has not considered the same. The 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 ....
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....ge the expenses incurred in relation to above to its customers. The amount for 'information Services' is charged to each customer on the basis of usage of SAP and amount for "IT" Services' is charged as share of license fees paid for SAP. In view of the same, Sigma-USA and Sigma-Germany have charged Sigma-India its share of expenses on the above basis. Since these expenses are recurring in nature, it is treated as revenue expenses." The AO held that this amount has been debited by Sigma USA & Sigma Germany to the account of the assessee towards assessee's share in respect of IT services and license fee etc. and further the SAP-ERP package of module was brought and installed by the assesseecompany in the year 2003 at the inception of the company and huge amount of about Rs. 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, ....
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....ent during the time of inspection he held that payment of such huge sum to the contractor is not justified. He, therefore, disallowed a sum of Rs. 20 lakhs out of the total payment to M/s.Indelox. (ii) On appeal, the CIT(A) granted relief to the assessee by holding that the expenditure is towards business activity of the assessee and an ad hoc disallowance of the same is not proper. Aggrieved, the revenue is in appeal before us. The learned Departmental Representative supported the order of the AO while the learned counsel for the assessee supported the order of the CIT(A) and also placed reliance upon the following decisions: i) Alfa Laval India Ltd. vs. DCIT (2003) 133 Taxman 740 (Bom.) affirmed by Hon'ble Supreme Court in (2008) 295 ITR 45 (SC), 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 inspe....
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.... the same, the assessee, vide letter dated 12/8/2009 stated that the assessee-company was trading in special chemicals which has specialized uses and the assessee, being a leading supplier of such high quality research chemicals, has to maintain high quality all the time. It was submitted that due to oxidation and chemical reactions, the products lose shelf life and hence are scrapped and claimed as expiry products. The AO did not agree with this contention of the assessee and held that the entire purchase of the assessee is from parent holding company and if any item has reached expiry date, then the assessee may have been compensated by the holding company. Therefore, he disallowed 50% of the claim and 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 ri....
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....ance with method of accounting regularly employed by the assessee. Similarly, s. 145A of the Act of 1961 provides that the inventory shall be valued in accordance with the method of accounting employed by the assessee therefore, if the method of valuation adopted by the assessee is recognized method then the same cannot be rejected on the ground that the net realizable value/market value has been determined on the basis of certain estimate. It is to be noticed that the AO while holding that the inventories valued by the assessee @ 5 per cent is excessive did not care to estimate the net realizable value of the store and proceeded to disallow the amount of Rs. 68,59,108 written off 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....
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....assessee preferred an appeal before the CIT(A) who allowed the same and the revenue is in appeal before us. (ii) The learned Departmental Representative submitted that the CIT(A) has given relief to the assessee without verifying the contentions of the assessee that Genosys is the laboratory facility of the assessee and also that it has offered income from sale of products manufactured from the raw material supplied by the assessee-company. The learned counsel for the assessee, on the other hand, supported the order of the CIT(A) and also the contentions of the assessee in the statement of facts filed before the CIT(A). (iii) On perusal 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 riv....
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....rom anywhere across the world which are informed by the corporate office or other office to the company who in turn scraps the entire batch as the same has not met the quality standards since the material will be contaminated. AO disallowed the same and the CIT(A) has granted partial relief to the assessee. Against the order of the CIT(A), both the assessee as well as the revenue is in appeal before us. (ii) The learned counsel for the assessee submitted that it is the assessee's quality policy that wherever quality of any batch is rejected by the customers from anywhere across the world, the 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 profes....