TaxTMI 
TaxTMI 
2013 (9) TMI 1072
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.... The return was processed u/s. 143(1) of the Income Tax Act, 1961 ('the Act' in short) and the case was subsequently taken up for scrutiny. The assessment was completed by an order u/s.143(3) of the Act dt.24.12.2007 wherein the loss was determined at Rs. 1,08,82,186 by making the following disallowances : (i) U/s.43B : Rs. 6,205. (ii) U/s.40(a)(ia) : Rs. 43,93,515. (iii) Shortage of raw material : Rs. 11,70,705 (iv) Seed Development Cost : Rs. 55,18,529. 2.2 Aggrieved with the order of assessment for Assessment Year 2005-06 dt.24.12.2007,the assessee preferred an appeal before the learned CIT(Appeals) - I, Bangalore. The learned CIT(Appeals) disposed the assessee's appeal by order dt.17.8.2012 allowing the assessee partial relief. 3. Aggrieved by the order of the learned CIT(Appeals) -I, Bangalore dt.17.8.2012 for Assessment Year 2005-06,revenue is in appeal before us raising the following grounds : "1. The order of the learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) has erred in holding that the reimbursements of R....
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....of expenses amounting to Rs. 4,78,499 made to C&F Agents. 6.1.2 On appeal, the learned CIT(Appeals) observed that these expenses were incurred by C&F Agents on behalf of the assessee; that the claims were made in their bills on actual basis and the amounts were shown separately and supported by necessary evidence. The learned CIT(Appeals) observing that since these payments were made on actual basis and did not contain any element of income, held that these payments were not liable for deduction of tax u/s.195 of the Act and in that view of the matter, the action of the Assessing Officer in invoking the provisions of section 40(a)(ia)of the Act was held to be untenable and the disallowance was deleted. 6.2 The learned Departmental Representative contended that the assessee's submissions that the reimbursements are made through separate bills and since do not have any element of income, they do not come within the ambit of tax deducted at source (TDS) u/s.194Cota is not tenable. It is submitted by the learned D.R. that the scheme of TDS provisions apply to the gross sum paid to each C&F Agent, but not the sum paid bill-wise. In this regard, the learned D.R. relied on CBDT Circular....
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....t in the case of GE India Technology Centre (P) Ltd V CIT (2010) 327 ITR 456 wherein it was held that - " ..... The expression "Chargeable under the provisions of the Act" in section 195(1) shows that the remittance has got to be a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted." The learned A.R. also submitted that the decision of the ITAT, Delhi, relied on by the learned D.R. has been over ruled by the Hon'ble Delhi High Court in Van Oord ACZ India Ltd.(2010) 323 ITR 130. 6.3.2 The learned A.R. further submitted that the Answer to Question No.30 of the CBDT Circular No.715 dt.8.8.1995 is applicable only in cases where the gross amount of the bill includes reimbursement of expenses and the same cannot be separately identified in the bill and does not apply in respect of reimbursement of actual expenses. It is submitted that if the bill in question is only in respect of reimbursement of actual expenses, there is no question of deduction of tax at source from such payments. In this regard the learned A.R. relied on the decision of the Delhi Tribunal in the case of ITO V Dr. W....
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....rties and perused and carefully considered the material on record, including the judicial decisions cited. In terms of sub-section (2) of Section 4 of the Act, which is the charging section, in respect of income chargeable under sub-section (1), income tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of this Act. From this, it is clear that tax is to be deducted only where the element of income is part of the payment. Since reimbursement of expenses do not constitute trading receipts or have any element of income therein, TDS is not liable to be made from reimbursements. Though section 194C of the Act mentions TDS being made on "any sum" paid to a resident in pursuance of a contract, the term "any sum" cannot be stretched to mean even expenses incurred on behalf of the client and later recovered from them. When a C& F agent incurs expenses like custom duty, port dues, and other sundry charges, he is merely acting as a front man of his client and on his behalf. These expenses do not normally have any nexus with the commission he is supposed to earn for his work. Though the decision of the Hon'ble Apex Court in Transmission ....
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....h a payment is not liable for deduction of tax under section 195 of the Act. Further the Board's circular is applicable only where there is no indication about the reimbursable amounts in the bills separately. In that case, the gross amount has to be considered for deduction of tax. In view of this factual and legal position, the amount of Rs. 4,78,499 is not liable for TDS. Hence, it cannot be disallowed under section 40(a)(ia). In view of the above findings, the disallowance of Rs. 12,41,217 (Rs.87,807 and the amount of Rs. 11,53,410) is sustained as against the amount of Rs. 43,93,515 made by the Assessing Officer in the assessment order on various items discussed above." 6.4.3 In the case on hand, as pointed out by the learned CIT(Appeals), the expenses have been incurred by the C&F Agents on behalf of the assessee; the claims were made on actual basis and the amounts were separately shown with proper evidence. The fact that the reimbursement of expenses have been separately billed, in the case on hand, is not disputed. The C&F Agents are appointed to provide the service of carrying out sales for which they are paid service charges on which TDS has been made and not for the p....
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.... the decision of the learned CIT(Appeals) on the issue of shortage. The learned A.R. submits that, in the business of seed processing normally 5% to 7% seeds get eliminated due to processing activity and therefore the assessee's claim of shortage of 3.64% was reasonable. The learned A.R. submitted that, as in the case of Namdhari Seeds cited by the learned D.R., in the case of the assessee also there is no separate debit to the profit and loss account in respect of shortage of raw materials. The learned A.R. submitted that the learned CIT(Appeals)'s order / finding on the issue of shortages was based on the assessee's own case for earlier and subsequent years and held the shortages claimed in the period under consideration to be reasonable. In view of this, the learned A.R. prayed that no interference is called for in the order of the learned CIT(Appeals) and sought dismissal of this ground raised by revenue. 7.3.1 It is seen form the records that in the course of assessment proceedings, the Assessing Officer found that the assessee claimed an amount of Rs. 25,96,379 towards shortage of raw materials incurred in the course of business which amounted to3.64% of the consumption ....
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....on of raw material is reasonable or excessive. The Assessing Officer was of the view that the claim of shortages was excessive and hence allowed the same to the extent of 2% of consumption of raw materials. In doing so, we find that, the Assessing Officer did not assign any reasons for making such an adhoc estimate. In the absence of any basis for the Assessing Officer to adopt shortages at 2% in the absence of any industry average, we find that, the learned CIT (Appeals) examined the shortages claimed by the assessee in the period 2004-05 to 2006-07. It is seen that the shortage of Assessment Year 2004-05 was 9.75% and that of Asst. Year 2006-07 was 4.68% which fluctuated and was in excess of the 3.64% shortage of the current year. In this factual view of the matter, we agree with the learned CIT (Appeals) that the shortages at 3.64% in the current year is less than that of both the earlier and subsequent year and is therefore reasonable. In view of the above, we find no infirmity in the order of the learned CIT (Appeals) and uphold the same. Consequently, we dismiss Ground No.3 raised by revenue. 8. Seed Development Expenses disallowed - Rs. 7,59,989. 8.1 In the ground raised a....
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....ee in its C.O. has challenged the order of the learned CIT (Appeals) in sustaining the aforesaid disallowance of Rs. 7,59,989 and also that the learned CIT (Appeals) did not grant depreciation on the same. 8.5 The learned D.R. has filed a paper book elaborately discussing the business process of development of seed technology by the parent company M/s. Metahelix Life Sciences (P) Ltd. from which the assessee has purchased the parent seed in order to buttress the proposition of revenue that there is an enduring benefit for a number of years to the assessee and therefore the expenses ofRs.55,18,529 are capital in nature and ought to be disallowed. In written submissions, the learned D.R. submits as under: " From the start of the breeding program to the end of the release of new variety/ hybrid, it will usually take 4-8 years, sometimes even more time. The R&D leadingto development of new varieties / hybrids is a very expensive activity. The life cycle of a newly released high yielding variety / hybrid is around 6-8 years. That means once either a new variety/ hybrid is produced or acquired through contract, its benefit flows to the seed company over a period of time. Every year, th....
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....see processes such parent seeds form Metahelix and supplies it to farmers who grow and develop these seeds. The fully developed seeds are received by the assessee from the farmers after 3 to 6 months, and are about 20 times more than the parent seeds received by the assessee from Metahelix. The assessee, after receiving these seeds from the farmers, processes these seeds in its plant which consists of many operations like cleaning, processing, conditioning, chemical treatment, etc. and then does packing of the same. In this process, the damaged and bad seeds are removed and only top quality seeds are packed. 8.7.2 In the light of the activities involved in the ass business model, the following facts emerge :- (i) That Metahelix does research and development leading to development of new technologies enabling new strains in varieties of crops; (ii) The assessee purchases the parent seed from Metahelix, which are the result of the research program of Metahelix; (iii) These parent seeds are given by the assessee to farmers, whereby it is multiplied many times into hybrid seeds; (iv) The parent seeds developed by Metahelix lose its life once it is given to farmers for further deve....