TaxTMI 
TaxTMI 
TaxTMI 
2019 (9) TMI 300
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.... and in other year, cross appeals filed by assessee and Revenue were decided by the Tribunal in the first round vide order dated 31.03.2010. The assessee carried the matter before Hon'ble High Court and the Hon'ble High Court in Writ Petition No.3650/2014 vide judgment dated 14.08.2014 has remitted the issue of allowability of service charges, back to the file of Tribunal. The relevant findings of the Hon'ble High Court are vide para 19, wherein the Tribunal was directed to decide and consider the claim in relation to service charges by taking into account the contentions and case of both the sides. The Hon'ble High Court vide para 20(C) has recalled the order of Tribunal dated 31.03.2010 to the extent of claim of service charges including travelling expenses and the appeal was restored back to the file of Tribunal for decision afresh on merits and in accordance with law. The Hon'ble High Court thus, directed the Tribunal to decide the claim in accordance with factual and legal aspects of case. Hence, these appeals were consequently fixed for hearing and were heard from date to date. 4. The issue which needs to be adjudicated in the present set of appeals is in respect of service ....
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....essee and Coca Cola India Inc. ii) That the assessee did not furnish any evidence of services actually rendered by the Coca Cola India Inc. even when specifically asked for by the A.O. vide order sheet entry dated 04.03.2002 and letter dated 07.03.2002. 2. On the facts and in the circumstances and in Law, the CIT(A) erred in not appreciating the decisions of the Apex court in the case of Swadeshi Cotton Mills (63 ITR 57) and Lachminarayan Mandanlal v/s CIT (86 ITR 439) wherein it was held that mere existence of an agreement is not sufficient to prove that the expenditure was incurred wholly and exclusively for the purpose of business. 3. On the facts and in the circumstances and in Law, the CIT(A) erred in allowing the relief to the assessee @ 70% of total service charges, while he himself has given adverse comments in this regard in para numbers 5.4.3, 5.4.5, 5.5, 5.6.5, 5.6.6 of his order. 4. The order of the CIT(A) be vacated and that of the A.O. be restored. 7. Briefly, in the facts of the case, the assessee was a public limited company. The assessee was engaged in the manufacture and sale of non-alcholic beverage bases for various brands of soft drinks of Coca Cola.....
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.... The assessee explained that the said expenses were claimed by Coca Cola India Inc (in short 'CCI Inc') towards cost of services rendered and another 5% was charged as markup. The Assessing Officer took note of the business activities carried on by assessee and observed that initially during the year the assessee was having three divisions for the period from 01.04.1997 to 30.10.1997 i.e. Concentrate Division, Pet & Can Division and Glass & Bottles. The manufacturing process carried on by assessee under different divisions was detailed in Annexures 4 and 5 annexed to the assessment order. The finished products for three divisions were non alcoholic beverage base, can & pet and glass & bottles. For the period from 01.12.1997 to 31.03.1998, the Assessing Officer took note of business activities of assessee. The assessee had filed a petition in February, 1999 with the Hon'ble High Court of Bombay for scheme of arrangement under section 391 and 394 of the Companies Act, 1956 and the effective date for the scheme was 30.11.1997. The Hon'ble High Court vide its order dated 03.05.1999 had approved the scheme of demerger between the assessee company and Hindustan Coca Cola bottling South W....
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....ioning one entry as service charges paid to CCIL amounting to Rs. 5,74,18,785/- and no other supporting details were filed. On further enquiries, the assessee only submitted copy of service agreement along with debit notes on 30.03.2001 which were annexed by the Assessing Officer as Annexure 3. The Assessing Officer also perused service agreement which was annexed as Annexure 2 to the assessment order, which revealed that services stated to be rendered under the agreement were in the nature of supply of technical knowhow. The Assessing Officer thus, in this connection observed that ultimate holding company, which was the owner of brand, had given license to the assessee company for the use of its trademarks and trade secrets for manufacturing of concentrate base and there was no apparent consideration, which had been paid to ultimate holding company for allowing use of its trademarks and trade secrets. The Assessing Officer had held that combined reading of both the agreements i.e. license agreement and service agreement revealed that the amount paid in the name of service charges was nothing but royalty paid by assessee to TCCC, Inc, USA for use of trademarks and trade secrets and....
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.... Officer only on 30.03.2001. During appellate proceedings, the assessee furnished additional evidence in the form of letter dated 23.07.2002, which was forwarded to Assessing Officer to submit remand report. The remand report is reproduced at page 52 of appellate order, under which it is reiterated by Assessing Officer that the total basis for claiming service charges as allowable expenditure was the service agreement. However, during scrutiny proceedings, the assessee could not produce any iota of evidence regarding actual rendering of services by TCCC to the assessee company. Thus, in view of failure on the part of assessee to substantiate its claim of actually rendering of services, service charges claimed need to be disallowed. It was further reported that burden of proof of substantiating the claim by way of positive evidence was upon the assessee which has not been discharged. Mere book entries in third party account or mere execution of service agreement would not automatically entitle the assessee company for reimbursement of service charges. Reliance was placed on the decision of Apex Court in Swadeshi Cotton Mills Vs. CIT (1967) 63 ITR 57 (SC), wherein it was categoricall....
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....f interests of parent company as well as the bottling units / entities including Hindustan Coca Cola Beverage Pvt. Ltd. From the information submitted by assessee which is referred in paras 7 and 7.1 at pages 56 to 58 of appellate order, the CIT(A) concluded that branch office was meant to provide services to licensed bottlers, to build up quality and goodwill of TCCC brand, besides rendering services to assessee company. He was of the view that these were basic facts, which need to be kept in mind for taking a decision on the issue. He also noted that these aspects were not before the Assessing Officer to take right decision regarding service charges and hence, there was need to enhance disallowance out of service charges. Another agreement i.e. license agreement dated 01.06.1993 between assessee and Coca Cola was perused. As per clause 6 of the license agreement, TCCC was to provide technical and managerial services to the assessee in the area of manufacturing, distribution, marketing, advertising, accounting and other skills required by assessee, by dispatching technical and managerial experts. He then referred to service agreement dated 01.04.1995 and the CIT(A) observed that s....
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....ancement notice issued by CIT(A) talked about admission that major part of services rendered by CCI Inc. were directly to the assessee but some part of it related to bottlers could not be overlooked. The CIT(A) then referred to submissions of assessee dated 03.03.2003, copy of which is enclosed as Annexure 6 to the appellate order and pointed out that the same would make it clear that the assessee was not stating true facts in its earlier submissions with regard to the exclusive nature of CCI Inc operating only for the assessee and held it to be not correct. 11. He further referred to separate agreement between bottlers and TCCC and observed that there was no contractual obligation on the assessee to incur any expenses or provide services to bottlers. The bottlers were required to purchase concentrate from the assessee as per bottler's agreement with TCCC. The services were rendered by CCI Inc. for quality control of bottlers, plants & products, servicing of bottlers' supply, etc. and they were directly rendered to them without any direct business purpose of assessee. He further held that services relating to coordination between the assessee and bottlers were there and expenses r....
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....noted that they had separate service agreement. The whole argument of assessee that the Indian branch of CCI Inc. was incurring all expenses exclusively for the benefit of assessee was found to be not correct. The CIT(A) took note of para 1.2.1 of the submission dated 03.03.2003 of assessee, wherein he admitted that some part of services rendered by CCI Inc. related to bottlers but the argument of assessee was that the said services were also for the benefit of assessee as bottlers problems adversely affect the assessee's sale/profit. The CIT(A) in this regard held that there is no direct nexus of these services rendered by CCI Inc., with the business of appellant as the bottlers are licensed by TCCC, who was the main beneficiary. He further observed that services rendered by CCI Inc. to the bottlers for quality improvement, for purchase of new machinery, etc. were services rendered to bottlers for their business needs in terms of bottlers agreement of TCCC with the bottlers. He further noted the nature of legal expenses and pointed out that though some of it are to be allowed but expenses incurred for training CCI Inc employees for International Laws relating to 'Brand' and 'trade....
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..... G. Kumar, Production Service Manager were not allowable and the assessee did not furnish documents and evidences mentioned in submissions. The CIT(A) acknowledged the vouchers which depict services rendered for the business needs of assessee company under para 8.7. He pointed out that expenses were either to be allowed in full or partly as they were internal HR functions of CCI Inc. for selection of candidates. Statement on oath of Mr. K.S. Nair, who was the key person of assessee company since 1994, was recorded on 22.05.2003. In the discussion, he admitted that vouchers submitted by CCI Inc. were not checked voucher-wise but quarterly audit of the same was done. He however, could not produce any such audit report stated to be prepared by M/s. Ernst & Young, C.As. He pointed out that CCI Inc. provided technical, legal, marketing, finance, information system and HR related support to the assessee company. The quality of concentrate manufactured by assessee was mainly checked and maintained by the Quality Assurance Manager with a team of six chemists, whereas the quality of beverages was taken care of by nearly 20 persons who were employees of CCI Inc. The CIT(A) pointed out to hi....
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....essee but licensed bottlers, various suppliers to licensed bottlers and towards building equity and goodwill of TCCC's brand. Reference was made to letter dated 23.05.1994 in this regard. It was further observed by CIT(A) that after demerger of bottling operations of two units from the assessee company, no services were required from CCI Inc., which was being rendered as bottler to the assessee. Further, there were specific services rendered by CCI Inc. to bottler with no direct relevance to the assessee. The CIT(A) held that the cost related to coordination between assessee and bottler was though allowable business expenditure of assessee but this line of arguments could not be stretched to include cost of services directly rendered to the bottlers by CCI Inc. Further, reference was made to marketing strategy designed by S&OP meeting and it was held that these marketing strategies were required to be developed, not only for and on behalf of assessee, but also for brand image and enhanced sale of beverages in different parts of the country, in competition with other brands. He held that merely because the marketing strategy resulted in benefit/loss to the assessee indirectly would ....
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....lling the concentrate to bottlers were its income, wherein CCI Inc. had licensed the assessee the brand name at no cost base. The Ld. AR pointed out that there were four-fold transactions with CCI Inc.; at the top, the assessee manufactures concentrate and then bottlers who makes the drinks from concentrate and the ultimate was various persons including retailers, who in turn, sold it to the consumers. He then referred to history of the case and pointed out that assessment year 1996-97 was the first year in which the assessee was assessed to tax. In assessment year 1997-98, there was disallowance of service charges paid by assessee to CCI Inc., wherein the Assessing Officer had disallowed 10% of service charges. The CIT(A) enhanced the disallowance to 25% and the Tribunal in the second round had allowed expenses fully. In the first round, the Tribunal had sent back the matter but then the Hon'ble High Court had remitted the matter back to the Tribunal to look into it and he further pointed out that the second issue in all these appeals was in respect of marketing charges paid by assessee, wherein the Assessing Officer disallowed certain amount and CIT(A) reduced the same, whereas t....
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....entrate and hence, assessee's profits increased; secondly, the assessee was sole supplier of concentrate to bottlers and thirdly bottlers were sole purchasers of concentrate. 17. He then pointed out to the provisions of section 37(1) of the Act which only talks of wholly and exclusively for the purpose of business, whereas the test applied by Revenue was 'solely' for the purpose of business. Reliance was placed on the decision of Hon'ble Supreme Court in Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC). The Ld. AR makes special reference to pages 3 and 4 of assessment order, wherein the Assessing Officer had noted that for use of trademarks, no royalty was being paid by assessee and at page 14, total expenditure was Rs. 70.40 crores on account of service charges. He then referred to the order of CIT(A) which at page 50 has referred to four debit notes. It was pointed out to the Ld. AR that the last debit note was dated 09.09.2008, which was after the close of year. The assessee pointed out that it had made payments on the basis of debit notes raised and because of agreement between the parties; he admitted that copy of agreement was made available to Assessing O....
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....ibunal in the first round and submissions of assessee and reply of Revenue and assessee's rejoinder to the same and pointed out that it was the plea of assessee that advertisement expenses also benefitted the bottlers. Similarly, service charges also included the benefit to the bottlers. He further referred to the order of the Hon'ble High Court in assessee's own case in Coca Cola India P. Ltd. Vs. ITO and others (2007) 290 ITR 464 (Bom), wherein the Hon'ble High Court has accepted that apart from incurring service charges, the petitioner incurred huge marketing expenses to boost the sales of non-alcoholic beverages which ultimately boosts the sales of concentrate. He pointed out that same simile applied to even service charges. The Ld. AR pointed out that the Tribunal acknowledges that the assessee had not furnished full details before the Assessing Officer, but details were filed before CIT(A) and hence the matter was restored back to substantiate the claim of expenditure with evidences. However, the Hon'ble High Court has set aside the matter back to the file of Tribunal. The Ld. AR stressed that for assessment year 1998-99, complete evidence was filed before the CIT(A) and from....
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....0445 (Bom), wherein expenses incurred on wife of Managing Director was allowed. He pointed out that expenses were for conference at Phuket and also referred to the assessment order of CCI Inc, placed at pages 85 to 97 of Paper Book Volume-2. He also pointed out that the year of admissibility of expenses was not relevant where the rate of tax was same. He placed reliance on the following decisions: i) CIT Vs. Excel Industries Ltd. reported in 358 ITR 295 (SC) ii) CIT Vs. Nagri Mills reported in 33 ITR 681 (Bom) 20. He then referred to credit note received and unaccounted for in assessment year 1999-2000 and it was pointed out that if in assessment year 1998-99 it was denied, then in assessment year 1999-2000, the same was to be allowed. He however, pointed out that this entire exercise was futile as per order of Hon'ble Supreme Court and the Hon'ble High Court. He stressed that credit note was to be charged when received. He invited our attention to the breakup of expenses. He then referred to page 139 of Paper Book Volume-I to point out the breakup of Rs. 63.19 crores accounted for by CCI Inc as on 31.03.1998, which also included depreciation of Rs. 4.87 crores on which ma....
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.... total service charges charged were Rs. 63.19 crores. Our attention was drawn to item No.1, 2, 3 and 5 of said list and stressed that CCI Inc. had not provided complete details and even the breakup of expenses was not available with assessee. Where the services had overlapped and the assessee was not able to substantiate services, then allocation key had to be applied. He stressed that onus was upon the assessee to give details where it specifically states that expenses were incurred wholly and exclusively for its business purpose. The Ld. CIT-DR questioned that what precluded / prevented the assessee from filing complete details. He then referred to four debit notes filed by assessee, wherein three were for this year and last one was dated next year. He said that from the perusal of debit notes, the nature of services and for what purpose had not been established. Further evidences by way of vouchers were not filed by assessee. Referring to bottlers agreement between TCCC and assessee, then another agreement between TCCC and bottlers and service agreement between assessee and CCI Inc, he referred to RBI's letter dated 28.02.1997 where CCI Inc was permitted to open office in Ba....
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.... of concentrate was concerned, as the same had to be sold to bottlers as prescribed by TCCC. Further, the assessee had no role to take any business decisions. 26. The Ld. CIT-DR then referred to agreement between bottlers and TCCC (page 39, Vol.III) and pointed out that under clause 6, obligations of bottlers are provided and under clause 7 it is provided that amounts could be spent for advertising and marketing and then he referred to other clauses of said agreement. He then summarized the same and stated that bottlers were under obligation to carry out advertising and marketing and also to maintain hygiene. He thus, emphasized that in view of various terms / clauses agreed upon between TCCC and bottlers, it was not necessarily incumbent upon the assessee to incur expenditure relating to Bottlers. 27. The Ld. CIT-DR then referred to para 55 of order of CIT(A) for assessment year 1998-99 and pointed out that the conclusion was as under:- a) Cost incurred by CCI Inc. was not being monitored by assessee at any level; b) Payment being made without verifying anything, simply on the basis of debit notes; c) Assessee was reimbursing whatever parent company was charging. d) No m....
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.... f) Swadeshi Cotton Mills Co. Ltd. Vs. CIT (1967) 63 ITR 57 (SC) for the proposition that question of expenditure made wholly and exclusively for business, to be decided on facts of the case. g) CIT Vs. Amalgamation Pvt. Ltd. (1997) 226 ITR 188 (SC) for the proposition that there must be nexus between nature of expenses and business of assessee. h) Lachminarayan Madanlal Vs. CIT (1972) 86 ITR 439 (SC) for the proposition that mere existence of agreement was not sufficient to prove that expenses were wholly and exclusively incurred for the purpose of business. i) Chemaux (P) Ltd. Vs CIT (1977) 109 ITR 705 (Bom) for the proposition that for deduction under section 37 of the Act, burden of proof always lies on assessee. j) Premier Breweries Ltd. Vs. CIT (2015) 372 ITR 180 (SC) for the proposition that mere existence of agreement between assessee and selling agent does not bind the ITO that payment was made exclusively and wholly for business; it was open to ITO to consider relevant facts. k) Dhimant Hiralal Vs. CIT (2015) 64 taxmann.com 177 (Bom) for the proposition that explains the expression 'wholly and exclusively' as used in section 37(1) of the Act. 30. The Ld. ....
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....s made to para 3(d) of agreement, wherein the assessee could sell concentrate only to authorized bottlers. Then the assessee pointed out that in Service Agreement between CCI Inc and assessee, under clause 5, reference is to any of the subsidiary companies including authorized suppliers. Under clause 6, it talks of 'actual cost'. In this regard, he pointed out that where the Auditor had certified that expenses were incurred, then the same had to be allowed. Referring to arguments of Ld. CIT-DR on services to group companies other than assessee, pointed out that same was raised in the first round before Tribunal and there was no adverse finding. Referring to order of Tribunal in the first round dated 31.03.2010 placed in Paper Book-2 at pages 101 to 194 with special reference to pages 138 to 140, the Ld. AR made reference to the submissions of Ld. CIT-DR in the first round of appeal. However, during the course of hearing itself, attention of Ld. AR was drawn to para 76 at pages 162 and 163 of said Paper Book-2, wherein the decision was given with regard to both claim of marketing expenses and service charges, wherein the issue of service charges was remitted back to the file of Asse....
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....available to the Assessing Officer. He then referred to para 5.3.4 at page 26 of CIT(A)'s order and reiterated that for this year, it was case of 100% disallowance by Assessing Officer. Where the assessee did not furnish evidences, so after holding that no supports were filed, CIT(A) held that some expenses related to assessee though assessee produced vouchers of June, 1998 and March, 1999 only. Referring to letter of approval from RBI, which allowed CCI Inc to open branch office in order to give services to group companies, the Ld. CIT-DR pointed out that basic details of services to group companies have not been given. He then took us through various paras of the order of CIT(A) starting from para 5.4.2 to 6.1.1 and placed strong reliance on the said findings of CIT(A) with regard to various expenses claimed by assessee. At page 45 of order of CIT(A), it is noted that assessee had filed 19 box files before the CIT(A). Coming to the conclusion of CIT(A), wherein he had held that loss on sale of assets needs to be disallowed but allowed expenditure to the extent of 70%. It was then stressed that loss on sale of asset was capital loss, which belonged to the owners and had to be writ....
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....l income. He stressed that DEPP was notional and would arise when exports happen. So, the Hon'ble Apex Court had decided the year of taxability. However, income in the hands of assessee had to be determined vis-à-vis year to which it is related. He stressed that this was the second round of appeal and the issue which is to be addressed is whether the vouchers were adequate enough and also whether vouchers asked for by Assessing Officer and CIT(A) have been filed. He also pointed out that this issue had been left open by the Hon'ble High Court for the Tribunal to decide. 36. The Ld. CIT-DR concluded by pointing out that the assessee was not entitled to the claim of expenditure because of following propositions:- i) Where the assessee has not been able to produce any of original vouchers except four debit notes; ii) where the assessee has not been able to produce any evidence of nature of services and evidence of services provided; iii) Under Rule 29, request was made that assessee be directed to produce vouchers; however, assessee fails to produce vouchers, then stand of Assessing Officer disallowing expenses be upheld; iv) It has to be taken into fact that w.e.f. as....
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....nd decisions of lower authorities in assessment year 1999-2000. 40. The Assessing Officer during the course of scrutiny proceedings noted that the assessee had debited service charges amounting to Rs. 45,27,29,472/-. During the course of scrutiny proceedings, the assessee stated that total debit on account of service charges at Rs. 54,22,93,800/-. The details of debit / credit notes raised by CCI Inc are available at page 12 of the assessment order. The Assessing Officer noted that details of Rs. 54.23 crores included debit note dated 14.12.1999 amounting to Rs. 8,95,64,328/- which was not raised during the relevant assessment year and hence, the same could not be considered as expenditure incurred during the relevant assessment year, where the assessee was following mercantile system of accounting. The assessee was specifically asked to explain the details and nature of services rendered along with evidences of rendering the services by CCI Inc. In the written submissions, the assessee stated that various services as mentioned in service agreement were rendered by CCI Inc to the assessee. Regarding evidence of services rendered, the assessee gave the following note:- "Evidence:....
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.... was not the liability of assessee, then the contention of assessee in this regard was not accepted as the assessee had not provided any services and hence, there was no liability for payment of service tax and it was disallowed. Regarding remaining service charges of Rs. 35,12,09,987/-, the assessee during scrutiny proceedings was asked several times to produce the details of services rendered. However, the assessee emphasized on service agreement for allowability of expenditure. Since the details filed by assessee company in this regard were only general in nature, the Assessing Officer rejected the claim of assessee and disallowed expenditure of Rs. 35,12,09,987/- (Balance). 42. The CIT(A) referred to his earlier order in assessment year 1998-99 in which 25% of service charges was disallowed on examination of various nuances of the issue. He further observed that enquiries made and the decision arrived at in the appellate order for assessment year 1998-99 were largely relevant even for the present assessment year. After noting the clauses of amended agreement dated 01.04.1997, the CIT(A) referred to various clauses of amended agreement and was of the view that service agreement....
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....panies in India. Vide para 5.4.3, the CIT(A) observed that even during appellate proceedings, the assessee in spite of repeated opportunities having been provided, did not submit even basic details of the nature of services, along with verifiable evidence, rendered by CCI Inc to the other business entities covered by new service agreement. Even the basis for allocating service charges to entities of the group other than assessee by CCI Inc were not made available. Only in the submissions dated 27.11.2003, the assessee submitted names of 13 employees who were providing services to HCCBPL but from the discussion it further transpired that HCCBPL was initially being provided services by 13 employees of CCI Inc and thereafter, HCCBPL recruited about 140 employees from CCI Inc. The assessee filed a list of names of 140 employees transferred from CCI Inc to HCCBPL but failed to specify as to what services were being provided by these employees to the assessee earlier. 43. The assessee also on 27.11.2003 furnished reply as to the space occupied by the Department that rendered services to HCCBPL during assessment year 1999-2000 and out of total area of 88,000 sq.ft., 16,000 sq.ft. was bei....
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....ge of disallowance out of service charges. Another item of expenditure was loss on sale of assets. The CIT(A) held that the said amount is not allowable as it would be required to be set off against block of assets and depreciation re-worked and hence, disallowance of Rs. 36,14,397/- was warranted. He thereafter, estimated reasonable disallowance out of total expenditure i.e. 30% of service charges claimed as against 25% in assessment year 1998-99. He thus, worked out the expenditure to be disallowed in the hands of assessee at Rs. 16,22,50,083/- as per calculation at page 49 of appellate order. 44. Both the assessee and Revenue are in appeal against the order of CIT(A). The assessee is agitated by disallowance of Rs. 16,22,50,083/-. The Revenue is in appeal against the relief given by the CIT(A). 45. We have heard the rival contentions put forward by both the Ld. ARs and have also gone through written submissions, reply and rejoinder filed by them including the case laws. The issue which arises in the present appeal is consequent to the order passed by the Hon'ble High Court in assessee's own case. This is second round of litigation. Considering the facts and issues, wherein the....
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....nch of five Judges of the Supreme Court in the case of Indian Aluminium Co. Ltd. (supra). 18.2 In the case of Travancore Titanium Product Ltd. (supra), the test adopted by the Supreme Court was that 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business'. 18.3 In the case of Indian Aluminium Co. Ltd. (supra), the above test was qualified by stating that if the expenditure laid out by the assessee was 'incidental' to the carrying on of his business, it should be allowed. In other words, the requirement of a 'direct and intimate connection between the expenditure and business' was substituted by 'expenditure being incidental to the carrying on of business'. 18.4 It is seen that the expression 'wholly and exclusively' used in s. 37(1) of the IT Act, 1961 was the subject-matter of discussion by the Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC). In this case, the Court held that the expression "wholly and exclusively" used in s. 10(2)(xv) of the IT Act, 1922 [s. 37(1) of the IT Act, 1961] does not mean "necessarily", that ordinarily it was for ....
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....iness'. The two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earning the profits of the business. This is established by the decision of the Supreme Court. Subba Rao, J., speaking for the Supreme Court, observed in CIT vs. Malayalam Plantations Ltd., "The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits........" The law directs attention to the purpose for which, and not to the motive with which, the expenditure is incurred." 18.7 Both the parties referred to the recent decision of the Supreme Court, in relation to s. 37(1) of the Act, in the case of S.A. Builders Ltd. vs. CIT(A) (supra). In this case the Court held as under : "35. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably clai....
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....not gone into that reasoning but had made disallowance for the reason that it did not relate to that year. Vide para 23, the Tribunal notes that in earlier order dated 05.10.2005 the Tribunal had given clear finding that Rs. 3.37 crores related to earlier years and had to be excluded. This finding of Tribunal was noted by the Hon'ble Bombay High Court in para 25 of its order and was not reversed; therefore, they confined themselves to disallowance of balance Rs. 7.42 crores (para 23). The Tribunal thus, held as under:- "24. We find that TCCC, USA is a multinational company operating in more than 150 countries through its subsidiaries. The three agreements, mentioned above, are part of the 'business model' chosen by TCCC. The subsidiary companies like the CCI Inc. and the assessee are independent entities for the purpose of the IT Act, 1961. In such a situation, an expenditure incurred by one company may sometimes directly and/or indirectly benefit more than one group company. There will be inter se purchases and sales at rates carefully worked out after taking into consideration various factors. The Courts have laid down clear guidelines for determining the allowability of expens....
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..... 27. Shri Kapila the learned Departmental Representative, reiterated that it was the TCCC which was doing business in India, and that the assessee was merely a captive contract manufacturer and supplier of concentrate. 27.1 Shri Dastur, the learned Authorised Representative, responded by saying that the learned Departmental Representative had made an altogether new case, that if what was contended by the learned Departmental Representative was accepted the entire expenditure claimed by the assessee would have to be disallowed, which even the AO had not done. He argued that it was not open to the Tribunal, at this stage, to consider all that the learned Departmental Representative had argued. He insisted that, in the present proceeding the Tribunal had to confine itself to the directions given by the High Court. 28. Now, coming to the specific issues mentioned above, it is, no doubt, true that the services rendered by the CCI Inc. to the bottlers did benefit the business of the bottlers. It is also true that these services benefited TCCC-surely a group company, in enhancing its brand image in India. But it is equally true that these services benefited the assessee company.....
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....er, assessee was carrying on three divisions, but from 01.01.1998, the assessee has stopped its Bottling Division and was only engaged in the manufacture of concentrate. Hence, the services which were rendered by CCI Inc to bottlers have no nexus to the services provided by assessee and there was no basis for CCI Inc to charge total cost of its operations to assessee. Further, proceedings for assessment year 1997-98 were on the premise that expenses do not relate to that year. In the present year, case of Revenue is at variance wherein the assessee was given an opportunity to explain justification for the allowability of expenditure along with evidences thereon (page 14 of assessment order), where the assessee was time and again asked to give breakup of expenditure with supporting vouchers. 50. Another aspect which was also raised by Revenue is that in later years, CCI Inc has also entered market on account of green tea and Kinley water and the said items had no relevance to the concentrate manufactured by assessee and consequently, service charges for such services should not be charged to the assessee. The assessee had objected to the pleadings of Revenue in this regard and has ....
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....nical know-how, services and assistance to assessee in all its manufacturing operations including its manufacture of products in Cans and Pet bottles, which included not only technical advice and guidance in the manufacturing operations, but also assistance and monitoring quality of finished goods and package in particular, Cans and Pet packages. Clause 3 talked of marketing support to assessee which included development of marketing strategy and other ancillary activities relating to selling of products. Under clause 4, accounting assistance was to be provided to assessee including planning, costing and monitoring of transactions with bottlers. Clause 5 provided that CCI Inc had no authority to negotiate or conclude contracts, in any form or manner, for or on behalf of assessee or any of the subsidiary suppliers, without prior approval of assessee. Clause 6 related to consideration for services provided by CCI Inc, wherein it was agreed that fees shall be paid on the basis of invoices issued by CCI Inc and fees to be paid shall be calculated on the basis of actual costs incurred by CCI Inc in providing such services plus mark up of 5%. 54. For entering into this agreement, approv....
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....red by CCI Inc was not monitored at any level by the assessee company. The vouchers were maintained by said concern at Delhi only and the payments were made without verifying anything but on the basis of debit notes. The Finance Manager of assessee company also stated that only debit notes for 9 months were with the assessee company and nothing further was taken by assessee company. On this ground, the CIT(A) was of the view that service charges were not incurred wholly and exclusively for the purpose of business of assessee company on two accounts i.e. non furnishing of details and also CCI Inc by its very genesis was required to take care of interest of parent company as well as bottling units / entities including HCCBPL. Reference was made to information submitted by assessee under which Branch office was set up in India in October, 1994 and the communication to RBI in this regard, under which parent company CCI, USA was to provide support services to licensed bottlers of Coco-Cola in India. Hence, the Branch Office was meant to provide services to licensed bottlers to build up quality and goodwill of TCCC Branch besides rendering services to assessee company. Since these aspect....
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....ul. Vis-à-vis reimbursement of expenses incurred for training of CCI Inc employees for International Laws relating to 'Brand' and 'trade marks', it was observed that they were not business expenses of assessee. 58. Expenditure on foreign travel of spouses of Rs. 21,50,348/- was also noted by CIT(A) including expenses of various employees for giving technical support to the bottlers. The CIT(A) acknowledged that CCI Inc to provide services to assessee, as the assessee did not have human resources and administrative infrastructure and these services had actually being provided, but he held that the entire expenditure was not for the business of assessee as the assessee had failed to file the details / vouchers and also services were being provided to bottlers and other group companies. The breakup of expenses (headwise) was filed before the CIT(A) as per letter dated 21.02.2002 and the CIT(A) in final analysis disallowed 25% of service charges in assessment year 1998-99. 59. In such scenario, the question which arises is whether there is any justification in the order of CIT(A) in making disallowance to the extent of 25% of service charges. This is the issue in assessment ye....
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....As against breakup of Rs. 63.19 crores, assessee had booked expenditure of Rs. 70.40 crores. The basis for booking expenditure are four debit notes, details of which are as under:- Date Amount 30.01.1998 48,25,08,612 30.01.1998 26,14,908 30.01.1998 98,10,668 09.09.1998 20,91,39,800 Total 70,40,73,988 62. So, as against expenditure of Rs. 70.40 crores, assessee in assessment year 1998-99 had filed vouchers for the months of June, 1997 and March, 1998. The description in the debit notes was expenses incurred for services provided for the period 01.04.1997 to 31.12.1997, under the terms of service agreement, plus markup of 5%; for the last debit note dated 09.09.1998 expenses incurred for services provided for the period 01.04.1997 to 31.03.1998. The assessee had also filed tabulated details (debit notes wise) of reconciliation of service charges between assessee and CCI Inc. For assessment year 1998-99, CCI Inc had credited service charges of Rs. 63,19,94,114/- and the assessee had on the other hand, debited expenditure of Rs. 70.40 crores. On reconciliation, the Ld. AR pointed out that sum of Rs. 5.04 crores was charged by CCI Inc during assessment year 1997-9....
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....nario, proceedings for assessment year 1997-98 have attained finality and the order of Tribunal has been passed, hence expenditure relating to assessment year 1997-98 to the extent of Rs. 5.04 crores is not allowable in the hands of assessee. We follow the principle laid down by Tribunal in assessment year 1997-98 vide para 93 of the order. The Ld. AR for the assessee placed reliance on CIT Vs. Excel Industries Ltd. (supra) for the proposition that where rate of taxes was same, it can be allowed in any year. The said decision was on rate of taxes to be applied on duty free imports and has no relevance to present issue, where assessee is following mercantile system of accounting and receipts for the year had to be considered. Also issue stands covered against the assessee by order of Tribunal in assessee's own case for assessment year 1997-98, on which issue no appeal was filed before higher Forum. 64. Now coming to next sum of Rs. 2,16,41,969/-, which admittedly is an amount overcharged by CCI Inc and the same has been debited by CCI Inc in its hands in assessment year 1998-99. Following the principle of accounting on mercantile basis, the said amount is also to be reduced from to....
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....m the return of income filed by CCI Inc with the Income Tax Authorities that in the computation sheet as against depreciation debited of Rs. 8.67 crores, depreciation claimed as per IT Act was Rs. 10.07 crores. The Assessing Officer observed that CCI Inc had claimed depreciation as per IT Act at Rs. 10.07 crores and had also claimed reimbursement of depreciation at Rs. 8.67 crores from the assessee. The Assessing Officer in view of provisions of section 32 of the Act held that reimbursement of depreciation could not be entertained as the assessee was not owner of depreciable assets. Secondly, the assessee had also claimed reimbursement of expenditure on account of payment of service tax which was to be paid by CCI Inc to Excise Department at Rs. 1.47 crores. Since service tax was liability of service provider, as per provisions of Service Tax Act, and where the assessee had not provided any services, the said claim was also not accepted. Vide para 5.10.2, the Assessing Officer notes that during scrutiny proceedings, assessee was asked several times to produce details of services rendered. The assessee was specifically asked to produce evidence of services rendered but the assessee ....
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....upport services to assessee company and HCCBPL but specific details were not filed and in the absence of basic details, the CIT(A) held that claim of assessee was not verifiable. The CIT(A) in final analysis held that all the expenditure incurred by CCI Inc with markup of 5% could not be the business expenditure of assessee company as the same was not incurred wholly and exclusively for the purpose of business of assessee in actual practice. The CIT(A) admitted that cost relating to coordination between assessee and bottlers was allowable business expenditure of assessee, but this line of argument could not be stretched to include cost of services directly rendered to bottlers by CCI Inc. Vide para 5.6.9 at pages 44 and 45, the CIT(A) acknowledged that assessee had furnished vouchers in 19 box files before the Assessing Officer and similarly, vouchers were produced before him. However, examination of vouchers, fortified decision taken in assessment year 1998-99 and it was held by CIT(A) that expenses claimed under the garb of service charges were not allowable as per law as business expenditure under different provisions of the Act. The CIT(A) stressed that expenses of the nature s....
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....ent Fund and other funds was Rs. 1.70 crores. The Assessing Officer and CIT(A) have time and again referred to services rendered by CCI Inc to assessee and to other concerns including providing services to HCCBPL with which it had entered into separate agreement w.e.f. 01.08.1997. In view of the separate agreed terms between CCI Inc and HCCBPL, under which it was providing services to the said concern, the cost relating to the said concern cannot be full responsibility of assessee. The case of assessee first, on the other hand is that the said expenditure can be attributable to the assessee as concentrate which is prepared by the assessee was in turn, supplied to the suppliers, who made beverages from the same and increased sale of beverages was increased sale of concentration. We find that the onus was upon the assessee to justify expenditure, but same has not been fully discharged by assessee. 71. Coming to the next head of expenses, wherein expenditure of Rs. 2.81 crores has been debited on account of moving and re-location, travelling expenses to the tune of Rs. 11.12 crores and consultancy charges of Rs. 1.84 crores with rent of Rs. 5.10 crores, telephone expenses of Rs. 5.80....
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....in the books of account. In such scenario, the issue which arises is whether the disallowance of entire expenses is to be made in the hands of assessee or part of expenses as made by CIT(A). The Revenue is in appeal from assessment year 1999-2000 onwards and has opposed the order of CIT(A) in restricting disallowance to a percentage. 73. Before proceeding further, we may look at the legal precedents relied upon by both the Ld. ARs before us. 74. It may be pointed out that majority of reliances on case laws which were considered in the hands of assessee in earlier year and on the basis of said decisions, though the expenditure has been allowed in entirety in assessment year 1997-98, but the facts of present case are at variance to the extent that in assessment year 1997-98 the Assessing Officer had raised the issue of non-furnishing of item-wise, date-wise details of payments and evidence / details of services rendered by CCI Inc to the assessee, which were not furnished. The Tribunal vide para 21 of its decision notes that the Assessing Officer on this reason / ground had not made any disallowance. However, entire disallowance was made by Assessing Officer for the reason that it ....
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....ring of concentrate, was also engaged in bottling activity which has been discontinued by assessee w.e.f. 01.01.1998. The assessee had Pet & Can unit, Ahmedabad unit, Goble Contract Packing Unit at Tarapore and units situated at various places. In such scenario, the question which arises is that in case activity carried on by CCI Inc not only benefits the assessee but also benefits bottlers, then whether such expenditure is to be allowed as deductible in the hands of assessee, especially where the assessee had discontinued its bottling business. The Ld. AR has time and again stressed that the issue stands covered in favour of assessee by the order of Hon'ble High Court in Coca-Cola India Pvt. Ltd. Vs. CCE (2009) 226 CTR 221 (Bom) for the proposition that even if some benefit arises to the bottlers, but since it increases the profits of assessee, as increased sale of drink means the increase in sale of concentrate, then such expenditure is to be allowed in the hands of assessee. 77. In this regard, we may refer to the order of Hon'ble Bombay High Court in DCIT Vs. Coco Cola India Pvt. Ltd. in Income Tax Appeal No.1159/2011, order dated 04.09.2014. The said appeal has been filed by ....
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....n each case whether the amount claimed as deductible was laid out wholly and exclusively for the purpose of such business and if the fact finding Tribunal comes to the conclusion on evidence, to give finding, then it will become admissible deduction. He further referred to the said decision of Hon'ble Supreme Court in the said case and pointed out that it was concluded by holding as under:- "Thus in cases like the present one in order to justify deduction the sum must be given up for reasons of commercial expediency; it may be voluntary, but so long as it is incurred for the assessee's benefit the deduction would be claimable." 79. Now, coming to the next reliance of the Ld. AR in CIT Vs. Royal Calcutta Tuft Club (supra), wherein also similar proposition following CIT Vs. Chandulal Keshavlal & Co. (supra) was laid down and it was held that any expenditure to be held to be wholly and exclusively for the purpose of business must be for reasons of commercial expediency; it may be voluntary but incurred for assessee's business; and if the expenditure is incurred for the purpose of business of assessee, it does not matter that the payment also enures to the benefit of third p....
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.... and publicity expenses are akin to marketing expenses and hence, this proposition cannot be extended for deciding the issue of allowability of service charges paid by assessee, which admittedly are paid as per terms of agreement entered into between the parties and the said terms very clearly provided that the assessee is to reimburse the actual cost incurred by CCI Inc in this regard. 82. Similarly, the decision in CIT Vs. Adidas India Marketing (P.) Ltd. (supra) was on advertisement expenses. The proposition which has been raised is with regard to the term 'wholly and exclusively' used in section 37 of the Act and would it mean necessarily for the purpose of business. The Hon'ble Delhi High Court in this regard held that it was for the assessee to decide whether any expenditure should be incurred to facilitate its business activities. The Hon'ble High Court further held that for deciding the said issue, the purpose of business is to be considered and looked into having regard to the realities of business from the point of view of a prudent businessman. 83. The Ld. AR further placed reliance on the decision of CIT Vs. Samsung India Electronics Ltd. (2014) 42 taxmann.com 498 (De....
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.... 37(1) of the Act cannot be disallowed. The Hon'ble High Court categorically observed that there can be no dispute with the above proposition but in the facts of said case it was observed that expenditure incurred was personal in nature and benefit of such expenditure and there was incidental benefit, if any to carrying on of the profession. The Hon'ble High Court held that thus, it was not expenditure which could be said to be incurred wholly and exclusively for the purpose of business. Addressing the plea of Ld. AR in the said case that some part of expenditure may be allowed as being incurred for professional or business purpose, the Hon'ble High Court held that The words used in Section 37(1) of the Act is wholly and exclusively for the purposes of business. In this case, the finding of fact is that it is incurred for the personal purposes. Be that as it may, the words used are "wholly and exclusively for the purposes of business or profession". In normal understanding the word "wholly" would mean entirely and the word "exclusively" would mean solely. Thus, any element of expenditure not laid out entirely and solely for the purpose of profession would not be covered by Section ....
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....aid are not wholly and exclusively laid out for the business, especially where the payment was made in utter disregard to the value of corresponding goods or services and without any satisfactory explanation for such disregard, the expenditure could be disallowed by Assessing Officer. The Hon'ble High Court further observed that mere fact that the payment has been made under a contract is not conclusive of the expenditure being laid out wholly and exclusively for the purposes of the business. It was further observed as under:- "Once doubts arise about the bona fide nature of the payment, it is necessary to look into all the necessary circumstances such as relationship of the payee to the assessee, the general standards of similar expenditure in comparable business, the true worth of the services or goods in question and so forth." 89. Vide para 14 the Hon'ble High Court observed that it was within the powers of Assessing Officer to consider all the relevant evidences and decide as to what expenditure was attributable to bonafide business purposes and in that event the Assessing Officer would be justified in disallowing the amount paid as not having been wholly and exclusively la....
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....pent and also the claim is bonafide. But once the same is held to be a bonafide expenditure, then it is not in the realm of Assessing Officer to decide what is reasonable quantum of expenditure for the assessee. The role of Assessing Officer is to decide whether the expenditure relates to the business and is wholly spent for the purpose. Thus, in cases where the burden of proof was not completely discharged, the Assessing Officer would be well within his jurisdiction to disallow the expenditure in excess of reasonable limits. Further, reliance is placed on the ratio laid down by the Hon'ble Supreme Court in Swadeshi Cotton Mills Vs. CIT (supra) and Laxminarayan Madanlal Vs. CIT (supra) for the proposition that mere existence of agreement would not make the expenditure as allowable business expenditure. It is incumbent upon the assessee to prove that expenditure incurred had fulfilled the conditions laid down in section 37(1) of the Act. 91. The Hon'ble Supreme Court in later decision in Premier Breweries Ltd. Vs. CIT (supra) has laid down similar proposition that mere existence of agreement between assessee and selling agent would not bind the Assessing Officer that the pa....
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....gh Court that in some cases where section of activities undertaken result in income which were not taxable, would not justify the disallowance of expenditure incurred by assessee for the purpose of its business. (This was the position before introduction of section 14A of the Act). It was further held that but where the portion of expenditure incurred by assessee is in relation to business of another assessee, then the assessee would be entitled to deduction only in respect of expenditure incurred by it for the purpose of his business but not expenditure incurred for the purpose of business of another assessee. 94. Another reliance placed upon by the Ld. CIT-DR was on the decision of Hon'ble High Court of Madras in CIT Vs. C.C.C. Holdings (supra) for the proposition that in Taxing Statute, there cannot be presumption as to the facts. The Hon'ble High Court held that the person who claims the benefit under the provisions of the Act, has to prove before the authorities that it is entitled to the benefit of deduction by placing proper and sufficient material to that effect. In the absence of any such material, the authorities under the Act cannot grant any relief based on presumption....
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.... head-wise, the assessee had failed to even file what was disclosed under the so-called head-wise expenditure. Further even the breakup of expenses was at variance to total claim of expenditure. The learned Authorized Representative for the assessee before us time and again pressed that the issue which had arisen was whether the assessee had discharged the onus cast upon it under the provisions of the Act to justify that the expenditure so claimed was business expenditure wholly and exclusively for the purpose of business of the assessee and whether benefit to bottlers was benefit to assessee. The assessee claimed that the fact that it was earning high income justifies the allowability of expenditure in its hands. The conduct of assessee before the Assessing Officer in initial years was only to file the copy of agreement and copies of debit notes, which in the first year were filed literally at the close of assessment proceedings and no vouchers at all were produced in assessment year 1998-99. Before the CIT(A), vouchers for two months of the accounting period were produced for test check. Similar was the case in assessment year 1999-2000, where 19 box files were filed relating to ....
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....on of fact to be determined by the Assessing Officer. The Tribunal as final fact finding body has thus authority to go into such questions and thus, decide the issue on the facts available on record. The Ld. CIT-DR had time and again stressed that the assessee be asked to produce vouchers before the Tribunal. Be that as may, the assessee before authorities below have failed to do so. 99. The present issue which is arising before us is first, factual issue of nature of expenditure, which were being borne by assessee. The assessee as per agreement, had to reimburse the 'actual cost' with markup to CCI Inc, but those costs should be attributable to the assessee. Merely because there is an agreement between the parties would not be the basis for allowance of expenditure in the hands of assessee. Such is the proposition laid down in the Hon'ble Supreme Court in Swadeshi Cotton Mills Vs. CIT (supra) while deciding the issue of whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of business, pursuant to agreement, held that merely because of existence of an agreement, it cannot be held that the payment was made wholly and exclusive....
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....the assessee to establish that such costs were for the benefit of assessee only. Several opportunities were given to the assessee, but the assessee failed to produce any material that the travelling expenses undertaken by employees of CCI Inc were for the benefit of business of assessee company. Mere furnishing of information/cost and that also partly and making the statement i.e. for the purpose of business of assessee is not good enough to establish the case of assessee. In respect of certain foreign travel expenses, the wives of employees of CCI Inc have accompanied. The Assessing Officer in assessment year 2000-01 has clearly brought on record that the purpose of travel was not for the purpose of business. In such circumstances, merely because the travelling expenses have been incurred by CCI Inc, the same cannot be allowed as business expenditure of assessee, either under the head service charges or reimbursement of expenses. 101. The Hon'ble Supreme Court in Bengal Enamel Works Ltd. Vs. CIT (1970) 77 ITR 119 (SC) while deciding the issue of allowability of business expenditure in a case where the amount was paid to an employee pursuant to an agreement had held it to be e....
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....me, cost has been allocated to the assessee and the same have been paid with markup, we are unable to accept the aforesaid contention of assessee that all claims however, untenable, but once certified by Chartered Accountant or the Directors of the company should be accepted as gospel truth. 105. In the present set of facts, the assessee in assessment year 1998-99 had provided head-wise breakup of expenditure totaling Rs. 60.18 crores, which is reproduced by us under para 60, against which it produced vouchers for the months of June, 1997 and March, 1998 before the CIT(A), but did not give breakup of expenses under each head, especially where the assessee had to reimburse the costs with markup. It may be reiterated that no such vouchers were produced before the Assessing Officer and the copy of agreement dated 01.04.1997 was filed on the last date of completion of assessment proceedings before the Assessing Officer. The assessee time and again had placed reliance on the terms of agreement and the debit notes raised by CCI Inc. The details of debit notes are provided in para 61 of our order and the perusal of the same would reflect that three of debit notes were dated 30.01.1998 an....
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....im, but as that may be, we are considering even debit notes which were issued much after close of accounting period or close of books of account in the year to which it relates, but the onus upon the assessee to give breakup of expenses, including the value of debit notes i.e. total expenses headwise for the year issued later, had not been discharged. First of all, sum of head-wise breakup does not match with final claim made. And secondly, the detailed breakup of expenditure under each head had not been filed; hence not known whether expenditure is capital or revenue in nature. 107. Now, coming to allowability of said expenditure in the hands of assessee, wherein the CIT(A) has carried out further investigation during appellate proceedings both in assessment years 1998-99 and 1999-2000. Not only he has test checked the vouchers of two months in each of the years but has also recorded statements of key persons and has come to a finding that the assessee has never enquired into the nature of claims made under the head 'service charges' by CCI Inc. The said vouchers were maintained at Delhi and the assessee received debit notes nearly at the close of year or even after close of the ....
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.... service charges. In reply, the assessee again referred to the letter dated 23.05.1994 to RBI, under which CCI Inc was to charge services at cost + 5% and also it was stressed that CCI Inc was providing technical support services and assistance to the assessee in its manufacturing operations including its manufacture of products in cans and pet bottles. The assessee then refers to service agreement which was renewed on 09.05.2000, under which it was agreed that in consideration of services provided by CCI Inc, the assessee would reimburse out of pocket expenses incurred in rendering services on production of supportings. Further in addition, the assessee shall pay to CCI Inc fees on the basis of actual cost under certain expense heads incurred by CCI Inc in providing such services + markup of 5% on such actual cost. It may be pointed out that the Assessing Officer notes at page 32 that in support of its claim of expenditure, the assessee furnished copy of agreement and did not furnish any evidence of services actually rendered by CCI Inc. Thereafter, the assessee produced certain box files regarding service charges which were subjected to verification but the assessee was again ask....
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....t business exigencies have been served. 114. However, the assessee did not furnish any information and the Assessing Officer disallowed total travelling expenditure of Rs. 9.59 crores. 115. The CIT(A) while deciding the issue of disallowance of service charges vide para 4 at page 22 onwards asked the assessee to explain as to why service charges paid to CCI Inc for assessment year 2000-01 had shown decline as compared to assessment year 1999-2000. He then observed that pointer to the same was available in the addition of Rs. 9.59 crores made by Assessing Officer in disallowance of travelling expenses. The assessee was asked to submit its explanation on different dates. On each and every date of hearing, the learned Authorized Representative was reminded to submit reasons for lowering of service charges. However, no explanation was submitted. Then as on 12.03.2004 vide order sheet entry, it was noted by the CIT(A) that no explanation on the issue of lower service charges debited during the year has been given, though reference was made to letter dated 27.02.2004 but there was no explanation on this issue. On perusing the Schedule 14, it was pointed out that items like rent, rates ....
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....penses have been incurred by CCI Inc for running business of assessee. The CIT(A) vide para 4.6 notes that expenses referred were in fact expenditure incurred by CCI Inc which have been reimbursed by assessee company to CCI Inc and thus need to be included for disallowance under the head 'service charges' and the total amount had been worked out as under:- Service charges claimed Rs. 52,92,79,422 Less: Debit notes considered in A.Y. 1999-2000 Rs. 8,95,64,328 Rs. 43,97,15,094 Add: Other expenses as discussed Above Rs. 20,52,87,189 Rs. 64,40,02,283 118. The CIT(A) disallowed 30% of said expenses at 19.32 crores on the ground that facts during the year were similar to assessment year 1999-2000. The CIT(A) separately dealt with the disallowance of travelling expenses which were separately disallowed by the Assessing Officer. After considering reply of assessee, the CIT(A) held that travelling expenses were not considered as part of service agreement and since no other contractual obligation was on record to justify the reimbursement of travelling expenses of persons who had travelled to different places for the business of assessee, as well as for the busines....
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....ere the assessee was initially booking all these expenditure under the head 'service charges', then the said method of accounting cannot be disturbed in the absence of any agreement for the relevant period. There is no merit in the plea of assessee that agreement dated 09.05.2000 which was executed after close of the accounting period is effective as per understanding between parties retrospectively from 01.04.1999. We draw strength from the narration of the debit notes for financial year 1999-2000, which talks of Service Agreement and not any understanding between parties and hence, this plea of assessee is rejected. The assessee had time and again changed its stand regarding claim of the expenditure under the head service charges, wherein debit notes were issued nearly to the close of the year and even some, after close of the year and also after filing of return of income. In such scenario, keeping in mind all these facts and circumstances, we find no merit in the claim of assessee for the year under consideration and we uphold the action of CIT(A) in clubbing of reimbursement of expenses and service charges claimed under the head 'service charges' and thereafter making disallow....
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....IT (2012) 340 ITR 190 (Ker), wherein it was held that The appellant's contention that the claim is allowable merely because the payment is made and the same is bona fide cannot be accepted. This is because the payee is a related company within the group and, therefore, the standard of proof required for allowing the claim is more than what is required in other cases. If the payment was to a stranger and bona fide, presumption of reasonableness of payment would apply but not when payments are between related parties. This is because in the case of related companies beneficiaries are the same set of people and therefore, unless details are furnished justifying the payment of services charges, the Department is not bound to allow the claim. On the whole, we find that a liberal approach is taken by the officer and still more liberal were the first appellate authority and the Tribunal because the claim made is sustained at 50 per cent without proof for the service rendered justifying allowance of even so much of the claim. 123. The Hon'ble Bombay High Court in Chemaux (P.) Ltd. Vs. CIT (1977) 109 ITR 705 (Bom) noted the contention of authorized representative that Taxing Authoritie....
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....n by the assessee and non discharge of onus by the assessee to prove that expenditure has been expended wholly and exclusively for the purpose of business especially in the present set of facts where the assessee had even failed to give complete details of expenditure. 125. We may again repeat that the assessee had even failed to give breakup of expenses, for example miscellaneous expenditure and it was difficult to decipher / decide whether under the garb of miscellaneous expenditure any expenditure in the nature of capital or personal expenses or referred to in sections 30 to 36 of the Act, have been debited. One instance which has been pointed out by the CIT(A) is in assessment year 1998-99, wherein security deposit of Rs. 1.30 crores had been written off. The assessee explained that the said write off was in respect of premises taken on lease in Mumbai. But such expenditure claimed by assessee is capital in nature and cannot be allowed as deduction. Reliance placed upon the decision of Richardson Hindustan Ltd. Vs. CIT (supra) is misplaced. Another instance is the travelling expenses which we have referred in the paras above. In this regard we have held that reliance on CIT Vs....
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....ligatory on the part of assessee to prove reasonableness of the amounts spent in order to establish that the claim was bonafide. 128. The present appeals are second round of proceedings before the Tribunal as the issue had been remitted to the file of Tribunal as per the directions of Hon'ble High Court in a Writ Petition filed by assessee. Under the provisions of section 37(1) of the Act, the assessee had to establish (a) reasonableness of expenditure; (b) bonafide nature of any item of expenditure; and (c) quantum to the extent attributable to the business of assessee. Simply because the payment was made in view of the contract was not conclusive proof of expenses being incurred wholly and exclusively for the business of assessee. Undoubtedly, the assessee had entered into an agreement with CCI Inc but CCI Inc also enters into separate agreements for providing services to the bottlers and other entities. The terms of agreement are no doubt, sacrosanct but onus was upon the assessee to establish that what was being reimbursed was the actual cost attributable to it though some part of it enured to the bottlers. The onus was also upon assessee is greater because of the change in te....
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....next aspect of disallowance made in the hands of assessee is in assessment year 2000-01, wherein under the head 'service charges', the assessee had claimed only some of expenditure and the balance was claimed as reimbursement of expenses. The plea of assessee in this regard is that as per the terms of agreement dated 09.05.2000, certain costs are to be paid with markup and other expenditure is reimbursement of expenses on which no markup is charged. The CIT(A) has carried out the exercise and worked out the reimbursement of so-called expenses and added the same to total value of service charges to be considered for making disallowance in the hands of assessee. The agreement dated 09.05.2000 which has been entered into between the parties after the close of year i.e. on 31.03.2000 could not bind the terms between the parties starting from 01.04.1999. Even in the debit notes issued by CCI Inc, there was no mention of any oral understanding between the parties but reference was made to service agreement only, which undoubtedly was the earlier agreement as the next agreement was entered only after the close of the year. We find no merit in the plea of assessee in this regard and we uph....
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....details filed, the Assessing Officer had pointed out that from the breakup of expenses filed, that the same were not relatable to business of assessee. We thus, uphold the disallowance of expenses for which no details were filed i.e. Rs. 9.59 crores (-) Rs. 1.23 crores = Rs. 8.36 crores. Out of Rs. 1.23 crores, we confirm disallowance of 40% of expenses as in the case of service charges. Similarly, in the balance years, the assessee having failed to furnish breakup of travelling expenditure would not entitle it to the said claim of expenditure. Only to the extent the assessee had furnished breakup of travelling expenses, the disallowance is to be restricted to 40% of expenses but where the assessee has failed to give breakup of expenditure itself under the head 'travelling expenses', then the entire expenses needs to be disallowed. With this, we decide the first issue of allowability of service charges in the hands of assessee, reimbursement of expenses and its allowability and travelling expenses and its allowability. 131. The next issue which arises in the present bunch of appeals starting from assessment year 2000-01 is depreciation on coolers. 132. Brief facts relating to the....
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....essing Officer that since the bottling activity had been demerged in another company and the assessee had ceased to be engaged in the business of manufacturing and sale of beverages, then it could not be said that the said coolers were used in the business of assessee. It was also observed by the Assessing Officer that there was no agreement between the bottlers and the assessee for providing coolers to them for running their business activity i.e. sale of cold beverage drinks. In the absence of contractual obligation to incur such huge expenses, assessee's claim of depreciation on coolers was denied and was added back to the total income of assessee. Such an addition has been made in the hands of assessee in assessment years 2000-01 to 2004-05. 134. The Tribunal in the first round had upheld the order of CIT(A) in this regard. However, this matter in one year was recalled by way of Miscellaneous Application and other years by the Hon'ble High Court. The issue has been sent back to the Tribunal. 135. Now, the issue stands before us. During the course of hearing, it was put to the Ld. AR that it must establish its case of fulfillment of conditions of section 32 of the Act. In this....
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....de, then it is only to be made to the extent of addition to the asset. 138. We have heard the rival contentions and perused the record. In order to decide the present issue raised against claim of depreciation on coolers, we need to look at the provisions of section 32 of the Act. The said section very clearly at the outset provides that depreciation on the assets can be claimed by a person who owns the asset and uses the said asset for its business. So, in order to claim the depreciation, these two conditions are paramount conditions which need to be fulfilled in order to be eligible to claim the depreciation on assets. In the case of assessee, in the initial years the assessee was engaged both in the manufacture of concentrate and also had various bottling units and was also manufacturing beverages i.e. cold drinks. So, the assessee had two lines of business in earlier years. In accordance with the needs of its business, it had made investments in coolers which were then placed at the premises of retailer outlets, who were selling the beverages. When the assessee was carrying on the business both as manufacturer of concentrate and as a bottler in its line of business and where t....
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....0 crores, but the Ld. AR for the assessee time and again stressed that the same was not in dispute and it was a fresh issue being raised by the Tribunal. He again stressed that only issue which needs to be decided is whether the asset has been used for the purpose of business. Be that as may be, but we are of the view that the onus was upon the assessee to fulfill both the conditions of section 32 of the Act. First, let us be take up the issue whether the asset was owned by assessee. If we look at the total value of assets owned by assessee, the opening WDV of plant and machinery was only Rs. 3.02 crores and the total value of assets owned including the land and building as on 01.04.1999 was Rs. 8.05 crores. As against which, the assessee in the year had made addition of Rs. 9.50 crores on account of coolers + Rs. 30 lakhs (approx.) (total Rs. 9.80 crores). So, it is incumbent upon the assessee to demonstrate the ownership of said assets by way of purchase invoices, etc. 140. Before proceeding further, we may also take into account the fact that not only in this year but in the subsequent years also, the assessee has made substantial investments in purchase of coolers, which is ap....
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....eement has not been doubted and is not in issue. Due to lapse of time as of today, it has not been possible to locate the other agreements." 144. The question which arises is whether where the assessee is not even in a position to give year-wise placement of coolers with the retailer outlets because of so-called paucity of time and being voluminous and only sample list of retailers in area of Punjab (as of 2015) being filed, can it be said that the assessee had discharged its onus of proving the use of asset. Let us go by the argument of assessee that the said assets were used by the retailer outlets. We will decide this issue whether assets were used by retailer outlets or used by assessee in paras later. But the first condition which needs to be fulfilled is the discharge of onus by assessee to establish that it had purchased the coolers, date-wise and value-wise and placed the said coolers at different locations, which the assessee had not fulfilled. In the absence of the same, merely because the assessee had purchased the assets and had shown the said purchases as addition in its block of assets, the assessee was not entitled to claim of depreciation on such assets. This is th....
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....s. As held in the above paras, the assessee is entitled to claim depreciation on WDV of coolers at Rs. 3.02 crores as on 01.04.1999. 146. Before parting, we may also take support from the ratio laid down by the Hon'ble High Court of Karnatakka in M/s. Fidelity Business Services India Pvt. Ltd. Vs. ACIT & Anr. in ITA No.512/2017, judgment dated 23.07.2018, wherein while addressing the issue of powers of Tribunal, it was held as under:- "64. The powers of the Tribunal are not limited or circumscribed by the grounds raised before it and any order on the subject matter of appeal can be passed if it is found to be necessary, expedient and relevant by the learned Tribunal. 65. Truth being the cherished ideal and ethos of India, pursuit of Truth should be the guiding star of the entire justice system. For justice to be done, truth must prevail. It is truth that must protect the innocent Date of Judgment :23-07-2018 I.T.A.No.512/2017 M/s. Fidelity Business Services India Pvt. Ltd., Vs. Assistant Commissioner of Income-Tax, & Anr. and it is truth that must be the basis to punish the guilty. Truth is the very soul of justice. Therefore truth should become the ideal to inspire the court....