Air Liquide India Holding Pvt. Ltd, New ... vs Assessee

Air Liquide India Holding P. Vs. Income Tax Officer, Ltd. Ward 1(3), C.R. Building, A-24/9, Mohan Cooperative New Delhi 110044 Industrial Estate, Mathura Road, New Delhi- 110044

(PAN AAACA 9121 F)

(Appellant) (Respondent)

Date of hearing : 19.05.2015 Date of Pronouncement 29.05.2015

Appellant by : Shri Ajay Vohra, Sr. Advocate And Ms. Bhavita, Advocate Respondent by: Smt. A. Mishra, CIT, DR.

ORDER

PER SHRI I.C. SUDHIR, JM:

1. The assessee has questioned first appellate order on the following grounds:-

"1. That on the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) ["Ltd. CIT(A)"] has erred in sustaining disallowance of 25 per cent of the total increase in the salary of the managing director under section 40A(2).

2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in sustaining the disallowance of management ITA No.4614/Del /2009 2

support expenses of Rs.43,32,025/- by holding that such expenses falls within the definition of "fee for technical services"and accordingly tax is required to be deducted on the same under the Act.

3. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in sustaining the disallowance of management support expenses of Rs.43,32,025/- on the alternative ground that such expenses have not been justified to have been made wholly and exclusively for business purposes.

4. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that in computing the book profit under section 115JB of the Act, the claim of additional depreciation of Rs.12,84,985/-, arisen as a result of change in the method of depreciation from Straight Line method to Written Down Value, is not justified."

2. At the outset of hearing, the Ld. AR submitted that an application dated

23.03.2012 under Rule 29 of the Income Tax Appellate Tribunal, Rule 1963 for

admission of additional evidence has been moved by the assessee with request to

place on record certain emails made available at Page 199 to 408 of the paper

book filed by the assessee, which demonstrate the nature of service. He submitted

that these documents could not be furnished before the authorities below on

account of technical problem in retrieving the same.

3. The Ld. AR submitted that vide impugned order the Ld. CIT(A) has upheld

the action of the Assessing Officer in disallowing payments amounting to

Rs.43,32,025/- made by the assessee to Air Liquide Asia Pvt. Ltd., Singapore

(ALAP) u/s 40(a)(i) of the I.T. Act on the ground that the same constituted "fee

for technical services" on which tax was to be deducted at source and there was

failure on part of the assessee to deduct tax at source from the above payments. ITA No.4614/Del /2009 3

The Ld. AR submitted that in arriving aforesaid conclusion, the Ld. CIT(A) has

observed that the assessee could not establish nature of services rendered by

ALAP to the assessee. In order to rebut the adverse inferences drawn by the

CIT(A), on the basis of which the above disallowances have been made and in

order to establish that the services rendered by ALAP to the assessee did not

constitute "fee for technical services" the assessee seeks to place on record the

above said certain emails which demonstrate the nature of services received.

4. The Ld. AR further submitted that the payment in question had been made

in consideration of services rendered by ALAP to the assessee pursuant to

Management Support Agreement dated 01.10.2004 ("the agreement") entered

into between the said companies. He submitted that the said agreement was made

available before the Assessing Officer as well as Ld. CIT(A). Neither the

Assessing Officer nor the Ld. CIT(A) has doubted the genuineness or validity of

the agreement. The emails, being presently filed as additional evidences, merely

elaborate the nature of services listed in the agreement.

5. The Ld. AR further submitted that under almost similar facts and

circumstances the Hon'ble Jurisdictional High Court of Delhi in the case of CIT

Vs. Text Hundred India P. Ltd. 239 CTR 263 (Delhi) has upheld the order of the

Tribunal in admitting additional evidence in the form of emails which could not

be produced earlier on account of technical difficulties. The Ld. AR also placed

reliance on the following decisions:

ITA No.4614/Del /2009 4

i) CIT Vs. Virgin Securities and Credits (P) 332 ITR 396 (Del)

ii) CIT Vs. Hewlett Packard India: 314 ITR 55 (Del).

iii) CIT Vs. Chittosoh Motors:11 Taxmann.com 81 (P&H)

6. The Ld. DR on the other hand, opposed the application with the submission

that before the authorities below the assessee had not shown its difficulties in

retrieval of emails to demonstrate the nature of service received. Sufficient

opportunities were afforded to the assessee before disallowing the payments made

by the assessee to ALAP u/s 40(a)(i) of the Act. The authorities below on several

occasions required the assessee to furnish the details to which the assessee failed

to without assigning any reason particularly the reason of non retrieval of the

emails, which the assessee has now raised. In support the Ld. DR referred Page

no.149 of the paper book i.e. copy of the submission filed by the assessee before

the Assessing Officer vide letter dated 27.12.2007 wherein under the heading

details of services along with documentary evidence, the assessee is talking about

few officials of ALAP visits to assessee to support the Management Support

Services and the assessee has not talked about any email which was non retrieval.

In this regard, he also referred contents of Page No.3 of the assessment order and

Pages 128 to 132 of the paper book, which is copy of the submissions of the

assessee filed before the Ld. CIT(A).

7. The Ld. AR rejoined with the submission that payment of Rs.43,32,025/-

was made by the assessee to ALAP on account of services received. He submitted

that the authorities below have denied the claim on the basis that the assessee has ITA No.4614/Del /2009 5

not provided the details of the actual nature of the services received. The Ld. AR

referred Page Nos. 310, 312, 292, 297, 298 and 301 of the paper book to support

his submission that the documents, which are copies of certain emails admission

of which has been sought as additional evidence, demonstrate the nature of

service received. These documents are thus relevant to decide the issue raised in

Grounds No. 2 and 3 of the appeal and for making the just assessment. The Ld.

AR drew our attention to the relevant observations and finding of the Hon'ble

Delhi High Court in the case of CIT Vs. Tax Hundred India Pvt. Ltd. (Supra)

wherein under the similar circumstances the application for allowing the

additional evidence has been accepted.

8. Having gone through the cited decisions of the Hon'ble Jurisdictional High

Court of Delhi in the case of Tax Hundred India Pvt. Ltd. (Supra), we find that

under similar circumstances the Hon'ble High Court has been pleased to approve

the order of the Tribunal to allow such documents to be produced for substantial

cause. The relevant paras 15 thereof is reproduced hereunder:

"15. In the present case the reason which was given by the assessee in support of its plea for admission of additional evidence was that the assessee could not produce these records before the lower authorities due to non retrievability of e-mail on the date because of technological difficulties. This reason was specifically mentioned in the application filed. No reply to this application was filed refuting this averment, though the departmental representative had opposed the admission of the additional evidence. The ground pleaded by the assessee was not confronted. In this backdrop, the Tribunal looked into the entire matter and arrived at a conclusion that the additional evidence was necessary for deciding the issue at hand. It is, thus, clear that the Tribunal found the requirement of the said evidence for proper adjudication of the matter and ITA No.4614/Del /2009 6

in the interest of substantial cause. Rule 29 of the Income Tax (Appellate Tribunal) Rules categorically permits the Tribunal to allow such documents to be produced for any substantial cause. Once the Tribunal has predicated its decision on that basis, we do not find any reason to interfere with the same. As a result, the questions of law are answered in favour of the assessee and against the Revenue resulting into dismissal of these appeals. No costs."

9. In para no. 5 the Hon'ble High Court has observed further that as per Rule

29 parties are not entitled to produce additional evidence. It is only when the

Tribunal requires such additional evidence in the form of any documents or

affidavit or examination of witness or through a witness it would call for the same

or direct any evidence to be filed that too in the circumstances (a) when the

Tribunal feels that it is necessary to enable it to pass orders; or (b) for any

substantial cause; or (c) where the income tax authorities did not provide

sufficient opportunity to the assessee to adduce evidence.

10. In the present case before us, it has not been seriously disputed that the

additional evidence for which the assessee seeking permission for consideration

are relevant to decide the issue raised in Grounds No. 2 and 3 to ascertain the

nature of the services rendered for which payment was made and there is no

reason to disbelieve the explanation of the assessee that these documents could

not be filed before the authorities below due to technical problem i.e. non

retrieval of these additional evidence in the shape of emails in the form of

correspondences in furtherance to the agreement between the parties, showing

nature of the services rendered to the assessee by the other parts of the agreement. ITA No.4614/Del /2009 7

Under these circumstances and to meet the end of justice, we allow the

application and set aside the matter to the file of the AO to decide the issue afresh

as per law, after affording opportunity of being heard to the assessee and

considering the documents available on record including those which have been

made available at page nos. 199 to 408 of the paper book in the shape of

additional evidence.

11. The Ground Nos. 2 and 3 are thus allowed for statistical purposes.

12. The relevant facts are that the assessee company is engaged in the business

of manufacturing and trading of various industrial gases. The Assessing Officer

noted that during the year salary of the Managing Director was increased by

Rs.9,39,323 and additional amount of Rs.10,41,172 had been paid for school fees

of his children. In absence of explanation of the assessee in this regard, the

Assessing Officer observed that effective remuneration of the Managing Director

increased by Rs.19,80,495 is covered under sec. 40A (2)(b) of the Income-tax

Act, 1961. The Assessing Officer disallowed 50% of increase in salary

(including school fee) with this noting that the assessee company did not provide

any justification and explanation for the unusual increase in the salary and perks

of the Managing Director. The same was questioned before the Learned

CIT(Appeals) but the assessee could not succeed.

13. In support of the ground, the Learned AR submitted that the Assessing

Officer had not given any comparable instances before coming to the conclusion ITA No.4614/Del /2009 8

that the salary and perks of the Managing Director paid during the year was

excessive and unreasonable. The Learned CIT(Appeals) has also failed to

appreciate this material aspect of the issue. He submitted further that the

employee had paid tax on entire salary. In this regard, he referred page Nos. 1 to

91 of the paper book i.e. copies revised return of the assessee, audit report and

audited financial accounts of the assessee for the assessment year under

consideration. The Learned AR submitted that payment of school fee was part of

the appointment letter and he referred page No. 146 of the paper book in support.

He placed reliance on the following decisions:

1. Recon Machine Tools (P)Ltd. vs. CIT - 286 ITR 637 (Mad.);

2. CIT vs. Girnar Construction Co. - 261 ITR 463 (Raj.);

3. Abbas Wazir (P) Ltd. vs. CIT - 265 ITR 77 (All.);

4. DCIT vs. Spark Hotels (P) Ltd. - 52 SOT 395 (Del.);

5. Jagdamba Roller Floor Mills Ltd. vs. ACIT - 121 TTJ 761 (Nagpur);

14. The learned CIT(DR) on the other hand tried to justify the orders of the

authorities below on the issue. She submitted that the onus is not upon the

Assessing Officer to justify to enhancement of payment of salary and perks to the

Managing Director during the year. Despite opportunities afforded by the

Assessing Officer, the assessee did not furnish any explanation for the said

enhancement. The enhancement was excessive and unreasonable.

ITA No.4614/Del /2009 9 15. Considering the above submission, we find that in the appointment letter of

the employee, there is provision of bearing of school fee of the two children of

primary and secondary schooling by the assessee company to the limit of 36,000

US $ per year. The dispute however is regarding justifiability of payment of

higher salary and school fee of the children during the year at Rs.19,80,495 in

total. A plain reading of the provisions of sec. 40A(2) of the Act, suggest that for

making the disallowance under the provisions, the Assessing Officer is required

to form an opinion that the claimed expenditure is excessive or unreasonable

having regard to (a) fair market value of the goods, services or facilities for which

the payment is made; or (b) the legitimate need of the business of the assessee; or

(c) the benefits derived by or accruing to the assessee on receipt of such goods,

services or facilities, then the Assessing Officer shall not allow a deduction so

much of the expenditure as is so considered by the Assessing Officer to be

excessive or unreasonable. In the present case before us, when the Assessing

Officer had asked for explanation of the assessee to justify the payment in dispute

in view of the provisions under sec. 40A(2) of the Act, it was duty of the assessee

to cooperate the Assessing Officer to arrive at a just conclusion by furnishing the

required explanation to the Assessing Officer. Even before the Learned

CIT(Appeals), it does not appear that the assessee had furnished the required

explanation to justify the payment. In such a situation, the only option left with

Assessing Officer was to estimate the disallowance taking note of some ITA No.4614/Del /2009 10

comparable instances. No such effort has been made by the Assessing Officer.

The Learned CIT(Appeals) while estimating the disallowance by 25% of the total

increase has noted that it was also not clear as to whether the total turnover and

the profits of the company have gone up substantially, which can be attributed to

the managing director of the company for increasing his salary and emoluments.

Under the circumstances and to the interest of justice, we find it proper to set

aside the matter to the file of the Assessing Officer to decide the issue afresh as

discussed above after affording opportunity of being heard to the assessee. The

ground No.1 is accordingly allowed for statistical purposes.

16. Ground No.4: The Assessing Officer was of the view that the assessee had

claimed excess depreciation of Rs.12,84,985. The assessee tried to justify the

claim on the basis that there was change in the method of computation of

depreciation in order to follow uniform method of providing depreciation keeping

in view the accounting standard issued by the Institute of Chartered Accountants

of India. The Learned CIT(Appeals) did not agree and has upheld the addition

with this finding that the Assessing Officer had relied upon the observations of

the statutory auditor who had clearly stated that profit had been under valued to

the extent of Rs.12,84,985 due to change in the method of depreciation.

17. In support of the ground, the Learned AR submitted that as per the

provisions of sec. 211 of the Companies Act, the account is to be prepared as per ITA No.4614/Del /2009 11

accounting standard (AS6). In support, he placed reliance on the following

decisions:

i) Apollo Tyres vs. CIT - 255 ITR 273 (S.C);

ii) CIT vs. Tidel Park Ltd. - 334 ITR 126 (Mad.)- (SLP filed by the

Revenue dismissed by the Hon'ble Supreme Court in CC 2936/2010 vide order dated 8.3.2010.

iii) Garden Silk Mills Ltd. vs. ACIT - ITA No. 220/Ahd/2008 & 651/Ahd/2009.

Iv ) CIT vs. Hindustan Pipe Udyog Ltd. (2014) - 360 ITR 437 (All.).

v ) DCIT vs. Farmson Pharmaceuticals Guj.Ltd. - 347 ITR 394 (Gujarat)

18. The Learned CIT(DR) on the other hand tried to justify the orders of the

authorities below. She placed reliance on the decision of Hon'ble Madhya Pradesh

High Court in the case of Gilt Pack Ltd. vs. CIT ( copy supplied ), wherein it has

been held that the depreciation, upon change of method, can be claimed

prospectively only from the date the change has been effected.

19. The Learned AR rejoined with the submission that the decision of Hon'ble

Allahabad High Court in the case of CIT vs. Hindustan Pipe Udyog Ltd. (supra)

and of Hon'ble Gujarat High Court in the case of DCIT Vs.Farmson

Pharmaceuticals Guj. Ltd. (supra) are later dated than the decision of Hon'ble

Madhya Pradesh High Court in the case of Guilt Pack Ltd. vs. CIT (supra), hence,

the later decisions will prevail. He submitted further that it is also a trite law that

in absence of the decision of jurisdictional High Court on an issue, the favourable ITA No.4614/Del /2009 12

decision to the assessee of other Hon'ble High Courts will be followed. In this

regard, he cited the decision of Hon'ble Supreme Court in the case of CIT Vs.

Vegetable Products Ltd.- 88 ITR 192 (S.C).

20. In our opinion, it is now an established position of law that when on an

identical issue, different views of different Hon'ble High Courts except the

Hon'ble jurisdictional High Court are available, the view favourable to the

assessee is followed. The accounting standard (AS)- 6 (revised 1994) on changing

from one method of providing depreciation to another, speaks as under:

"15. The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed,. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus is credited to the ITA No.4614/Del /2009 13

statement of profit and loss. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed."

21. The Learned CIT(DR) has cited the decision of Hon'ble Madhya Pradesh

High Court on the issue in the case of Gilt Pack Ltd. vs. CIT (supra). The

Hon'ble High Court has recorded its deviation from the ratios laid down by the

Hon'ble Bombay High Court in the case of Kinetic Motors Co. Ltd. vs. DCIT -

(2003) 262 ITR 330 (Bom.) , only to the extent that, the change from one method

to another has to be prospective. The Hon'ble Madhya Pradesh High Court thus

has been pleased to hold that the depreciation, upon change of method, can be

claimed prospectively only from the date the change has been effected. On the

issue as to whether in view of specific definition of expression "book profit"

given in Explanation to section 115J (1) of the Income-tax Act, 1961, it is

permissible for the Assessing Officer to make adjustment to the book profit

beyond those authorized by the definition and to recast the profit and loss

account?, both the Hon'ble High Courts are in agreement that under the

Companies Act, 1956, both straight line method and WDV method were

recognized.

22. On the issue as to whether, on the facts and in the circumstances of the

case, the departmental authorities and the ITAT were justified in rejecting the

amount of depreciation actually debited to the profit and loss account admittedly

prepared in accordance with Parts-II and III of Schedule-VI to the Companies ITA No.4614/Del /2009 14

Act, 1956, and in holding that the assessee ought to have provided depreciation

on the same basis as adopted in the earlier years?, the Hon'ble Bombay High

Court answered the issue in favour of the assessee, which has been deviated from

by the Hon'ble Madhya Pradesh High Court as discussed above to the extent that

the depreciation upon change of method can be claimed prospectively only from

the date the change has been effected.

23. The Hon'ble Allahabad High Court in its recent decision in the case CIT vs.

Hindustan Pipe Udyog Ltd. (supra) has answered the issue as to whether it is

opened to the Assessing Officer to make adjustment to the book profits beyond

what is authorized by the definition given in Explanation to section 115J of the

Income-tax Act, 1961, if the accounts are prepared and certified to be in

accordance with Parts-II and III of Schedule-VI to the Companies Act, 1956?, in

favour of the assessee. In this regard, the Hon'ble Allahabad High Court has

discussed the decision of Hon'ble Bombay High Court in the case of Kinetic

Motor Co. Ltd. (supra) and followed the decision of Hon'ble Supreme Court in

the case of Apollo Tyre Ltd. (supra) holding that while computing the income

under sec. 115J of the Act, the Assessing Officer has only power to examine

whether the books of account were certified by the authorities under the

Companies Act as having been properly maintained in accordance with the

Companies Act. It is further held that the Assessing Officer thereafter has limited

powers of making increases and reductions as provided for in the Explanation to ITA No.4614/Del /2009 15

the said section. It was further held that the Assessing Officer does not have the

jurisdiction to go beyond the net profits shown in the profit and loss account,

except to the extent provided in the Explanation to sec. 115J of the Income-tax

Act, 1961. In that case before the Hon'ble Allahabad High Court, the accounts

maintained by the assessee were certified by the auditors. The Hon'ble High

Court thus held that the books adjustment made by the Assessing Officer being

contrary to the decision of Hon'ble Supreme Court, the issue was decided in

favour of the assessee. The Hon'ble High Court held further that it is not in

dispute that under the Companies Act, 1956, both straight line method and written

down method are recognized, therefore, once the amount of depreciation actually

debited to the profit and loss account is certified by the auditors, then, the issue

has to be answered in favour of the assessee.

23.1 Similar view has been expressed by the Hon'ble Gujarat High Court in the

case of DCIT vs. Farmson Pharmaceuticals Guj. Ltd. (supra).

24. Since the ratios laid down on the issue by the Hon'ble Bombay High Court

Hon'ble Allahabad High Court and Hon'ble Gujarat High Court in the above cited

cases are favourable to the assessee, we set aside the matter to the file of the

Assessing Officer to decide the issue afresh following these decisions after

affording proper opportunity of being heard to the assessee. The ground No. 4 is

accordingly allowed for statistical purposes.

ITA No.4614/Del /2009 16

25. In the result, the appeal is allowed for statistical purposes.

The order is pronounced in the open court on 29th May, 2015.

Sd/- Sd/- (T.S. KAPOOR) (I.C. SUDHIR) Accountant Member Judicial Member

Dated: 29th May, 2015.

Aks/- Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi