Caparo Maruti Ltd., New Delhi vs Department Of Income Tax

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No.369 & 370 /Del/2013 Assessment year : 2008-09 & 2009-10 DCIT, (LTU), Vs. M/s. Caparo Maruti Ltd., New Delhi 101-104, 1st Floor, Naurang House, 21, K G Marg, New Delhi-110 001 GIR / PAN:AAACC6423G (Appellant) (Respondent)

Appellant by : Shri Gagan Sood, Sr. DR Respondent by : Shri Ved Jain, CA Mrs. Ranu Jain, Adv.

ORDER

PER T.S. KAPOOR, AM:

These are two appeals filed by Revenue against separate orders of Ld. CIT(A) both dated 16.10.2012. Both these appeals were heard together and therefore, for the sake of convenience, a common and consolidated order is being passed. The grounds of appeal taken by Revenue in both these years are reproduced below:

I) I.T.A. No. 369/Del/2013 (Assessment Year 2008-09:

"On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.2,66,16,709/- holding that it was an ascertained liability and not contingent liability."

II) I.T.A.No. 370/Del/2013 (Assessment Year 2009-10):

2 ITA No.369, 370/Del/2013 "On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.9,20,54,942/- holding that it was in ascertained liability and not contingent liability."

2. The brief facts of the case as coming out form assessment orders are that the assessee is engaged in the business of manufacture, job work and trading of sheet metal components and allied components. The assessee is making supplies to Maruti Suzuki India Ltd. and is one of the various vendors. During the financial year ending 31.03.2008 and 31.03.2009, the assessee while finalizing its accounts, reduced its profits by debiting sales and by crediting the account of other liabilities by an amount of Rs.6,37,47,120/- and Rs.9,20,54,942/- in the two years. However, the amount in Assessment Year 2008-09 was reduced to Rs.2,66,16,709/-.The said adjustment was reported in its balance sheets vide notes to account which read as under:

" 16. During the year, company has received amendment to purchase order from MSIL (Formerly MUL) for Model L Components and received payments accordingly. The same is in excess of the price settlement, which is subject to MSIL management approval. Pending final settlement, a provision has been made for different amount of RS.6,37,47,120/- and shown under current liabilities by way of reduction from sale."

2.1 Similar reporting was made in Assessment Year 2009-10 vide note NO.16 which reads as under:

"16. During the year, provision has been made for different amount of Rs.92,054,942/- on account of amortization, price of adjustments etc. against certain models billed to MSIL the same is presently in the process of reconciliation/settlement, hence has been shown under the head 'Other Liabilities' by way of reduction from sale."

3 ITA No.369, 370/Del/2013 2.2 The above adjustment entries were claimed to have been passed on account of downwards revision of provisional prices from the original prices. The assessee had submitted that as per basic price agreement with Maruti, the billing is done on tentative prices and with continuous negotiations the prices are revised upwards or downwards as the case may be.

2.3 The A.O. after raising queries in this regard held that in fact, assessee had created provisions which were unascertained liabilities and therefore, were not allowable and therefore he made the additions.

3. Aggrieved, the assessee filed appeals before Ld. CIT(A) and Ld. CIT(A) deleted the additions by holding as under:

"i) Assessment Year 2008-09:

"During the year under consideration the appellant company has supplied 33,551 car sets to MSIL. A car set consists of 17 parts. These parts were developed by the appellant company and after approval, the tentative rate was fixed for each of the part. The rate fixed initially for 17 parts in aggregate was Rs.6169 per car set. The appellant company accordingly issued sales invoices to MSIL at these rates. Since these were provisional rates subject to adjustment, there were certain discussion between the appellant company and the Maruti Suzuki India Ltd. and after discussion, an interim settlement was reached on 11th February, 2008 where the price was re-fixed at Rs.4269 per car set. Consequent to this, reduction in the price during the year of Rs. 1900 per car set. The appellant company reduced the sales of 33,551 car sets by Rs.6,37,47,867 and finalized its accounts and filed its return of income accordingly. In the Balance Sheet the assessee company disclosed the above fact by way of a note. Since this is an interim settlement after the discussion with MSIL confirmed thereafter and final settlement was done on 8th December, 2008 whereby MSIL allowed benefit of tool amortization etc. with the result this amount of Rs.6,37,47,867 got reduced and the appellant company got the benefit of Rs. 3,71,30,4111- to Rs.2,66, 16,709. The appellant company, accordingly, revised its return by increasing its income by Rs.3,71,30,411.

4 ITA No.369, 370/Del/2013 The Assessing Officer based on the above facts has considered that the sum of Rs.2,66,16,709 is a contingent liability and hence not allowable. The finding of the Assessing Officer, however, is not correct. There is no dispute about the fact that the assessee company has supplied 33,551 car sets to MSIL and the initial rate fixed was Rs. 6169 per car set on the basis of which the appellant company has accounted for the sales and included the same in its income. There is also no dispute to the fact that there was an interim settlement whereby the price was reduced to Rs.4269 per car set consequent to which the sales amount in respect of 33,551 car sets got reduced by Rs.6,37,47,867. Consequent to this the appellant company has reduced this amount while preparing its accounts. There was a subsequent revision . 8th December, 2008 whereby this amount of Rs. 6,37,47,867/- he got reduced to Rs.2,66,16,709. In view of these facts there is no reason for the Assessing Officer to consider that the balance amount of Rs. 2,66,16,709 is a contingent liability. The appellant is a supplier to the MSIL. It has raised invoices as per the arrangement it has with the MSIL. Based on the final settlement the appellant company is required to give a credit of Rs. 2,66,16,709 to MSIL. Thus this is an ascertained liability and not contingent in nature and the Assessing Officer was not justified in disallowing the same. The appellant during the course of the assessment proceedings has filed all details and 21.3evidences in support of its contention. All these documents clearly establish the case of the appellant. As per these details, the facts are quite clear and accordingly I hold that the Assessing Officer was not justified in making an addition· of Rs. 2, 66, 16, 709 and accordingly the Assessing Officer is directed to delete the same."

ii) Assessment Year 2009-10:

"4.3 I have gone through each of the observation made by the Assessing Officer in the assessment order and the clarification submitted by the appellant in this regard. The appellant company has clarified the issues raised by the Assessing Officer about the total liability quantified at Rs.10,09,68,831 as per letter dated 20th December, 2011 which is net of the two figures of Rs. 10,96, 18, 793 and Rs. 86, 49, 962 stated in the letter dated 26th December, 2011.

5 ITA No.369, 370/Del/2013 4.4 The observation of the Assessing Officer that Maruti Suzuki India Ltd. has accounted for only Rs.5,88,00,347 in its account during the assessment year under consideration cannot be read in isolation and against the appellant. It is a matter on record that Maruti Suzuki India Ltd. in response to the notice issued by the Assessing Officer has clarified that it has reduced the purchasing price by Rs. 10,51,49,184 and has increased the purchase price by Rs.2,46,57,919 in respect of the supplies made by the assessee company pertaining to the financial year 2008-09 i.e. assessment year 2009-10 under consideration. Thus there cannot be any dispute of reduction in price of Rs. 8, 05,01,265 (i.e. Rs.10,51,49, 184 - Rs.2,46,57,919) The appellant company has further submitted a clarification about the difference between the· amount of Rs.8,05,01,265 as per the Maruti Suzuki India Ltd. and Rs. 9, 20, 54, 942 as per the appellant's submission. The contention of the Assessing Officer that the upward revision quantified at Rs. 89, 13,888 as per letter dated 2dh December, 2011 and Rs.1,75,63,851 as per letter dated 26th December, 2011, has not been explained is also not factually correct. In fact in the letter dated 2dh December, 2011 the amount is netted of, whereas in the letter dated 26th December, 2011 the gross figures have been stated.

4.5 The observation of the Assessing Officer that the appellant has not taken into consideration the price increase on account of power and transport is also not correct. The appellant has filed letters before the Assessing 'Officer along with evidence to the fact that increase on account of power has been taken into consideration while determining the price and whereas the transportation has been denied by the Maruti Suzuki India Ltd. Further when the Assessing Officer has made an enquiry from the Maruti Suzuki India Ltd. independently and nothing adverse has provided the explanation regarding the difference between Rs. 9, 20, 54, 942 and Rs.8,05,01,265 as stated by Maruti Suzuki India Ltd. It has been explained that this difference of Rs.1, 15,53,677 has arisen since Maruti Suzuki India Ltd. has given a price increase of Rs.81, 76,862 in the financial year 2009-10 and it has been accounted for by the appellant company in the financial year 2009-10 i.e. assessment year 2010-11. It has been further explained that Rs. 62, 07, 060 is the total amortization amount short recovered by Maruti Suzuki India Ltd. which, as per the arrangement, it was supposed to recover from the appellant company. Since Maruti 6 ITA No.369, 370/Del/2013

Suzuki India Ltd. has failed to recover this amount, the appellant company has included this amount in its income in the subsequent year. Further a sum of Rs. 28, 30, 244 is the amount recovered by Maruti Suzuki India Ltd. during the assessment year under consideration which has not been provided for by the appellant company. Thus the difference of Rs.1,15,53,677 has also been fully explained by the appellant company.

4.9 In view of the above facts, the conclusion drawn by the Assessing Officer that the Profit and Loss Account of the appellant is not reflecting the actual nature of the transaction is not correct. The appellant has raised the invoices in respect of the material supplied. These sales have been adjusted by the reduction in prices made by the buyer, MSIL. The observation of the Assessing Officer that these recoveries which were reduced from the sales and hence was not routed through profit and loss account is incorrect. By reducing the sales by the reduction in the prices itself means that the same have been routed through the profit and loss account. The contention of the Assessing Officer that these are inthe nature of provisions and contingent in nature is also not correct. The note appended to the Balance Sheet is by way of a clarification and no adverse inference needs to be drawn on the basis of such note.

4.10 Therefore, in my opinion, the Assessing Officer was not justified in making the above addition of Rs. 9, 20, 54, 942. The appellant being a supplier to Maruti Suzuki India Ltd. is entitled to the price, which are agreed between the two parties. As per the facts analysed hereinabove it is quite clear that the amount provided for by the appellant company was as per of the arrangement which it has with Maruti Suzuki India Ltd. and thus the observation of the Assessing Officer that it is a contingent liability is not correct. In view of these facts, this ground of appeal is allowed."

4. Aggrieved, the Revenue is in appeals before us.

5. At the outset, Ld. D.R. invited our attention to assessment order and submitted that addition in these years was made on account of transactions with M/s. Maruti Suzuki (India) Ltd. It was submitted that the amount 7 ITA No.369, 370/Del/2013

claimed as provisions were not ascertained liability and were contingent in nature and, therefore, the A.O. has rightly made the additions. It was submitted that the nature of provisions being contingent clearly comes out from the fact that in Assessment Year 2008-09, the assessee itself had reduced the amount of provisions from the original amount of Rs.6,37,47,120/- to Rs.2,66,16,709/- and had offered the difference of Rs.3,71,30,411/- for taxation through a revised return which was filed on 01.09.2009 and that too after notice u/s 143(2) was served on assessee on 10.08.2009. Inviting our attention to paper book page 17 item 16, Ld. D.R. submitted that the assessee initially had provided for provision of Rs.6.37 crores which it had reduced to Rs.2.66 crores by way of filing a revised return which clearly shows that the amount of provision was not ascertained liability. Ld. D.R. further submitted that the assessee and Maruti Suzuki Ltd. were related parties as M/s. Maruti Suzuki Ltd. had 25% share in the assessee's business. Highlighting various clauses of supply agreement, Ld. D.R. submitted that the prices were fixed as per the agreement and the goods were supplied and, there was no defect in the goods therefore the reduction in sales price was arbitrary and was be part of overall tax planning. Arguing for Assessment Year 2009-10, Ld. D.R. submitted that though the facts remained similar, in this year also, but in this year, the A.O. had conducted inquiry u/s 133(6) from Maruti Suzuki Ltd. and as per the inquiry, there still remained a difference of Rs.1,15,53,677/- which at least should have been confirmed by Ld. CIT(A) and which he has not done. Ld. D.R. placed reliance on the following case laws:

i) 37 ITR 66 Indian Molasses Co. (Pvt. ) Ltd. Vs CIT 8 ITA No.369, 370/Del/2013

iii) 266 ITR 47 Alembic Chemical Works Ltd. Vs DCIT (Guj.)

iv) 248 ITR 04 Indian Smelting & Refining Co. Ltd. Vs CIT (S.C.)

6. Ld. A.R. on the other hand explaining the facts of the case, submitted that the assessee is a vendor for Maruti Suzuki Ltd. and it is in the business of supplying various parts of cars to Maruti Suzuki Ltd. and the rates fixed for supply of items are at cost plus profit basis and the assessee had made billings to Maruti Suzuki India Ltd. at tentative prices and negotiation for the final prices continued and ultimately lower prices from billed prices were agreed and therefore, the assessee provided for the difference by debit of sales account and credit to other liabilities. It was submitted that in Assessment Year 2008-09 by way of another agreement the prices were revised upwards which necessitated the reduction in earlier provision and that is why the assessee offered the difference for taxation by way of revised return. Explaining the facts of the case Ld. A.R. submitted that in fact these were not provisions and, therefore, there was no question of ascertained or unascertained liabilities. It was submitted that the assessee had reduced sales prices for supply of goods to Maruti Suzuki Ltd. on account of mutual discussions and, therefore, had accordingly provided for the same in the books of account by debit to sales and credit to other liabilities account. Ld. A.R. submitted that the A.O. during investigation u/s 133(6) had observed that still there was difference of Rs.1,15,53,677/- which was again explained to him by way of filing a reconciliation statement, therefore, there was no unascertained liabilities. Ld. A.R. invited our attention to Ld. CIT(A)'s order in both the years and submitted that Ld. CIT(A) has passed the order after taking into account all the facts and circumstances of the case and therefore needs to be upheld. During appellate proceedings before us the 9 ITA No.369, 370/Del/2013

Ld. A.R. was asked to explain as to whether the entries passed on account of revised prices related only to financial entries or excise duty was also recalculated to which Ld. A.R. submitted that he was not aware about these facts but he will file a written note on this point. The said note was filed after the conclusion of hearing on 24.02.2015.

7. We have heard rival parties and have gone through the material placed on record. We find that the assessee supplied material to Maruti Suzuki Ltd. in terms of agreements whereby it billed to Maruti Udyog Ltd. on tentative prices and before finalization of accounts on the basis of continued mutual discussions had reduced the prices and therefore, it revised sales amount to that extent and credited the corresponding amount to other liabilities. During Assessment Year 2008-09, the assessee supplied 33551 car sets comprising of 17 parts to Maruti Suzuki Ltd. at a provisional rate of Rs.6169/- which was got reduced to Rs.4269/- by interim agreement dated 12.02.2008 and, therefore, while finalizing the accounts for 31.03.2008, the assessee had credited an amount of Rs.6,37,47,120/- to the accounts of other liabilities by debiting equivalent amount to sales account. However on 08.12.2008, final settlement took place whereby amount payable under other liabilities was reduced to Rs.2,66,16,704/- and, therefore the assessee revised its return of income and offered the difference of Rs.3,71,30,411/- for taxation. Therefore, from the above, it becomes apparent that amount credited in other liabilities was not due to ascertained or unascertained liabilities but was due to revision in sale prices of goods. Similar is the position in Assessment Year 2009-10 however, the amount involved is Rs.9,20,54,942/- and in that year the amount remained the same as prices after first reduction was not revised upward & moreover in that year, th A.O. 10 ITA No.369, 370/Del/2013

had made enquiries u/s 133(6) also. We note from the facts that this is not a case of ascertained or unascertained liabilities and rather it is a case where after raising bills, further discussion took place between assessee and Maruti Udyog Ltd. and on the basis of further discussions, the prices were reduced and accordingly, the amounts were credited. From the note filed by Ld. A.R. we find that assessee used to raise bills on tentative prices & excise duty + VAT and in case of downward reduction in the basic prices, the assessee used to consider only basic price and vat and did not touch excise as the purchasing party must have taken credit of cenvat. However, while revising the prices upwards the difference in excise duty along-with interest thereon was used to be recovered. The note filed by Ld. A.R. placed in the file is self explanatory. The case laws relied upon by Revenue relate to contingent liabilities which are distinguishable from the facts and circumstances of the present cases.

8. In view of the above, we are in agreement with the findings of Ld. CIT(A) except for findings with respect to difference of Rs.1,15,53,678/-. The difference of Rs.1,15,53,677/- in that year was claimed to have been explained to Ld. CIT(A) by way of a reconciliation statement reconciling the differences.

9. We find that Ld. CIT(A) accepted the reconciliation statement filed by assessee. The difference of Rs.1,15,53,677/- comprised of the following amounts:

i) Price increase given by Maruti Ltd. claimed to have been offered for taxation in succeeding year 81,76,862/-

ii) Short recovery by Maruti Ltd. which it failed to recover and therefore, offered for taxation in succeeding year. 62,07,060/-

---------------

11 ITA No.369, 370/Del/2013 1,43,83,922/-

iii) Amount recovered by Maruti Udyog Ltd. which was not provided by assessee (-) 28,30,244/- --------------- 1,15,53,678/- ---------------

10. The Ld. CIT(A) has given relief of this amount on the basis of simple explanation by assessee and has not got verified from succeeding year whether the said differences were offered for taxation or not. Therefore, in view of the above, we set aside this issue to the office of A.O. for verification of the claim that the said amounts were offered for taxation in the succeeding year.

11. In view of the above facts and circumstances, the appeal for Assessment Year 2008-09 is dismissed whereas appeal for Assessment Year 2009-10 is partly allowed for statistical purposes.

12. Order pronounced in the open court on 04th March, 2015.

Sd./- Sd./- (G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER th Date: 04 March, 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

12 ITA No.369, 370/Del/2013 S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement Sr. PS/PS 7 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order