Jotun Powder Coating (India) ... vs Department Of Income Tax

आयकर अपीलीय अिधकरण, अिधकरण, अहमदाबाद Ûयायपीठ ''C'', अहमदाबाद ।

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, "C" BENCH सव[ौी ौी जी.

जी.सी.

सी.गुƯा, माननीय उपाÚय¢, उपाÚय¢, एवं अिनल चतुवद ȶ ȣ, ȣ, लेखा सदःय के सम¢ ।

BEFORE S/SHRI G.C. GUPTA, VICE-PRESIDENT AND ANIL CHATURVEDI, ACCOUNTANT MEMBER)

ITA No.1778 and 1779/Ahd/2010 [Asstt.Year : 2006-2007]

ACIT, Vapi Circle बनाम/Vs. Jotun Powder Coating (India) P.Ltd.

Vapi. 204-205, Ascot Centre, Sahar Road Andheri (East), Mumbai 400 099.

CO No.257/Ahd/2010 IN ITA No.1778/Ahd/2010 [Asstt.Year : 2006-2007]

Jotun Powder Coating (India) P.Ltd. बनाम/Vs. ACIT, Vapi Circle 204-205, Ascot Centre, Sahar Road Vapi. Andheri (East), Mumbai 400 099.

(अपीलाथȸ / Appellant) (ू×यथȸ / Respondent)

राजःव कȧ ओर से/ : Revenue by Shri M.K. Singh, Sr.DR िनधा[ǐरती कȧ ओर से/ : Assessee by Shri Sanjay R. Shah सुनवाई कȧ तारȣख/ : Date of Hearing 10th December, 2014

घोषणा कȧ तारȣख/ : Date of Pronouncement 09-01-2015

आदे श / O R D E R

PER G.C. GUPTA, VICE-PRESIDENT: These appeals by the Revenue and the CO by the assessee for the Asstt.Year 2006-07 are directed against the order of the CIT(A). These are being disposed of with this consolidated order.

ITA No.1778 and 1779/Ahd/2010 with CO

ITA No.1778/Ahd/2010 (Revenue's Quantum appeal)

2. The revised ground of the appeal of the Revenue is as under:

"1. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in treating the loyalty commission paid of Rs.65,25,000/- as capital expenditure and directing the AO to allow depreciation on that amount since the AO has rightly disallowed the same as inadmissible expenditure."

3. The learned DR submitted that the loyalty commission of Rs.65.25 lakhs was claimed by the assessee as paid to M/s.PSL Corrosion Control Ltd. ("PSL" for short) vide agreement dated 24.12.2004 for no business purpose, and therefore, was rightly disallowed by the AO. He submitted that the assessee has paid heavy loyalty commission fees before a single sale transaction was entered into by the assessee with "PSL" and it was not clear that why the assessee has clubbed the loyalty commission and consideration it has paid to "PSL" for purchase of machinery. He referred to relevant potions of the assessment order in support of the case of the Revenue. He submitted that this loyalty commission was paid only to single purchaser party i.e. "PSL" and no such commission was paid by the assessee to any other party. He submitted that the purpose of transaction of paying loyalty commission was not established by the assessee. He relied on the order of the AO.

4. The learned counsel for the assessee has opposed the submission of the learned DR. He submitted that the "PSL" is not a related party to the assessee. He submitted that the expenditure in question was incurred for obtaining first preference to supply for PSL's requirements and for getting the status of the most preferred supplier, the expenditure was incurred for business consideration only, and the department should not sit over the judgment of the assessee in this regard. He submitted that it is not the case -2- ITA No.1778 and 1779/Ahd/2010 with CO

of the department that the said commission was not paid to "PSL" and that it was an arm's length transaction. H submitted that "PSL" has purchased about 75% of the requirement from this assessee, and therefore, the payment of commission was justified. He referred to the figure of actual sales made by the assessee to "PSL" in the subsequent years running in cores, which justifies one-time payment of loyalty commission to "PSL". He referred to series of decisions of Hon'ble High Courts including that of Hon'ble Supreme Court in CIT Vs. Dhanrajgirji Raja Narasingirji, 91 ITR 544 (SC) and ITAT, Ahmedabad Bench in Hathiwala Silk Mills Vs. ITO, 19 TTJ 284 (Ahd) in support of the case of the assessee.

5. We have considered rival submissions and perused the orders of the AO and the CIT(A) and also relevant clauses of the agreement of the assessee with "PSL" dated 24.12.2004. We find that in this case genuineness of the payment claimed to have been made to "PSL" as loyalty commission is not disputed. It is also undisputed fact that it is an arm's length transaction. Only dispute is regarding the business purpose of the payment of loyalty commission to "PSL". We find that the assessee has made one time loyalty payment to "PSL" for acquiring the status of most preferred supplier. The assessee's claim that "PSL" has purchased about 75% of its requirement from the assessee alone in the subsequent years, has not been disputed by the Revenue. We find that "PSL" has made purchases from the assessee-company to the tune of Rs.1.60 crores in financial year 2005-06, Rs.2.92 crores in financial year 2006-07, Rs.2.70 crores in financial year 2007-08 and Rs.1.17 crores in financial year 2008-09 (till November, 2008). Considering the high volume of supplies made by the assessee-company to "PSL", it could not be said that the purpose of the said payment of commission could not be established by

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the assessee. It is not abnormal to enter into an agreement with intending heavy-weight purchaser party before entering into actual sale transacton with the said party. The purpose of the payment of loyalty commission was clearly for business of the assessee, and it is not for the department to sit over the judgment of the assessee that how the business has to be conducted and the expenditure incurred could not be disallowed, till it shows that the payment itself was not genuine or was made for some purpose other than the business purpose of the assessee. No valid reason for the said disallowance could be made out by the Revenue. The argument that why the said loyalty commission was paid to "PSL" alone, the same in our view is not sustainable in law. The assessee is not obliged to get deduction of the said payment only by paying to all the customers, but it is entitled to get the deduction for the commission which it has paid to a particular customer, who has made purchases in bulk. In these facts, we are of the view that the amount of loyalty commission paid by the assessee could not be disallowed. However, whether the said payment made by the assessee as loyalty commission to the PSL is capital or revenue expenditure in the hands of the assessee would be adjudicated separately, as the same is an issue in the CO preferred by the assessee. Accordingly, the ground no.1 of the appeal of the Revenue is dismissed.

CO No.257/Ahd/2010 (Assessee's CO)

6. The ground no.1 and 2 of the CO are as under:

"1. The ld.CIT(A) erred in holding that the loyalty commission of Rs.65,25,000/- is a capital expenditure.

2. The ld.CIT(A) ought to have directed the ld.JCIT to allow loyalty commission of Rs.65,25,000/- as revenue expenditure under section 37(1) of the IT Act."

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7. The learned counsel for the assessee submitted that the CIT(A) has erred in holding that the loyalty of Rs.65.25 lakhs was a capital expenditure and has allowed only depreciation on the same, as against the claim of the same as revenue expenditure under section 37(1) of the Act. He submitted that entire amount is paid during the year for business consideration, and is clearly a revenue expenditure. He submitted that although PSL has made bulk purchases in subsequent many years, but as far as the deduction of expenditure is concerned, the same being revenue in nature, has to be allowed as a deduction under section 37(1) of the Act for the relevant Asstt.Year 2006-07. The learned DR submitted that the expenditure of loyalty commission was not allowable to the assessee. He relied on the order of the AO.

8. We have considered rival submissions and perused the orders of the AO and the CIT(A). We find that the CIT(A) has passed a well reasoned speaking order on this issue. The assessee has derived enduring benefits by paying loyalty commission to PSL and has effected sales in crores in the subsequent years to PSL. It is not the case of the assessee that PSL has procured the goods from the assessee-company only for relevant Asstt.Year 2006-07. We find that the assessee is well aware of the fact that by paying loyalty commission, it shall be entitled to enduring benefits for subsequent many years, and PSL will retain as its customer. In these facts of the case, we confirm the order of the CIT(A) in holding that the assessee has paid the amount for enduring benefits for many years, and therefore, it should be treated as capital expenditure and depreciation to be allowed on this amount. Accordingly, the ground no.1 and 2 of the CO of the assessee are dismissed.

9. Ground no.3 of the CO is as under:

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"3. The ld.CIT(A) erred in holding that the bank interest of Rs.3,68,000/- is capital in nature. The ld.CIT(A) ought to have appreciated that the borrowing was made for general corporate use and there was no specific loans taken for purchase of assets."

10. We have heard the parties. We find that the CIT(A) has passed a well reasoned order on this issue. We find that the CIT(A) has recorded in the appellate order that the interest was paid by the assessee before the machinery was actually put to use, and therefore, the same has to be capitalized, and has allowed the depreciation, as applicable. There being no mistake in the order of the CIT(A), the same is confirmed and the ground no.3 of the CO is dismissed.

11. The ground no.4 of the CO is as under:

"4. The ld.CIT(A) erred in not directing the ld.JCIT for quantifying the amount of unabsorbed depreciation."

12. The learned counsel for the assessee submitted that the CIT(A) has not adjudicated the ground no.8 before him related to the issue raised in ground no.4 of the CO of the assessee. The learned DR has relied on the order of the AO. We have considered the rival submissions of the parties. In the facts and circumstances of the case, we restore this issue to the file of the CIT(A) with direction to decide the ground no.8 before him on merits after allowing due opportunity of hearing to the parties. We direct accordingly.

ITA No.1779/Ahd/2010 (Revenue's appeal - penalty under section 271(1)(c) of the Act."

13. The only ground of the Revenue in this appeal is as under:

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"1. On the facts and circumstances of the case and in law, the ld.CIT(A) erred in deleting the levy of penalty of Rs.23,20,193/-

u/s.271(1)(c) of the Act on addition made of Rs.65,25,000/- loyalty payment paid to PSL on the ground that such payment was not made as a part of normal business transaction and interest expenses incurred of Rs.3,68,000/- on purchase of machinery not put to use were disallowed on the ground that such expenditure forms character of revenue expenditure."

14. The learned DR submitted that the only issue in this appeal of the Revenue is regarding levy of penalty under section 271(1)(c) of the Act on the assessee. He submitted that disallowance of loyalty commission has been confirmed by the learned CIT(A) with direction that the same should be considered as capital expenditure and depreciation to be allowed thereon. He submitted that it was for the assessee to file correct return of income and having failed to do so, it should be made liable to penalty under section 271(1)(c) of the Act also. He relied on the order of the AO. The learned counsel for the assessee submitted that all the material facts were disclosed by the assessee and the payment of loyalty commission was fully disclosed by debiting the same in its profit & loss account, duly audited and filed before the AO. The issue is covered in favour of the assessee with the decision of the Hon'ble Apex Court in CIT Vs. Reliance Petroproducts Pvt. Ltd., 322 ITR 158 (SC). He submitted that only issue in this regard is whether the expenditure was capital or revenue in nature, and for that no penalty under section 271(1)(c) of the Act should be levied on the assessee.

15. We have considered rival submissions and perused the orders of the AO and the CIT(A). We find that all the material facts necessary for the assessment were filed by the assessee before the AO at the time of filing of return of income itself. The amount of loyalty -7- ITA No.1778 and 1779/Ahd/2010 with CO

commission amounting to Rs.65.25 lakhs was debited to profit & loss account ending 31.3.2006 and the copy thereof was filed in the audited accounts filed with the return of income by the assessee, a copy thereof has been field before us at page no.68 of the compilation. We have already held that such expenditure was genuine and the same was capital in nature, while disposing of the appeal of the Revenue and CO of the assessee preferred for the relevant assessment year in the foregoing paras of this order. In this background, the only dispute was whether the expenditure of loyalty commission was capital or revenue in nature. There can always be an honest difference of opinion on this issue between the parties. Merely because certain expenditure was held to be capital in nature and allowed depreciation thereon, it could not be said that the assessee is guilty of concealment of income or filing of inaccurate particulars of income. The ratio of the Hon'ble Supreme Court in CIT Vs. Reliance Petroproducts Pvt. Ltd.(supra) is clearly applicable to the facts of the case of the assessee, and accordingly, the order of the CIT(A) on this issue is confirmed in cancelling the penalty under section 271(1)(c) of the Act, and the ground no.1 of the appeal of the Revenue being without any merit, is dismissed.

16. In the result, both the appeals of the Revenue are dismissed and CO of the assessee is partly allowed for statistical purpose.

Order pronounced in Open Court on the date mentioned hereinabove.

अिनल चतुवȶदȣ / ANIL CHATURVEDI) (अिनल (जी. जी.सी. सी.गुƯा/G.C. GUPTA) लेखा सदःय /ACCOUNTANT MEMBER उपाÚय¢ /VICE-PRESIDENT

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