Mahyco Vegetable Seeds Ltd, Mumbai vs Assessee

ी संजय अरोड़ा, लेखा सद य एवं ी अ मत श ु ला, या यक सद य के सम ।

BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM

आयकर अपील सं./I.T.A. No. 8565/Mum/2011 ( नधा रण वष / Assessment Year: 2006-07)

Mahyco Vegetable Seeds Limited Addl. CIT-1(2), Maharashtra Hybrid Seeds Co. Limited Aaykar Bhavan, M. K. Road, 4th Floor, Resham Bhavan, बनाम/ Mumbai-400 020 78, Veer Nariman Road, Vs. Mumbai-400 021

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AACCM 3470 F (अपीलाथ% /Appellant) : (&'यथ% / Respondent)

अपीलाथ% क( ओर से / Appellant by : Shri Hiro Rai

&'यथ% क( ओर से/Respondent by : Shri Akhilendra Yadav

सनु वाई क( तार-ख / : 18.02.2015 Date of Hearing घोषणा क( तार-ख / : 27.02.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-2, Mumbai ('CIT(A)' for short) dated 12.10.2011, dismissing the Assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2006-07 vide order dated 26.12.2008.

2 ITA No. 8565/Mum/2011 (A.Y. 2006-07) Mahyco Vegetable Seeds Limited vs. Addl. CIT

2. The brief facts of the case are that the assessee was during the course of the assessment proceedings for the relevant year observed to have claimed tax on royalty to its group concern, M/s. Maharashtra Hybrid Seeds Company Limited (MHSCL), in the sum of Rs.75,07,507/-. An enquiry in its respect revealed that the amount was towards lease tax (VAT) on royalty, of which only a sum of Rs.32,88,151/- pertained to the current year, while the balance amount of Rs.42,19,356/- was in respect of the preceding two years, being the previous years relevant to A.Ys. 2004-05 and 2005-06. The assessee explained that the group concern was charging it royalty without any VAT (value added tax). On a survey by the service tax department on the said company, it came to its notice that the said transaction attracted VAT, which led to the raising of a debit note by its group concern thereon. The same was, accordingly, paid for by the assessee. The same had not been provided for in the accounts for the earlier years for the reason that it had not been charged by the 'lessor' company, and which was for the reason that it was under

the bona fide belief that no such tax was leviable. The liability had thus crystallized only during the current year.

The same was found not acceptable by the Revenue. The liability to tax was of the payee company, i.e., MHSCL, and not that of the assessee-company, which follows accrual method of accounting. Liabilities for the preceding years, thus, could not be allowed in the computation of income for the current year. There was also no question of crystallization of any liability inasmuch as there was no subsisting dispute. Rather, the assessee had paid the amount directly to the relevant department of the state government and, further, the payment made in protest, and only to save on the liability to interest, i.e., on MHSCL; the assessee even otherwise having no locus standi in the matter, i.e., the tax dispute, if any, between MHSCL and the service tax department, which is engaged in administration of the relevant law and, accordingly, recovery of tax. The assessee's claim having been denied thus, it is in second appeal before us.

3. We have heard the parties, and perused the material on record.

3 ITA No. 8565/Mum/2011 (A.Y. 2006-07) Mahyco Vegetable Seeds Limited vs. Addl. CIT

3.1 We firstly observe that the assessee's case, as argued before us, is wholly untenable. Much less a dispute, or even a disputed position, and which would, where so, require the assessee making a provision in its' accounts (section 145 r/w the Accounting Standards issued by the CBDT there-under), we observe no whisper of a dispute qua the liability in respect of the impugned payment between the parties, or one which has since been resolved. On the contrary, as it appears to us, there is complete harmony and understanding between the assessee and the payee concerned, with the charge of VAT or lease tax on the royalty payment, where and to the extent so, to be on account of the assessee, the lessee or the service recipient. This inference flows unmistakably from the undisputed facts and circumstances of the case. In fact, a similar transaction involving two unrelated parties is unlikely, i.e., in the absence of any specific agreement or understanding as to the party to whose account the said liability would arise or inure on it becoming payable, or its elements/scope not finalized. The same, after all, forms part of the trading cost which may be recovered from the customers through sale price and, in any case, goes to depress the profits to that extent. It needs to be appreciated that it is not the dispute, which again is non-existent, between the creditor and the sales-tax department, but between the parties inter se that is relevant in-as-much as it is only the creditor/service provider who is, if at all, liable to tax under the State VSAT law. It cannot, thus, by any means be said to be a case of crystallization of any liability upon resolution of a dispute.

We are constrained to observe that we discountenance the practice on the part of the counsels to invoke case law without regard to the peculiar facts of each case, matching the color of one decision with that of another. The representation by and on behalf of the department also leaves much to be desired. The matter of accrual of a liability is essentially a matter of fact, with the law qua a disputed liability being well settled, and for which we may refer to the decisions in the case of Calcutta Co. Pvt. Ltd. vs. CIT [1959] 37 ITR 1 (SC); CIT vs. Swadeshi Cotton & Flour Mills Pvt. Ltd. [1964] 53 ITR 134 (SC) (followed by the hon'ble jurisdictional high court in CIT vs. Phalton Sugar 4 ITA No. 8565/Mum/2011 (A.Y. 2006-07) Mahyco Vegetable Seeds Limited vs. Addl. CIT

Works Ltd. [1986] 162 ITR 622 (Bom) - also relied upon by the assessee) and CIT vv. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC).

3.2 At the same time, however, how could the liability, which in the instant case is contractual, said to have accrued to the assessee in the absence of any charge in its respect made/raised by the creditor. There is equally no iota of evidence to suggest that the liability had accrued and yet not booked by the assessee in its accounts. An expenditure, to whatever extent, can be said to have been incurred, which is the basis of claim in its respect, where the assessee follows the mercantile method of accounting, on the corresponding liability having accrued or arisen. Reference in this context may be made to the decision in the case of CIT vs. Excel Industries Ltd. [2013] 358 ITR 295 (SC). It is not uncommon in trade or other commercial situations for the parties to agree that a liability, though arising in law on one, shall be borne by the other, i.e., in the event of the same being required to be paid, being in relation to the transaction between them and, further, either disputed or not ascertained at the relevant time. This understanding, even if not explicit, is implicit and readily inferable in the facts and circumstances of the case, with, in fact, as stated (refer pg. 2 of the assessment order), the parties being under the bona fide impression that the transaction for the use of knowhow did not involve any tax under VAT. The charge for lease tax has been made in the instant case for the first time by the creditor, MHSCL, only on 31.03.2006, and for all the three years, i.e., f.ys 2003-04, 2004-05 and 2005-06, for which the liability in respect had arisen in its' case, and which in fact stands paid on 06.04.2008, even as submitted before the A.O. The fact of the assessee making the payment directly to the sales tax department, as noted by the ld. CIT(A), in-as-much as the primary liability is of MHSCL, so that the payment, where so, stands made only for and on its behalf, or of it being made under protest, or paid only to save the interest which the non-payment of tax would entail, would be to our mind of little consequence. This, rather gives, credence to our observation of there being no dispute between the contracting parties; the two rather working in tandem, and that therefore the claim of liability being disputed and resolved only on 31.03.2006 is a 5 ITA No. 8565/Mum/2011 (A.Y. 2006-07) Mahyco Vegetable Seeds Limited vs. Addl. CIT

bogey. In this regard it needs to be appreciated that a statutory liability accrues only on valid demand in its respect being raised. The law in the matter is well settled, and for which we may refer to CIT vs. Shah Engineering Pvt. Ltd. [1994] 208 ITR 985 (Raj); and Pope The King Match Factory vs. CIT [1963] 50 ITR 495 (Mad). How could, thus, MHSCL raise a charge on the assessee without a corresponding liability arising on it, given that the liability, if any, was to be to the assessee's account? The charge qua lease tax stands made in the instant case on the assessee (by MHSCL) only on the accrual of the liability thereon So, however, the liability being disputed, as it appears, by MHSCL, one issue may arise; rather, would, i.e., the entity, MHSCL or the assessee, who would be entitled to the same if the issue is finally settled in favour of the non-exigibility to tax on the impugned payment, even as the refund by the sales tax department would only be to the creditor (MHSCL). This aspect of the matter, to our mind, though germane, and directly relates to the understanding between the parties as to who of the two would finally bear the liability on account of lease tax, and which, as afore-noted, is only the assessee, does not arise for consideration for the current year. This is as the said refund and, consequently, the credit in its respect, would only arise in the year of the resolution of the dispute, where so, between the MHSCL and the sales-tax department. Where thus refrain from issuing any finding in the matter, if also for the reason that no argument thereon was made before us.

4. In sum, we are under the given facts and circumstances, unable to draw any distinction between the liability arising to the assessee qua the lease tax (VAT) liability on the royalty payment or for the use of knowhow, i.e., for the f.ys. 2003-04 and 2004-05 vis-à-vis that for f.y. 2005-06, the relevant previous year. The Revenue's case, thus, fails and that the assessee succeeds. We decide accordingly.

6 ITA No. 8565/Mum/2011 (A.Y. 2006-07) Mahyco Vegetable Seeds Limited vs. Addl. CIT

5. In the result, the assessee's appeal is allowed.

प1रणामतः नधा41रती क( अपील वीकृत क( जाती है ।

Order pronounced in the open court on February 27, 2015

Sd/- Sd/-

(Amit Shukla) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; 8दनांक Dated : 27.02.2015 व. न.स./Roshani, Sr. PS आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to : 1. अपीलाथ% / The Appellant 2. &'यथ% / The Respondent 3. आयकर आय ु त(अपील) / The CIT(A) 4. आयकर आय ु त / CIT - concerned 5. ;वभागीय & त न>ध, आयकर अपील-य अ>धकरण, मंब ु ई / DR, ITAT, Mumbai 6. गाड4 फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai