ACIT, Circle - 10(2), Kolkata, Kolkata V. M/s. Vesuvius India Ltd., Kolkata

ITA 1333/KOL/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4493 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 06-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY PAUL
• Keywords: Bogus purchase; Depreciation; Transfer pricing; International transaction; Valuation report; Commercial expediency; Revenue expenditure; Capital expenditure; Set aside
• Section: 43B; 143(3); 133(6); 37(1); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENC H KOLKATA BEFORE SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM ./ITA NO.1333/KOL/2017 ( / ASSESSMENT YEAR:2008-09) ACIT, CIRCLE-10(2), KOLKATA VS. M/S VESUVIUS INDIA LTD. P-104, TARATOLLA ROAD, KOLKATA- 700088 ./ ./PAN/GIR NO.: AAACV 8995 Q (APPELLANT) .. (RESPONDENT) ./ITA NO.1289/KOL/2017 ( / ASSESSMENT YEAR:2008-09) M/S VESUVIUS INDIA LTD. P-104, TARATOLLA ROAD, KOLKATA- 700088 VS. ACIT, CIRCLE-10(2), KOLKATA ./ ./PAN/GIR NO.: AAACV 8995 Q (APPELLANT) .. (RESPONDENT) ./ITA NOS.206 & 207/KOL/2018 ( / ASSESSMENT YEARS: 2009-10 & 2010-11) ACIT, CIRCLE-10(2), KOLKATA VS. M/S VESUVIUS INDIA LTD. P-104, TARATOLLA ROAD, KOLKATA- 700088 ./ ./PAN/GIR NO.: AAACV 8995 Q (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI SANJAY PAUL, ADDL. CIT (DR) RESPONDENT BY :SHRISOUMEN ADAK, FCA, SHRI AASHISH P ODDER, ACA &SHRI PRASHANT JAISWAL, ACA M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 2 / DATE OF HEARING : 13/12/2019 /DATE OF PRONOUNCEMENT : 26/02/2020 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED APPEALS FILED BY THE REVENUE AND ASSESSEE, PERTAINING TO ASSESSMENT YEARS2008-09, 2009-10 & 2010-11 RESPECTI VELY, ARE DIRECTED AGAINST THE SEPARATE ORDERS PASSED BY THE COMMISSIONER OF I NCOME TAX (APPEALS), KOLKATA, WHICH IN TURN ARISE OUT OF FAIR ASSESSMEN T ORDERS PASSED BY THE ASSESSING OFFICER U/S 143(3)/144C(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) WHICH INCORPORATE THE FINDINGS OF THE TRANSFER PRIC ING OFFICER U/S 92CA (3) OF THE INCOME TAX ACT, 1961. 2. GROUND RELATING TO TRANSFER PRICING GROUND NO. 4 RAISED BY THE REVENUE IN ITA NO. 1333/ KOL/2017 FOR A.Y. 2008-09 RELATES TO TRANSFER PRICING IN RESPECT OF DETERMINA TION OF ARMS LENGTH PRICE OF ROYALTY PAID BY THE ASSESSEE. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READS AS FOLLOWS: 4.WHETHER THE LD. CIT(A) WAS CORRECT IN DELETING TH E ADDITION OF RS. 1,18,83,649/- ON THE GROUND THAT THE RATE OF ROYALT Y PAID BY THE ASSESSEE COMPANY IS AT ARMS LENGTH? 3. BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRAILING OF REFRACTORIES. DURING THE RELEVANT F.Y.2007-08, IT WAS NOTICEDBY THE TRANSFER PRICING OFFICER (TPO) TH AT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH IT ITS ASSOCIAT ED ENTERPRISES [AES] NAMELY, VESUVIUS CRUCIBLE COMPANY AND VESUVIUS GROUP SA, BE LGIUM ON ACCOUNT OF ROYALTY PAYMENT. FROM THE TRANSFER PRICING REPORT S UBMITTED, IT NOTICEDBY TPO THAT ASSESSEE PAID ROYALTY TO VESUVIUS CRUCIBLE COMPANY ('REFRACTORY LICENSOR') AND VESUVIUS GROUP SA, BELGIUM ('SYSTEMS LICENSOR'). AC CORDING TO THE TERMS OF THE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 3 ROYALTY AGREEMENT BETWEEN THE ASSESSEE AND ITS ASSO CIATED ENTERPRISES (AES), THE ASSESSEE IS REQUIRED TO PAY ROYALTY TO REFRACTORY L ICENSER A ROYALTY RATE OF 3% ON THE DOMESTIC SALES AND 5% ON EXPORT SALES AND TO TH E SYSTEMS LICENSOR, A ROYALTY OF 2% ON THE DOMESTIC SALES AND 3% ON EXPORT SALES. IN ORDER TO JUSTIFY THE ARM'S LENGTH NATURE OF ITS TRANSACTION, THE ASSESSEE HAS APPLIED THE CUP METHOD WHERE IT HAS STATED THAT THE ASSESSEE HAS COMPARED THE ROYAL TY RATES FOR OTHER INDIAN COMPANIES AND IT IS OBSERVED THAT THE SAME IS AT PA R WITH THE RATES AT WHICH ROYALTY IS PAID BY VIL. [PAGE - 11 OF THE TRANSFER PRICING REPORT). HOWEVER,THE TPO NOTICED THAT IN ORDER TO VERIFY THE ASSESSEE'S CLAIM, THE ASSESSEE HAS NOT BROUGHT ON RECORD THE DETAILS OF SUCH INDIA N COMPANIES TO WHICH THE ASSESSEE'S CLAIMS ITS CASE TO BE COMPARABLE. THE CH ARACTERISTICS OF COMPARABLES ARE CONSIDERED IMPORTANT FOR COMPARISON IN THE CUP METH OD. IN THE CASE OF INTANGIBLE PROPERTY, IT WOULD COMPRISE THE FORM OF TRANSACTION (E.G. LICENSING OR SALE), THE TYPE OF PROPERTY (E.G. PATENT, TRADEMARK, OR KNOW-H OW), THE DURATION AND DEGREE OF PROTECTION, AND THE ANTICIPATED BENEFITS FROM THE U SE OF THE PROPERTY. THE QUESTION THUS, CAME BEFORE THE TPO THAT WHICH IS THE MOST AP PROPRIATE METHOD - CUP OR TNMM FOR DETERMINING ALP? TRADITIONAL TRANSACTION METHODS, SUCH AS CUP, ARE NORMALLY THE MOST DIRECT METHOD FOR DETERMINING ALP . THE TRANSACTIONAL PROFIT SPLIT METHOD, ON THE OTHER HAND, IS BASED ON AN APP ROXIMATION OF THE DIVISION OF PROFITS THAT INDEPENDENT ENTERPRISES WOULD HAVE EXP ECTED TO REALIZE FROM ENGAGING IN THE TRANSACTION(S). THE TPO NOTED THAT THE GREAT EST WEAKNESS IS THAT THE NET MARGIN OF A TAXPAYER CAN BE INFLUENCED BY SOME FACT ORS THAT EITHER DO NOT HAVE AN EFFECT, OR HAVE A LESS SUBSTANTIAL OR DIRECT EFFECT , ON PRICE OR GROSS MARGINS. THESE ASPECTS MAKE ACCURATE AND RELIABLE DETERMINATIONS O F ARM'S LENGTH NET MARGINS DIFFICULT. THUS, SO FAR AS THE APPROPRIATENESS OF T HE METHOD IS CONCERNED, CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE TRA NSACTIONS HERE, NAMELY, ROYALTY. THEN TPO CITED THE JUDGMENT OF COORDINATE BENCH OF ITATMUMBAI IN THE CASE OF GHARDA CHEMICALS VS DCIT (ITA NO. 2242/MUM/ 06, AY 2002-03) WHEREIN IT WAS HELD THAT CUP METHOD IS PREFERRED OV ER OTHER METHOD.AS THE ASSESSEE HAS NOT CONDUCTED ANY SEARCH TO BENCHMARK ITS ROYALTY PAYMENT, AN INDEPENDENT SEARCH ANALYSIS WAS CONDUCTED BY TPO US ING THE ROYALTYSTATDATABASE, M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 4 44 4 WHICH YIELDED FOUR COMPARABLE COMPANIES. A SHOW CAU SE LETTER DT.27.10.2011 WAS ISSUED TO THE ASSESSEE WHICH IS REPRODUCED BELOW (T O THE EXTENT APPLICABLE FOR OUR DISCUSSION): 'FROM THE TRANSFER PRICING DOCUMENT SUBMITTED TO TH IS OFFICE, IT IS NOTED THAT THE ASSESSEE IS MAKING ROYALTY PAYMENT TO ITS ASSOCIATED ENTERPR ISES [AES] AT THE RATE OF 3% ON THE NET DOMESTIC SALES AND 5% ON THE NET EXPORT SALES A S WELL AS 2% ON THE NET DOMESTIC SALES AND 3% ON THE NET EXPORT SALES TOWARDS REFRACTORY L ICENSE AND SYSTEMS LICENSE RESPECTIVELY I.E. FOR BOTH THE PRODUCT AND PROCESS. DURING THE COURSE OF HEARING, IT WAS LEARNT THAT-SUCH ROYALTY PAYMENT IS BEING MADE BY T HE ASSESSEE ON THE PRODUCTS IDENTIFIED AS 'VISO' AND 'SLIDEGATE' TO ITS AES, ON WHICH BOTH THE REFRACTORY LICENSE RATE AND SYSTEMS LICENSE RATE ARE APPLICABLE. IN OTHER WORDS, THE AS SESSEE IN REALITY IS ACTUALLY PAYING ROYALTY AT THE RATE OF 5% [3% + 2%] ON NET DOMESTIC SALES AND 8% [3%+5%] ON THE NET EXPORT SALES. IN ORDER TO VERIFY THE ARM`S LENGTH NATURE OF THE A SSESSEE`S INTERNATIONAL TRANSACTION WITH RESPECT TO ROYALTY PAYMENT, A SEARCH ANALYSIS WAS CONDUCTED BY THE TPO USING THE ROYALTY STATDATABASE WHICH IS MENTIONED O N PAGE 31 OF ORDER OF LD CIT(A). 4. DURING THE TPO PROCEEDINGS, THE ASSESSEE IN ITS REPLY DATED 31.10.2011 HAS SUBMITTED THAT WITH RESPECT TO THE ROYALTY AGREEMEN T BETWEEN STONE MOUNTAIN FINISHES, INC, AND SPECIAL SHRINE SURFACES, ES3 INC , THE ASSESSEE HAS CLAIMED THAT THE ROYALTY RATE SHOULD BE CONSIDERED AT 7% ON SALE S WHICH HAS BEEN SHOWN AS 5% [ON THE ROYALTY STAT DATABASE] BASED ON THE FOLLOWI NG: SL. NO. SALE OF VALUE OF PRODUCTS RATE OF ROYALTY PAYABLE 1. UPTO $ 50 MILLION 7% 2. MORE THAN $ 50 MILLION &UPTO $ 150 MILLION 6% 3. MORE THAN $ 150 MILLION &UPTO $ 300 MILLION 5% 4. MORE THAN $ 300 MILLION &UPTO $ 600 MILLION 4% 5. ABOVE $ 600 MILLION 3% THE ASSESSEE HAS CONTENDED THAT IF THE ASSESSEES S ALE OF PRODUCTS LIABLE TO ROYALTY IS CONSIDERED WITHIN $ 50 MILLION, THEN THE ROYALTY RATE/OR STONE MOUNTAIN FINISHES, INC, SHOULD BE CONSIDERED AS 7% INSTEAD O F 5%. M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 5 55 5 HOWEVER, LD TPO DID NOT ACCEPT THE CONTENTION OF T HE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT PROVIDED ANY REASONING FOR ITS CLAIM. IN FACT, THE RATE OF 5% PROVIDED ON THE DATABASE WAS THE AVERAGE RATE OF RO YALTY PAYABLE, HENCE THE RATE AS AVAILABLE ON THE DATABASE IS REASONABLE. IN VIEW OF THE SAME, THE ASSESSEES REQUEST FOR COMPUTATION OF THE AVERAGE RATE TO 4.75% INSTEA D OF 4.25% WAS REJECTED. THE ASSESSEE HAS ALSO FURTHER SUBMITTED THAT THE REGULA TORY AUTHORITY IN INDIA HAVE PERMITTED PAYMENT OF ROYALTY AT 5% ON DOMESTIC SALE S AND 8% ON EXPORT SALES. THE CONDITIONS IMPOSED BY THE REGULATORY AUTHORITY IN I NDIA REGARDING PAYMENT OF ROYALTY ARE GOVERNED BY OTHER CONSIDERATION OTHER T HAN TAXATION ISSUES. IT IS LINKED TO THE FUND INFLOW-OUTFLOW FROM THE COUNTRY, FOREX RESERVE MANAGEMENT AND OTHER BROADER ECONOMIC PARAMETERS. THE RATE IS NOT DETERM INED FROM THE PERSPECTIVE OF ARMS LENGTH PRINCIPLE WHICH IS A PRINCIPLE OF TAXA TION AND HENCE ANY LIMITS SPECIFIED BY THE REGULATORY AUTHORITIES MAY NOT BE A CORRECT BENCHMARK TO DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONA L TRANSACTION. 5 THEREFORE, THE LD. TPO REJECTED THE SUBMISSIONS O F THE ASSESSEE AND COMPUTED THE ARMS LENGTH PRICE OF ROYALTY, OBSERVING THE FO LLOWINGS: M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 6 66 6 THIS WAY, THE LD TPO, BY USING THE CUP METHOD, COMP UTED THE ARM`S LENGTH PRICE (ALP) TO THE TUNE OF RS. 1,18,83,649/-. 6. AGGRIEVED BY THE ADDITION MADE BY THE TPO/AO, TH E ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A), WHO HAS DELETED TH E ADDITION MADE BY THE TPO/AO OBSERVING THE FOLLOWING: 1. I HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF TH E LD. TPO AND THE SUBMISSIONS OFFERED BY THE LD. A/RS FOR THE ASSESSEE. AFTER CAR EFUL EXAMINATION, I FIND THAT THE IMPUGNED ADJUSTMENT MADE BY THE LEARNED TPO IS BASE D ON AN INCORRECT APPROACH OF THE SITUATION AND AN INCORRECT APPROACH TOWARDS THE IMPUGNED TRANSACTIONS. I AM OF THE CONSIDERED VIEW THAT THIS ADJUSTMENT IS NOT SUSTAINABLE. 2.THE LD. TPO HAS FURNISHED 4 COMPARABLE AGREEMENTS , THE ARITHMETIC MEAN RATE OF ROYALTY OF WHICH IS 4.25%. IT WAS CONTENDED BY T HE ASSESSEE THAT IN VIEW OF THE INCORRECT SELECTION OF THE COMPARABLES, THE ARMS L ENGTH PRICE DETERMINED BY THE LD. TPO IS IMPROPER. I FIND THAT THE VARIOUS CASES RELIED UPON BY THE LD. TPO CANNOT BE CONSIDERED AS A COMPARABLE WITH TERMS AND SCOPE OF ROYALTY PAYMENT BY THE ASSESSEE TO ITS AES. THEY ARE DIFFERENT IN R ESPECT OF SCOPE, GEOGRAPHICAL LOCATIONS AND INDUSTRIES / SECTOR. THE AGREEMENTS R ELIED ON BY THE LD. TPO DEALS WITH BIOTECHNOLOGY AND DRUGS INDUSTRY REFUSE SYSTEM INDUSTRY AND MOTOR & GENERATORS INDUSTRY, WHEREAS THE ASSESSEE OPERATES IN THE REFRACTORY INDUSTRY. THEREFORE, THE CASE RELIED UPON BY THE LEARNED TPO CANNOT BE CONSIDERED AS A COMPARABLE. 3.THE COMPARABLE AGREEMENTS SUBMITTED BY THE ASSESS EE LD. A.RS HAVE BEEN DULY CONSIDERED BY ME AND FROM THE PERUSAL OF THE SAME I T CAN BE SAID THE RATE OF ROYALTY PAID BY THE ASSESSEE IS AT ARMS LENGTH. I N VIEW OF THE ABOVE DISCUSSION, I HOLD THAT THE ADJUSTMENT MADE BY THE LD. TPO WAS IM PROPER. ACCORDINGLY, THE SAME ARE REQUIRED TO BE DELETED. 7. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE RE VENUE IS IN APPEAL BEFORE US. M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 7 77 7 8. THE LD. DR FOR THE REVENUE HAS PRIMARILY REITERA TED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OU R EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY AND ON T HE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER OF THE LD. CIT( A). 9. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GON E THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT VESUVIUS INDIA LIMITED, IS A PUBLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF REFRACTORIES. DURING THE YEAR, THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES ('AES'). DURING THE PROCEEDINGS BEFORE THE LD. TPO, VARIOUS DETAILS, IN FORMATION & EXPLANATIONS (INCLUDING TRANSFER PRICING DOCUMENTATION STUDY REP ORT) AS REQUISITIONED WERE FILED BEFORE THE LD. TPO IN SUPPORT OF ARM'S LENGTH NATUR E OF INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AES. DURING THE COURSE OF PRO CEEDINGS, THE LD. TPO HAS ACCEPTED THE TRANSACTIONS ENTERED INTO BY THE ASSES SEE WITH ITS AES TO BE AT ARM'S LENGTH EXCEPT IN THE CASE OF THE INTERNATIONAL TRAN SACTION RELATING TO PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS AES WHEREIN A DOWNWA RD ADJUSTMENT WAS MADE BY LD TPO TO THE TUNE OF RS. 1,18,83,649/- OUT OF PAYM ENT OF ROYALTY OF RS. 5,34,42,085/- MADE BY THE ASSESSEE TO ITS AES. WE N OTE THAT THE ASSESSEE HAS ENTERED INTO A TECHNOLOGY LICENSE AGREEMENT DATED 2 8TH SEPTEMBER, 1992 READ WITH SUPPLEMENTAL AGREEMENT DATED 1ST FEBRUARY, 200 0 READ WITH SECOND SUPPLEMENTAL AGREEMENT DATED 16TH APRIL, 2007 WITH ITS ASSOCIATED ENTERPRISES ('AES') I.E. VESUVIUS CRUCIBLE COMPANY, USA (HEREIN -AFTER REFERRED AS 'REFRACTORY LICENSOR') & VESUVIUS GROUP SA, BELGIUM (HEREIN-AFT ER REFERRED AS 'SYSTEM LICENSOR') RESPECTIVELY. IN TERMS OF THE SAID AGREE MENT, REFRACTORY & SYSTEM LICENSOR HAS GRANTED THE ASSESSEE A LICENSE TO USE THE TECHNICAL INFORMATION TO MANUFACTURE AND A LICENSE TO USE THE TECHNICAL INFO RMATION TO MARKET, SELL AND SERVICE THE PRODUCTS. FURTHER, IN TERMS OF THE SAID AGREEMENT, THE ASSESSEE HAS TO PAY ROYALTY TO THE REFRACTORY LICENSOR @ 3% ON THE NET EX-FACTORY SALES PRICE OF M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 8 88 8 THE PRODUCT SOLD IN INDIA AND @ 5% ON THE FOB PRICE OF THE PRODUCT SOLD OUTSIDE INDIA AND TO THE SYSTEM LICENSOR @ 2% ON THE NET EX -FACTORY SALES PRICE OF THE PRODUCT SOLD IN INDIA AND @ 3% ON THE FOB PRICE OF THE PRODUCT SOLD OUTSIDE INDIA. 10. WE NOTE THAT DURING THE ASSESSMENT YEAR, THE A SSESSEE HAS PAID ROYALTY TO ITS AES AS FOLLOWS: (A). TO REFRACTORY LICENSOR, ROYALTY OF RS.2,47,85, 557/- AT THE RATE OF 3% ON THE NET EX- FACTORY SALES PRICE OF THE PRODUCT SOLD IN INDIA; (B). TO REFRACTORY LICENSOR, ROYALTY OF RS. 75,83,0 15/- AT THE RATE OF 5% ON THE FOB PRICE OF THE PRODUCT SOLD OUTSIDE INDIA; (C ). TO SYSTEM LICENSOR, ROYALTY OF RS.L,65,23,705 /- AT THE RATE OF 2% ON THE NET EX- FACTORY SALES PRICE OF THE PRODUCT SOLD IN INDI A; (D). TO SYSTEM LICENSOR, ROYALTY OF RS.45,49,809/- AT THE RATE OF 3% ON THE FOB PRICE OF THE PRODUCT SOLD OUTSIDE INDIA. WE NOTE THAT LD. TPO RAISED OBJECTIONS WITH RESPEC T TO THE ARM'S LENGTH NATURE OF THE ASSESSEE'S INTERNATIONAL TRANSACTION WITH RESPE CT TO ROYALTY PAYMENTS. THE LD. TPO CLAIMED THAT THE TWO SEPARATE PAYMENTS MADE TO REFRACTORY LICENSOR AND SYSTEM LICENSOR IS ACTUALLY BEING MADE BY THE ASSES SEE ON THE PRODUCTS 'VISO' AND 'SLIDEGATE' AND BOTH THE PAYMENTS SHOULD BE CLUBBED AND ROYALTY RATES SHOULD BE 5%[3% + 2%] ON NET DOMESTIC SALES AND 8%[3% + 5%] O N THE NET EXPORT SALES. THE LD. TPO RELIED ON ROYALTY PAYMENT DATA RELATING TO CERTAIN COMPANIES EXTRACTED FROM 'ROYALTYSTATS.COM' DATABASE AND ASKE D THE ASSESSEE TO SHOW-CAUSE THAT WHY ADJUSTMENT SHOULD NOT BE MADE IN CASE OF T HE ASSESSEE BASED ON THE SAID ROYALTY DATA. THE LD. TPO COMPUTED THE AVERAGE RATE OF ROYALTY PAYMENT BY THE ALLEGED COMPARABLE AGREEMENTS AT 4.25% ON NET SALES AS AGAINST ASSESSEE'S PAYMENT OF ROYALTY. BEFORE THE LD. TPO, IT WAS SUBMITTED BY THE ASSESSE E THAT THE ASSESSEE HAS RECEIVEDSUBSTANTIAL BENEFITS BY PAYING ROYALTY TO I TS AES WHICH OUTWEIGHS THE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 9 99 9 QUANTUM OF ROYALTY PAYABLE. FURTHER, IT WAS ALSO SU BMITTED THAT THE SAID ROYALTY RATES WERE WITHIN THE LIMITS PRESCRIBED BY THE GOVT . VIDE ITS PRESS NOTE 2 (2003 SERIES) DATED 24TH JUNE, 2003 (5% ON DOMESTIC SALES & 8% ON EXPORT SALES). THE ASSESSEE QUESTIONED ON THE COMPARABLE AGREEMENTS S ELECTED BY THE LD. TPO, AS THE COMPANIES BETWEEN WHOM THOSE AGREEMENTS WERE EN TERED WERE DIFFERENT IN RESPECT OF SCOPE, GEOGRAPHICAL LOCATION, INDUSTRY A ND TERMS OF PAYMENT ETC. AS COMPARED TO THE ASSESSEE'S ROYALTY AGREEMENTS WITH ITS AES. FURTHER, THE ASSESSEE COMPUTED THE EFFECTIVE RATE OF PAYMENT OF ROYALTY A PPLYING THE SAME BASIS (NET SALES) AS CONSIDERED BY THE LD. TPO IN THE AFORESAI D AGREEMENTS. THE EFFECTIVE RATE OF PAYMENT OF ROYALTY WORKS OUT TO BE 4.18% AN D 4.62% ON NET DOMESTIC SALES & EXPORTS RESPECTIVELY AGAINST 5% AND 8% ON NET EX- FACTORY SALES PRICE AND FOB RESPECTIVELY. THUS, THE ASSESSEE SUBMITTED THAT NO ADJUSTMENTS SHOULD BE WARRANTED IF THE SAME BASIS IS CONSIDERED BY THE LD. TPO AS I N THE COMPARABLE AGREEMENTS. FURTHER, IN ONE OF THE COMPARABLE SELECTED BY THE L D. TPO, STONE MOUNTAIN FINISHES, INC. USA, THE RATE OF ROYALTY SHOULD HAVE BEEN CONSIDERED @ 7% INSTEAD OF 5% CONSIDERING THE ASSESSEE'S TURNOVER AND THUS, THE AVERAGE RATE AS COMPUTED WOULD HAVE STAND INCREASED TO 4.75% INSTEAD OF 4.25 %. FURTHER, THE ASSESSEE SUBMITTED THAT THE TWO ROYALTY PAYMENTS AGAINST REF RACTORY LICENSOR AND SYSTEM LICENSOR SHOULDN'T BE CLUBBED AS EACH OF THE TWO AG REEMENTS HAVE SEPARATE IDENTIFIABLE DELIVERABLES AND SHOULD BE COMPARED IN DIVIDUALLY FOR BENCHMARKING. FURTHER, THE ASSESSEE ALSO APPLIED THE OVERALL TNMM CONTENDING THAT SINCE ITS MARGIN ARE HIGHER THAT THE MARGINS EARNED BY THE IN DUSTRY, ITS INTERNATIONAL TRANSACTION (INCLUDING PAYMENT OF ROYALTY) ARE AT A RM'S LENGTH. THE ASSESSEE SUBMITTED THAT IT HAS BEEN ABLE TO EARN HIGHER MARG INS THAN THE INDUSTRY STANDARDS WHICH HAVE BEEN POSSIBLE DUE TO TECHNICAL ASSISTANC E, SUPPORT FROM THE AES, THUS JUSTIFYING THE PAYMENTS. WE NOTE THAT THE LD. TPO, REJECTED THE CONTENTIONS AND SUBMISSIONS OF THE ASSESSEE AND HELD THAT THE ASSES SEE HAS NOT SUBMITTED ANY ALTERNATIVE SEARCH TO PROVE THAT THE ROYALTY PAYMEN T MADE BY THE ASSESSEE DURING THE RELEVANT A.Y. 2008-09 IS AT ARMS LENGTH AND AC CORDINGLY DETERMINED ALP MEAN RATE OF ROYALTY @ 4.25% ON NET DOMESTIC & EXPO RT SALES FURNISHED BY THE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 10 00 0 ASSESSEE. THUS, THE LD. TPO PROPOSED A DOWNWARD ADJ USTMENT OF RS. 1,18,83,649/- IN RESPECT OF ROYALTY PAYMENT TO ITS AES. 11. WE NOTE THAT THE ASSESSEE PAYS ROYALTY PURSU ANT TO TECHNOLOGY LICENSE AGREEMENT DATED 28 TH SEPTEMBER, 1992 READ WITH SUPPLEMENTAL AGREEMENT D ATED 1 ST FEBRUARY, 2000 READ WITH SECOND SUPPLEMENTAL AGREE MENT DATED 16 TH APRIL, 2007 BETWEEN VIL AND VESUVIUS CRUCIBLE COMPANY ('RE FRACTORY LICENSOR' OR 'VCC') AND VESUVIUS GROUP S.A. ('SYSTEMS LICENSOR'' ). THE ASSESSEE HAD ENTERED INTO A 'TECHNOLOGY LICENSE AGREEMENT' DATED 28 TH DAY OF SEPTEMBER, 1992 WITH REFRACTORY LICENSOR. IN TERMS OF THE SAID AGREEMENT VCC, WHO IS THE OWNER & HAS THE RIGHT TO LICENSE VALUABLE PROPRIETARY TECHNICAL INFORMATION AND TO PROVIDE TECHNICAL ASSISTANCE RELATING TO DESIGNS, STYLES, S PECIFICATIONS, COMPONENTS & MANUFACTURING PROCESSES, PLANT & MACHINERY, EQUIPME NT, SHARES AND ASSESSORS RELATING TO ALUMINA GRAPHITE REFRACTORIES, ACCUMETR IX, PROCESS CONTROL EQUIPMENTS& OTHER RELATED PRODUCTS, GRANTED THE ASS ESSEE, A LICENSE TO USE THE TECHNICAL INFORMATION TO MANUFACTURE AND A LICENSE TO USE THE TECHNICAL INFORMATION TO MARKET, SELL AND SERVICE THE PRODUCT S. UNDER THE TERMS OF THE AGREEMENT, THE ASSESSEE IS AT LIBERTY TO SELL THE P RODUCTS IN INDIA AND TO EXPORT DIRECTLY THE PRODUCTS TO ALL COUNTRIES. FURTHER, VC C PROVIDES THE ASSESSEE WITH CERTAIN PROCESS SPECIFICATIONS PURSUANT TO WHICH TH E ASSESSEE SHALL ACQUIRE MACHINES AND/OR EQUIPMENT TO MANUFACTURE THE PRODUC TS FROM THIRD PARTY EQUIPMENT SUPPLIERS. VCC FURTHER WARRANTS THAT THE MACHINES AND/OR EQUIPMENT SOLD BY IT OR ITS AFFILIATES TO THE ASSESSEE TOGETH ER WITH THE EQUIPMENT PROCURED FROM THIRD PARTY EQUIPMENT SUPPLIER SHALL OPERATE T OGETHER WITH THE TECHNICAL INFORMATION IN SUCH A WAY SO AS TO ENABLE THE ASSES SEE TO MANUFACTURE THE PRODUCTS. FURTHER, IN TERMS OF THE SAID AGREEMENT, VCC MAKES AVAILABLE AND FURNISHES TO THE ASSESSEE, TECHNICAL INFORMATION RE LATING TO PRODUCTS AS UNDER: A) TECHNICAL AND DESIGN DRAWINGS SPECIFICATIONS FOR TH E PRODUCTS, TOOLS AND RAW MATERIAL MIX NECESSARY FOR THE MANUFACTURE OF T HE PRODUCTS; M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 11 11 1 B) DATA REGARDING MANUFACTURING, PROCESS AND METHODS A S THE ASSESSEE MAY NEED RELATING TO THE PRODUCT, AND REGARDING CERTAIN MOULDS, PRODUCT NEEDS AND FIXTURES NECESSARY FOR MANUFACTURE OF THE PRODU CT; C) INFORMATION REGARDING STANDARDS, PRODUCT EQUIPMENT AND METHODS OF MANUFACTURING AND SERVICING AND PRODUCT TO THE DEGR EE THAT BOTH REFRACTORY LICENSOR AND THE ASSESSEE AGREE THAT THEIR IMPLEME NTATION BY THE ASSESSEE IS APPROPRIATE; D) INSTRUCTIONS REGARDING BOTH IN-PROCESS AND FINAL TE STING AND QUALITY CONTROL METHODS TO BE USED IN CONJUNCTION WITH THE PRODUCT AND MANUFACTURING PROCESS; E) INFORMATION REGARDING THE MOST SUITABLE PACKAGING M ETHOD FOR THE PRODUCTS; F) INFORMATION REGARDING SPECIFICATIONS FOR THE MATERI AL AND OTHER COMPONENTS TO BE USED IN THE MANUFACTURING PROCESS, AND INFORM ATION REGARDING TESTING AND QUALITY ASSURANCE METHOD RELATING TO RAW MATERI AL AND OTHER COMPONENTS TO THE DEGREE THAT LICENSOR UTILIZES SUC H TESTING QUALITY ASSURANCE METHODS. 12. WE ALSO NOTE THAT THE SAID AGREEMENT, AT ARTIC LE XIII, PROVIDES THAT VCC SHALL LICENSE THE ASSESSEE TO USE THE TRADEMARKS IN CONNE CTION WITH THE MARKETING AND SALE OF PRODUCTS OUTSIDE INDIA. FURTHER, AS PER ART ICLE XIV THE TERM OF THIS AGREEMENT IS FOR A PERIOD OF SEVEN YEARS FROM THE C OMMENCEMENT OF COMMERCIAL PRODUCTION PROVIDED THE COMMERCIAL PRODUCTION IS NO T DELAYED BEYOND THREE YEARS FROM THE DATE OF THE AGREEMENT. HOWEVER, ARTICLE XV I ON 'EFFECT OF TERMINATION' STATES THAT ON EXPIRY OF THE AGREEMENT ALL OBLIGATI ONS UNDERTAKEN BY VCC AND THE ASSESSEE SHALL TERMINATE EXCEPT INTER ALIA THAT THE LICENSES GRANTED BY VCC TO THE ASSESSEE, PROVIDED HOWEVER, THAT SUCH LICENSES SHAL L THEREAFTER BE NON-EXCLUSIVE AND NO FURTHER TECHNICAL INFORMATION SHALL BE DISCL OSED BY VCC TO THE ASSESSEE. HOWEVER, VCC HAS UNDER A SEPARATE SALES AGREEMENT S OLD TO SYSTEMS LICENSOR, THE ENTIRE ENGINEERING ACTIVITIES INCLUSIVE OF THE RIGH TS, DESIGNS AND KNOW HOW, REGISTERED OR UNREGISTERED. THE ASSESSEE WAS INTERE STED TO MAINTAIN THE RIGHT TO USE THE KNOW HOW IN PRODUCING THE REFRACTORY PRODUCTS A S WELL AS TO SELL THE REFRACTORY M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 12 22 2 PRODUCTS FOR USE ON ANY ENGINEERED SYSTEMS PREVIOUS LY DEVELOPED BY VCC OR TO BE DEVELOPED IN FUTURE BY VSA. THUS, WITH EFFECT FROM 01-02-2000, FURTHER TO THE TECHNOLOGY LICENSE AGREEMENT, A SUPPLEMENTAL AGREEM ENT BETWEEN THE ASSESSEE AND REFRACTORY LICENSOR & SYSTEM LICENSOR WAS ENTER ED INTO TO ENABLE THE ASSESSEE CONTINUED AVAILABILITY OF TECHNICAL INFORM ATION & RELATED ASSISTANCE, USE OF TRADEMARKS, PATENTS ETC. THE SAID AGREEMENT WAS FURTHER EXTENDED BY ANOTHER SUPPLEMENTAL AGREEMENT DATED 16 TH APRIL, 2007. DURING THE PREVIOUS YEAR RELEVANT TO THE A. Y. 2008-09, THE ASSESSEE HAS PAID ROYALTY TO THE REFRACTORY LICENSOR @ OF 3% ON THE NET EX-FACTORY SALES PRICE OF THE PRODUCT SOLD IN INDIA AND AT RATE OF 5% ON THE FOB PRICE OF THE PRODUCT SOLD OUTSIDE INDIA AND TO THE SYSTEM LICENSOR @ 2% ON THE NET EX-FACTORY SALES PRICE OF THE PRODUCT SOLD IN INDIA AND AT RATE OF 3% ON THE FOB PRICE OF THE PRODUCT SOLD OUTSIDE INDIA. FURTHER, IN TERMS OF THE AFORESAID SUPPLEMENTARY AGREEMENTS, SYSTEMS SHALL M EAN ALL MECHANICAL EQUIPMENT, MEASUREMENT DEVICES, HYDRAULIC SYSTEMS & MANIPULATORS, AUTOMATION SYSTEMS & PROCESS DEVELOPMENT DESIGNED BY OR FOR WH ICH THE RIGHTS TO DESIGN AND KNOW-HOW ARE OWNED BY THE SYSTEMS LICENSOR FOR BLAS T FURNACE, BASIC OXYGEN FURNACES, ELECTRIC ARC FURNACE, LADLE AND TUNDISH O R OTHER MEASUREMENT SYSTEMS FOR USE OF THE PRODUCTS AS WELL AS ANY AND ALL NEW DEVE LOPMENT AND FINDINGS, IMPROVEMENTS AND UPGRADING OF SUCH MECHANICAL EQUIP MENT AND MEASUREMENT DEVICES. FURTHER, IN TERMS OF THE SAID SUPPLEMENTAR Y AGREEMENTS, THE ASSESSEE HAS BEEN GRANTED THE RIGHT TO SUPPLY THE PRODUCTS ON ME CHANICAL EQUIPMENTS OR MEASUREMENT DEVICES DESIGNED OR FOR WHICH THE RIGHT S TO DESIGN AND KNOW HOW IS OWNED BY SYSTEM LICENSOR. THUS, AFTER THE SUPPLEMEN TAL AGREEMENTS, THE REFRACTORY LICENSOR GRANTED A NON-EXCLUSIVE LICENSE TO USE THE TECHNICAL INFORMATION TO MANUFACTURE AND A NON-EXCLUSIVE LICE NSE TO USE THE TECHNICAL INFORMATION TO MARKET, SELL AND SERVICE THE PRODUCT S IN INDIA. THE SYSTEM LICENSOR GRANTED A NON-EXCLUSIVE RIGHT TO SUPPLY THE PRODUCT S FOR USE IN THE SYSTEMS FOR WHICH IT OWNS THE RIGHT OF DESIGN, KNOW HOW OR ANY OTHER INTELLECTUAL PROPERTY, RIGHT AND TO SUPPLY THE PRODUCT IN ANY AND ALL NEW DEVELOPMENTS, IMPROVEMENTS AND UPGRADING OF THE SYSTEMS. M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 13 33 3 13. THE REFRACTORY LICENSOR AND SYSTEMS LICENSOR HA VE BEEN PROVIDING THE FOLLOWING SERVICES TO THE ASSESSEE ON A CONTINUOUS BASIS: (A). REFRACTORY LICENSOR: PROVISION OF TECHNICAL KNOW-HOW, DESIGNS AND DRAWIN GS, ETC IN RELATION TO PRODUCT LIKE ALUMINA GRAPHITE ISOSTATICALLY PRESS P RODUCTS, SLIDE GATE REFRACTORIES AND SUCH OTHER PRODUCTS WHICH MAY BE D EVELOPED BY THE REFRACTORY LICENSOR; PROVISION TO THE ASSESSEE SUCH TECHNICAL INFORMATI ON LIKE TRADE SECRETS, KNOW-HOW AND OTHER PROPRIETARY INFORMATION RELATING TO DESIGN, PRODUCT SPECIFICATION, METHODS OF MANUFACTURE, MATERIAL SPE CIFICATIONS, SERVICE METHODS & TECHNIQUES, DRAWINGS, TOOLING, PROCESS TE CHNOLOGY AND ITS RELATED EQUIPMENT AND OTHER DOCUMENTATION; PROVISION OF ALL NEW DEVELOPMENTS, UPDATES AND UPGR ADES IN THE PRODUCT OR THEIR SPECIFICATIONS AS AND WHEN THEY HAPPEN. (B). SYSTEMS LICENSOR: PROVISION OF ALL DESIGNS AND DRAWINGS OF ALL MECHAN ICAL EQUIPMENT, MEASUREMENT DEVICES, HYDRAULIC SYSTEMS & MANIPULATO RS, AUTOMATION SYSTEMS & PROCESS DEVELOPMENT DESIGNED BY THE SYSTE MS LICENSOR; ASSISTANCE IN THE USE OF THE PRODUCTS IN THE SYSTEM S FOR BLAST FURNACE, BASIC OXYGEN FURNACES, ELECTRIC ARC FURNACE, LADLE AND TU NDISH OR OTHER MEASUREMENT SYSTEMS; PROVISION TO THE ASSESSEE WITH ALL NEW DEVELOPMENT AND FINDINGS, IMPROVEMENTS AND UPGRADING OF SUCH MECHANICAL EQUIP MENT AND MEASUREMENT DEVICES. AS STATED ABOVE, THE ASSESSEE HAS BEEN PAYING ROYAL TY FOR ONGOING TECHNICAL SUPPORT RECEIVED FROM ITS AES IN RELATION TO VARIOU S PRODUCTS. THE PRODUCT IN RESPECT OF WHICH THE ASSESSEE HAS BEEN PAYING ROYA LTY, ARE MEANT TO BE USED ON SOPHISTICATED SYSTEMS LIKE BLAST FURNACE, SLIDE GAT E MACHINERIES ETC. THE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 14 44 4 ASSESSEEFROM TIME TO TIME REFERS VARIOUS ISSUES AND QUERIES TO ITS GROUP COMPANIES AND RECEIVES SUPPORT FROM THEM. IT MAY BE NOTED THA T THE QUERIES MAY NOT ONLY BE REFERRED SPECIFICALLY TO THE SYSTEM LICENSOR OR REF RACTORY LICENSOR BUT ARE ALSO REFERRED TO ANY OF ITS GROUP COMPANIES. IT IS WORTH WHILE TO NOTE THAT THE ASSESSEE ENJOYS TECHNICAL SUPPORT BECAUSE OF ITS ASSOCIATION WITH THE VESUVIUS GROUP FOR WHICH IT PAYS ROYALTY. FURTHER, THE COUNSEL SUBMI TS THAT VESUVIUS GROUP HAS BEEN ENGAGED EXTENSIVELY IN RESEARCH AND DEVELOPMEN T (R&D) AND HAS BEEN CONSTANTLY DEVELOPING NEW PRODUCTS AND SYSTEMS. OVE R THE YEARS, THROUGH ITS OWN R&D AND THROUGH VARIOUS VERTICAL ACQUISITIONS, VESU VIUS GROUP HAS VARIOUS PATENTS AT ITS NAME. THE LD. COUNSEL FOR THE ASSES SEE SUBMITS THAT THE PRODUCTS IN RELATION TO WHICH ROYALTY HAS BEEN PAID ARE NOT STA NDARDIZED PRODUCTS AND ARE TO BE DESIGNED BASED ON CUSTOMER SPECIFIC REQUIREMENTS. E VERY TIME THE ASSESSEE RECEIVES A NEW PRODUCT ENQUIRY, THE SPECIFICATIONS ARE SENT TO REFRACTORY LICENSOR WHO PROVIDE TECHNICAL DETAILS TO THE ASSESSEE TO EN ABLE IT TO MANUFACTURE THE REQUISITE PRODUCT AS PER THE VESUVIUS' STANDARDS. T HE AFORESAID SERVICES ARE AVAILABLE ON AS AND WHEN NEEDED BY THE ASSESSEE. FURTHER, THE ASSESSEE HAS RECEIVED ONLINE SUPPORTS AND OTHER TECHNICAL UP- GRADATION EMAILS, COPIES OF WHICH WERE ALSO ENCLOSE D IN THE TP DOCUMENT STUDY REPORT (REFER PAGE NO. 107-121 OF THE PAPER BOOK). THUS LD COUNSEL SUBMITS THAT THE ASSESSEE PAYS ROYALTY FOR ON-GOING, EVER-FLOWI NG AND COMPREHENSIVE BOUQUET OF SERVICES (SUCH AS TECHNICAL SUPPORT, INFORMATION , UPGRADES, USE OF TRADE-MARKS, PATENTS, VESUVIUS BRAND ETC.). THE BENEFITS RECEIVE D BY THE ASSESSEE DUE TO ITS ASSOCIATION WITH AES FOR OUTWEIGHS THE QUANTUM OF R OYALTY PAYABLE @ 3% & 5% TO REFRACTORY LICENSOR AND @ 2% & 3% TO SYSTEM LICE NSOR ON DOMESTIC &EXPORTS SALES OF CERTAIN SPECIFIED PRODUCTS. THUS, IT IS SU BMITTED THAT THE ROYALTY PAYMENT TO IT AE'S ARE AT ARM'S LENGTH IN VIEW OF THE BENEFITS RECEIVED BY THE ASSESSEE. BASED ON THE AFORESAID, THE LD COUNSEL SUBMITS THAT PAYME NT TO REFRACTORY & SYSTEM LICENSORS SHOULD NOT BE CLUBBED TOGETHER AND VIEWED SEPARATELY WHILE UNDERTAKING ANY COMPARATIVE ANALYSIS SINCE THE REFRACTORY LICEN SOR AND SYSTEMS LICENSOR HAVE BEEN PROVIDING THE BENEFITS ON A CONTINUOUS BA SIS INDEPENDENT OF EACH OTHER M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 15 55 5 AND EACH OF THE TWO AGREEMENTS HAVE SEPARATE IDENTI FIABLE DELIVERABLES. SO, BOTH MUST BE COMPARED INDIVIDUALLY FOR BENCHMARKING. 14. WE NOTE THAT ROYALTY DATA OF VARIOUS COMPANIES OBTAINED FROM ROYALTYSTATS.COM AND USED BY TPO FOR APPLYING CUP M ETHOD ARE DIFFERENT FROM PRODUCTS, TERMS & SCOPE OF ROYALTY PAYMENTS MADE BY THE APPELLANT AND ACCORDINGLY, APPLICATION OF CUP METHOD BY THE TPO F OR DETERMINING ALP IS NOT AS PER THE LAW AS HELD BY THE HON'BLE JURISDICTIONAL T RIBUNAL IN THE CASE OF AKZO NOBEL CHEMICALS (INDIA) LTD. V. DCIT [ITA NO. 1477/ PN/2010] & DCIT V. EMAMI LIMITED [ITA NOS.1065 & 1066/KOL/2017]. THAT BEING SO, WE DECLINE TO INTERFERE WITH THE ORDER OF ID. C.I T.(A) IN DELETI NG THE AFORESAID ADDITIONS. HIS ORDER ON THIS ADDITION IS, THEREFORE, UPHELD AND TH E GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 15. THE GROUND NO. 3 AND 4 OF ITA NO. 206/KOL/2018 AND GROUND NO. 1 AND 2 IN ITA NO.207/KOL/2018 ARE COMMON WHICH ARE RAISED BY THE REVENUE INA.Y. 2009- 10 & 2010-11RESPECTIVELY,RELATE TO TRANSFER PRICING ADJUSTMENT WITH RESPECT TO PAYMENT FOR MANAGEMENT SERVICES TO AE IN INR 3,10,4 8,978/-. SINCE THIS ISSUE IS COMMON IN THESE TWO APPEALS THEREFORE, WE TAKE LEAD CASE IN I.T.A. NO. 207/KOL/2018 FOR A.Y. 2010-11. 16. BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSESSEE HAS, INTER ALIA, AVAILED SERVICES IN THE NATURE OF SALES, MARKETING, VIP SUPPORT, HUMAN RESOURCES, ETC. FROM ITS AE, VESUVIUS GROUP S.A., BELGIUM VIDE SERVICE AGREEMENT (SA) DATED 22.02.2008 (INR 3,10,48,978/-). THE AFORESAID TRANSACTION WAS DULY BENCHMARKED BY APPLYING COST PLUS METHOD (CPM) WHEREIN THE ASSESSEE WAS CHA RGED A MARK-UP OF 5% ON THE MANAGEMENT SERVICE FEES ALLOCATED TO THE ASSESS EE. WITHOUT PREJUDICE, THE ASSESSEE HAD ALSO APPLIED THE TRANSACTIONAL NET MAR GIN METHOD (TNMM) TO CONTEND THAT THE TRANSACTION WAS MADE AT ARM LENGTH S PRICE (ALP). THE TPO REJECTING ALL THE CONTENTIONS RAISED BY THE ASSESSE E DISALLOWED AND MADE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 16 66 6 ADJUSTMENT OF AMOUNT OF INR RS.3,10,48,978/- BY WAY OF TRANSFER PRICING ADJUSTMENT ON THE FOLLOWING GROUNDS: A) THE SERVICES PROVIDED BY THE AE OF THE ASSESSEE UNDER THE SA FALL INTO THE CATEGORY OF STEWARDSHIP ACTIVITY; B) SERVICES PROVIDED BY THE AE OF THE ASSESSEE UNDE R THE SA WERE GENERAL SUPERVISORY ACTIVITIES WHICH ASSISTED THE AE TO CON TROL THE ACTIVITIES OF THE ASSESSEE; C) PAYMENTS MADE BY THE ASSESSEE TO THE GROUP WAS N OT COMMENSURATE TO THE BENEFITS RECEIVED BY THE ASSESSEE FOR WHICH HUGE PA YMENT WOULD HAVE BEEN MADE HAD THE SERVICES WOULD HAVE BEEN PROVIDED BY A THIR D PARTY TO THE ASSESSEE OR PERFORMED BY THE ASSESSEE IN-HOUSE. D) SERVICES WERE RENDERED TO THE ASSESSEE BY THE GR OUP BECAUSE OF THE OWNERSHIP INTEREST AND WERE DUPLICATIVE IN NATURE AND PROVID ED INDIRECT BENEFITS TO THE ASSESSEE. THUS, LD TPO MADE ADJUSTMENT OF INR 3,10,48,978/-. 17. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER / TPO, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DEL ETED THE ADDITION MADE BY THE ASSESSING OFFICER OBSERVING THE FOLLOWING: 1. I HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF TH E LD. TPO AND THE SUBMISSIONS OFFERED BY THE LD. A.R.S OF THE APPELLANT COMPANY. AFTER CAREFUL EXAMINATION, I FIND THAT THE IMPUGNED ADJUSTMENT MADE BY THE LD. TPO IS BASED ON AN INCORRECT APPROACH OF THE SITUATION AND AN INCORRECT APPROACH TOWARDS THE IMPUGNED TRANSACTIONS. I AM OF THE CONSIDERED VIEW THAT THIS ADJUSTMENT IS NOT SUSTAINABLE. THE TPO DID NOT MENTION ANY REASONS REJECTING THE M ETHOD OF BENCHMARKING APPLIED BY THE APPELLANT AND ALSO DID NOT APPLY ANY OF THE METHODS PRESCRIBED FOR BENCHMARKING. 2. A VOLUMINOUS SET OF DOCUMENTARY EVIDENCE SUCH AS SAMPLE EVIDENCES OF COMMUNICATIONS, TRAINING MANUALS, AND OTHER RELEVAN T DOCUMENTS WAS SUBMITTED WITH THE LD. TPO. THE DOCUMENTARY EVIDENCE SHOWS VA LUABLE COMMERCIAL SERVICES RECEIVED FROM AE. IT IS ALSO NOT DISPUTED THAT THE MANAGEMENT SERVICES WAS RENDERED EXCLUSIVELY FOR THE APPELLANT GROUP, AND T HAT SIMILAR SERVICES WAS NOT PROVIDED TO ANY THIRD PARTY. THE APPELLANT THROUGH EXECUTION OF THE AGREEMENT HAD HAS REAPED BENEFITS OF OPERATIONAL EFFICIENCY, ACCOUNTING & MANAGEMENT REPORTING EFFICIENCY. 3. THE LD. TPO DID NOT CONSIDER THE PLETHORA OF FAC TS, JUSTIFICATIONS, DETAILS & ARGUMENTS AS PRESENTED BY THE APPELLANT AND PROCEED ED ON THE BASIS THAT M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 17 77 7 JUSTBECAUSE THE GROUP CO. WANTED TO CONTROL ITS INT EREST, ALLOCATED THE COST TO THE APPELLANT AND THEREFORE THE SERVICES ARE IN THE NAT URE OF STEWARDSHIP SERVICES. THIS APPROACH OF THE LD. TPO WAS ERRONEOUS. 4. AS PER THE DEFINITION OF INTRA-GROUP SERVICE AS PER THE US REGULATIONS, FIRST THERE SHOULD BE AN ACTIVITY PERFORMED BY ONE OF THE MEMBERS OF A GROUP OF RELATED PARTIES WHICH LIES WITHIN THE AMBIT OF DEFINITION O F ACTIVITY (THE 'ACTIVITY TEST') AND SECOND, THAT ACTIVITY SHOULD RESULT IN A BENEFIT (T HE 'BENEFIT TEST') TO ONE OR MORE MEMBERS OF THAT GROUP OF RELATED ENTITIES. IN THE I NTEREST OF ECONOMY & EFFICIENCY, THE APPELLANT DESIRED TO OBTAIN THESE SERVICES FROM ITS AE. IT IS THE PRACTICE OF THE MULTINATIONAL TO FREQUENTLY CONCENTRATE VARIOUS ACT IVITIES FOR THE BENEFIT OF THE ENTIRE GROUP. 5. BY AVAILING THE INTRAGROUP SERVICES, THERE HAS B EEN SUBSTANTIAL SAVINGS IN TOTAL COSTS WHEN COMPARED WITH THOSE WHICH WOULD OTHERWIS E BE INCURRED IF THEY WERE BORNE BY THE INDIVIDUAL COMPANIES IN VARIOUS COUNTR IES. IT IS NOT DISPUTED BY THE TPO THAT HAD THE APPELLANT NOT RECEIVED SUPPORT FRO M AE, IT WOULD NEED TO PERFORM THE FUNCTIONS IN-HOUSE OR HIRE EXPERIENCED AND TRAINED SERVICE PROVIDERS. SUCH SERVICES ARE THUS NOT IN NATURE OF SIMPLE OVER SIGHT FUNCTIONS WHICH HAVE BEEN PERFORMED TO PROTECT THE INTEREST IN THE GROUP. FOR THE PURPOSE OF DETERMINATION AND EXPLANATION, THE APPELLANT HAS SUBMITTED DOCUME NTS EVIDENCING THE REGULAR FLOW OF VALUABLE COMMERCIAL SERVICES. FROM THE ABOV E DETAILS SUBMITTED BY THE ASSESSEE IT HAS BEEN AMPLY DEMONSTRATED THAT THE BE NEFITS GENERATED BY THE SAID SERVICES DURING THE RELEVANT FINANCIAL YEAR HAVE UN DENIABLY ADDED ECONOMIC / COMMERCIAL VALUE TO ENHANCE THE COMMERCIAL POSITION OF THE ASSESSEE AND SUCH SERVICES ARE RECEIVED BY THE ASSESSEE ON A CONTINUO US BASIS ACROSS ITS OPERATIONAL AREAS. HENCE IT IS ERRONEOUS TO CLASSIFY THE SERVIC ES TO BE IN THE NATURE OF STEWARDSHIP SERVICES. 6. THE APPELLANT DURING THE COURSE OF HEARING HAS S UBMITTED THE DECISIONS OF AKZO NOBEL INDIA LIMITED VS DCIT [ITA NO. 531/KOL/2014 & ITA NO. 335/KOL/2014] &NLC ,NALCO (INDIAL LIMITED VS, DCIT [2016] 71 TAXM ANN.COM 57 (KOLKATA - TRIB.) BY HON'BLE JURISDICTIONAL ITAT. ON PERUSAL O F THE SAME, I AM OF THE VIEW THAT THE APPELLANT'S CASE IS SQUARELY COVERED BY TH ESE DECISIONS AND THAT THE NATURE OF SERVICES ARE NOT IN THE NATURE OF STEWARD SHIP ACTIVITIES AND ACCORDINGLY, THE ARM'S LENGTH PRICE OF THE TRANSACTIONS CANNOT B E DETERMINED AT NIL . IN VIEW OF THE ABOVE, THE ADJUSTMENT MADE BY THE LD . TPO / AO IS NOT SUSTAINABLE ON THE FACTS OF THE CASE, AND THE LAW APPLICABLE. THE SAME IS DIRECTED TO BE DELETED, AND AS A RESULT, THIS GROUND OF APPEAL STA NDS ALLOWED. 18. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE R EVENUE IS IN APPEAL BEFORE US. 19. THE LD. DR FOR THE REVENUE HAS PRIMARILY REITER ATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OU R EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY AND ON T HE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER OF THE LD. CIT( A). M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 18 88 8 20. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY G ONE THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAD DEC IDED THE MATTER IN FAVOUR OF THE ASSESSEE BASED ON THE FOLLOWING OBSERVATIONS: A) THE ASSESSEE HAS REAPED BENEFITS OF OPERATIONAL EFFICIENCY, ACCOUNTING & MANAGEMENT REPORTING EFFICIENCY THROUGH THE EXECUTI ON OF THE AGREEMENT. B) THE SERVICES RENDERED BY THE AE WERE NOT IN THE NATURE OF STEWARDSHIP ACTIVITIES. LD COUNSEL SUBMITTED THAT APPELLANT HAD ENTERED INT O A SERVICE AGREEMENT (SA) DATED 22-02-2008 WITH ITS AE, I.E. VESUVIUS GROUP S .A, BELGIUM (VGSA) FOR PROVISION OF VARIOUS MANAGEMENT AND SUPPORT SERVICE S. IN TERMS OF ARTICLE 3 OF THE SA, VGSA HAS PROVIDED VARIOUS SERVICES TO THE APPEL LANT UNDER THE FOLLOWING CATEGORIES: SALES, MARKETING, VIP SUPPORT HUMAN RESOURCES; MANUFACTURING, ENGINEERING DEVELOPMENTS; & FINANCE, INFORMATION SYSTEMS, BUSINESS SUPPORT & DE VELOPMENT. IN TERMS OF ARTICLE 4 OF THE SA, THE APPELLANT HAS AGREED AND UNDERTAKEN TO PAY A SERVICE FEE FOR SPECIFIC AND SHARED SERVICES. FURTH ER, IN TERMS OF THE SAID ARTICLE, ALL DIRECT AND INDIRECT COST INCURRED BY VGSA IN RE NDERING SUCH SERVICES SHALL BE BROKEN INTO THE FOLLOWING 3 SERVICE CATEGORIES, INC LUDING ALL COSTS OF PERSONNEL, DEPRECIATION OF EQUIPMENT, OUTSIDE SERVICES AND OVE RHEADS EXPENSES: MARKETING, VIP AND TECHNICAL SALES SUPPORT (SERVICE CATEGORY - 1') M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 1 11 19 99 9 HUMAN RESOURCES SUPPORT (SERVICE CATEGORY - 2) FINANCE, INFORMATION SYSTEMS, BUSINESS SUPPORT AND DEVELOPMENT, MANUFACTURING, ENGINEERING DEVELOPMENTS,(SERVICE CA TEGORY - 3) THE BASIS OF CHARGE FOR SPECIFIC AND SHARED SERVICE S WERE AS UNDER: FOR SPECIFIC SERVICES : ON COST BASIS OR THE BASIS OF MAN DAYS @ EURO 200 0/1500 FOR SENIOR MANAGEMENT/OTHER EMPLOYEES RESPECTIVELY . FOR SHARED SERVICES : ON THE BASIS OF PRE-DEFINED ALLOCATION KEYS: SERVICE CATEGORY - 1 : ON THE BASIS OF APPELLANT'S DIRECT SALES VS. VESUV IUS DIVISION CONSOLIDATED DIRECT SALES; SERVICE CATEGORY - 2 : ON THE BASIS-OF APPELLANT'S PERSONNEL COSTS VS. V ESUVIUS DIVISION'S CONSOLIDATED PERSONNEL COSTS, EXCLUDING HQ COSTS SERVICE CATEGORY - 3 : ON THE BASIS OF APPELLANT'S NET ASSETS VS. VESUV IUS DIVISION'S CONSOLIDATED NET ASSETS AFTER DEDUCTION OF STEWARDSHIP COSTS. A MARK-UP OF 5% IS APPLIED ON THE PORTION OF ALLOCA TED SERVICES AFTER EXCLUSION OF EXTERNAL SERVICE FEES AND CONSULTATIONS ALLOCATED A T COST SUBJECT TO THE CONDITION THAT TOTAL AMOUNT OF FEES CHARGED BY VGSA SHALL NOT EXCE ED 1 MIO. EUROS ON AN ANNUAL BASIS. WE NOTE THAT DURING THE YEAR, THE APPELLANT HAS AVA ILED MANAGEMENT SERVICES FROM ITS AE AMOUNTING TO RS. 3,10,48,978/ - (INCLUDING P AYMENT FOR SPECIFIC SERVICES AMOUNTING TO RS. 26,48,778/-, (PB.9). THE APPELLANT HAD APPLIED TNNM TO BENCHMARK THE SAID TRANSACTION WHERE THE WEIGHTED A VERAGE, OPERATING INDUSTRY MARGIN ON TURNOVER (MOT) & MARGIN ON COST (MOC) WAS 16.98% AND 20.45% RESPECTIVELY WHILE THE APPELLANT WAS OPERATING WITH MOT OF 19.19% AND MOC OF 23.74% RESPECTIVELY [PB PAGE 23-43 AT PG NO. 39]. T HE APPELLANT WAS CHARGED A MARK-UP OF 5% ON THE MANAGEMENT SERVICE FEES ALLOCA TED TO THE APPELLANT. IT IS M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 20 00 0 SUBMITTED THAT THE WEIGHTED AVERAGE MARGIN ON TURNO VER IN CASE OF COMPANIES ENGAGED IN PROVIDING SIMILAR SERVICES IS 15.23%(PB. 43), WHICH IS MUCH HIGHER THAN THE MARK-UP OF 5% CHARGED FROM THE APPELLANT AND HE NCE THE SAID TRANSACTION IS AT ALP.IN TERMS OF THE PROVISION OF SEC. 92C(3), THE T PO CAN PROCEED TO DETERMINE THE ALP ONLY ON FULFILMENT OF THE CONDITIONS SPECIF IED IN CLAUSE (A) TO (D) OF THE SAID SECTION. IN THE ABSENCE OF ANY DEFAULT IN COMP LYING WITH THE CONDITIONS AS SPECIFIED IN PROVISIONS OF 92C(3), REJECTION OF APP ELLANT'S BENCHMARKING [BY APPLYING CPM READ WITH TNMM] IS NOT PERMISSIBLE UND ER THE LAW. FOR THAT ASSESSEE RELIED ON THE FOLLOWING CBDT CIRCULARS AND PRECEDENTS: CBDT'S CIRCULAR 12 OF 2001 DATED 23 RDAUGUST, 2001 CBDT'S CIRCULAR 14 OF 2001 DATED 22ND NOVEMBER 2001 PHILIPS SOFTWARE CENTRE PRIVATE LIMITED - VS. - ACI T [(2008) 15 DTR 0505 (BANG.)] [AFFIRMED BY THE HON'BLE KARNATAKA HIGH CO URT IN CIT V. PHILIPS SOFTWARE CENTRE (P.) LTD. [2018] 95 TAXMANN.COM 214 (KARNATAKA)] NLC NALCO (INDIA) LIMITED VS DCIT [ITA NO. 529/KOL. /2008 & ITA NO. 1256/KOL/2009] DCIT V. LANDIS+ GYR LTD. [2017] 86 TAXMANN.COM 109 (KOLKATA - TRIB.) BESIDES, SERVICES ARE NOT IN NATURE OF SHAREHOLDER ACTIVITY NOR STEWARDSHIP ACTIVITIES, ASTHE EMAIL CORRESPONDENCES SUBMITTED [ PB PAGE 69-190] SUBSTANTIATE THAT THE SERVICES ARE IN THE NATURE OF INTRA-GROUP SERVICES (PARA 7.14 OF OECD GUIDELINES).THAT BEING SO, WE DECLINE TO INTERFERE IN THE ORDER PASSED BY THE LD. CIT(A), HIS ORDER ON THIS ISSUE, IS HEREBY UPHELD A ND GROUND NOS. 1 , 2 IN ITA NO. 207/KOL/2018 AND GROUND NO. 3 AND 4 IN ITA NO. 20 6/KOL/2018 RAISED BY THE REVENUE ARE DISMISSED. OTHER GROUNDS 21. GROUND NOS. 1 AND 2 RAISED BY THE ASSESSEE IN I .T.A. NO. 1289/KOL/2017, FOR A.Y.2008-09 AND GROUND NO. 2 RAISED BY THE REVENUE IN I.T.A. NO. 1333/KOL/2017 FOR A.Y. 2008-09 ARE IDENTICAL AND CO MMON THEREFORE WE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 21 11 1 ADJUDICATE THEM TOGETHER. REVENUE`S APPEAL IN I.T.A . NO. 1333/KOL/2017 FOR A.Y. 2008-09 IS TAKEN AS THE LEAD CASE. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AND REVENUE ARE AS FOLLOWS: (ASSESSEE) I.T.A. NO. 1289/KOL/2017 FOR A.Y. 2008-0 9 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) WAS NOT JUSTIFIED AND GROSSLY ERRED IN NOT ALLOWING DEDUCTION IN RESPECT OF LEAVE ENCASHMENT ON PROVISION BASIS AMOUNTING TO RS. 34,33,302/-. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) WAS NOT JUSTIFIED AND GROSSLY ERRED IN NOT ALLOWING DEDUCTION IN RESPECT OF PROVISION FOR LEAVE ENCASHMENT ADJUSTED WITH THE OPENING GENERAL RESERVE AND DEFERRED TAX ASSETS AS PER AS-15 (REVIS ED 2005) AMOUNTING TO RS. 44,97,000/-. ( REVENUE)I.T.A. NO. 1333/KOL/2017 FOR A.Y. 2008-09 2. WHETHER THE LD. CIT(A) WAS CORRECT IN DELETING T HE ADDITION WITHOUT APPRECIATING THE FACT THAT THE PROVISIONING HAS BEE N MADE IN THE A.Y. 2008- 09 IN RESPECT OF A CLAIM OF AN EXPENSE PERTAINING T O AN EARLIER YEAR AND THE SAID PROVISIONING HAVING NOT BEEN DEBITED TO THE P & L ACCOUNT BUT TO THE RESERVE ACCOUNT COULD NOT HAVE BEEN ALLOWED AS BUSI NESS DEDUCTION FOR THE A.Y. 2008-09? WAS NOT THE LD. CIT(A) INCORRECT IN N OT FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F TUTICORIN ALKALI CHEMICALS VS. CIT (227 ITR 172) IN WHICH THE HONBL E COURT HAS HELD THAT EVEN IF THERE IS AN ACCOUNTING PRACTICE FOR REVENUE RECOGNITION IF IT DOES NOT AGREE WITH THE PROVISIONS OF THE INCOME TAX ACT IT HAS TO BE IGNORED? 22. FACTS OF THE CASE WHICH CAN BE STATED QUITE SHO RTLY ARE AS FOLLOWS:DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER EXAMI NED THE BOOKS OF ACCOUNTS AND COMPUTATION OF THE ASSESSEE AND NOTICED THAT THE AS SESSEE HAD DEBITED PROVISION FOR LEAVE ENCASHMENT AMOUNTING TO RS.34,33,302/- IN ITS PROFIT AND LOSS ACCOUNT. DURING THE COURSE OF HEARING, THE ASSESSEE WAS ASKE D TO EXPLAIN AS TO WHY THE SAID PROVISION FOR LEAVE ENCASHMENT SHOULD NOT BE DISALL OWED. IN RESPONSE, THE ASSESSEE VIDE ITS LETTER DATED 23.12.2011 HAS SUBMI TTED THAT THE PROVISION WAS CLAIMED AS DEDUCTION ON THE BASIS OF DECISION OF HO NBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD. VS. UNION OF INDI A (2007) 292 ITR 470 (CAL) WHEREIN IT HAS BEEN HELD THAT INSERTION OF CLAUSE ( F) IN SECTION 43B AND RESTRICTING THE DEDUCTION IN RESPECT OF LEAVE ENCASHMENT, WHICH IS OTHERWISE A TRADING M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 22 22 2 LIABILITY, IS ARBITRARY, UNCONSCIONABLE AND DE HORS THE SUPREME COURTS DECISION IN THE CASE OF BHARAT EARTH MOVERS VS. CIT (2000) 245 ITR 428 (SC). THE ASSESSEE HAS FURTHER SUBMITTED THAT APEX COURT VIDE ITS INTE RIM ORDER NO. CC12060 / 2008 DATED 08.09.2008 HAS STAYED THE SAID ORDER OF EXIDE INDUSTRIES LTD. (SUPRA) AND VIDE THE SUBSEQUENT ORDER NO. 22889/2008 DATED 08.0 5.2009 CLARIFIED THAT THE ASSESSEE IS ENTITLED TO LODGE THE CLAIM IN THE RETU RN AFTER PAYMENT OF TAXES. BASED ON THE ABOVE, NO DISALLOWANCE U/S 43B IS OFFERED ON ACCOUNT OF PROVISION FOR LEAVE ENCASHMENT. HOWEVER, THE AO REJECTED THE CONTENTION OF THE ASSE SSEE AND HELD THAT ACTUAL PAYMENT HAS NOT BEEN MADE BY THE ASSESSEE BEFORE TH E DUE DATE, THEREFORE THE PROVISION FOR LEAVE ENCASHMENT AMOUNTING TO RS. 34, 33,302/- WAS DISALLOWED. 23. AO`S OBSERVATION ABOUT AS-15 ADJUSTMENT ARE AS FOLLOWS.ON PERUSAL OF COMPUTATION OF TOTAL INCOME FURNISHED BY THE ASSESS EE, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS.1,95, 78,000/- AS DEDUCTION IN ITS COMPUTATION OF TOTAL INCOME ON ACCOUNT OF AMOUNT AR ISING UPON REINSTATEMENT OF EMPLOYEES BENEFIT OBLIGATION ON ACCOUNT OF ACCOUNTI NG STANDARD (AS)-15 ADJUSTMENT. THE SAID AMOUNT HAS NOT BEEN DEBITED TO PROFIT & LOSS ACCOUNT AND HAS NOT BEEN ROUTED THROUGH GENERAL LEDGER IN THE B ALANCE SHEET.THE ASSESSEE WAS ASKED TO EXPLAIN THE SAME. IN RESPONSE, THE ASSESSE E HAS SUBMITTED THE EXPLANATION IN RESPECT OF THE SAID CLAIM. IT HAS BEEN EXPLAINED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS ACCOUNTED FOR THE EM PLOYEE RETIREMENT BENEFIT AS PER ACCOUNTING STANDARD-15 'ACCOUNTING FOR RETIREME NT BENEFIT'. IN ACCORDANCE WITH THE TRANSITIONAL PROVISION IN THE REVISED ACCO UNTING STANDARD-15, RS.1,95,78,000/- REPRESENTING CHARGE FOR EMPLOYEE B ENEFIT OBLIGATION FOR EARLIER YEARS UP TO MARCH 31, 2007, HAS BEEN CREATED PARTLY BY DEBITING THE GENERAL RESERVE AND DEFERRED TAX ASSET ACCOUNTS. IN THIS RE GARD THE DETAILS OF THE PROVISIONS FOR EMPLOYEE RETIREMENT BENEFIT OF RS.1,95,78,000/- CREATED AS PER AS-15 IS SHOWN AS FOLLOWS:- M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 23 33 3 PARTICULARS AMOUNT (RS.) POST-RETIREMENT MEDICAL SCHEME 98,82,000/- GRATUITY 51,99,000/- LEAVE ENCASHMENT 44,97,000/- TOTAL 1,95,78,000/- ADJUSTED WITH THE OPENING BALANCE OF GENERAL RESERV E 1,29,23,000/- OPENING BALANCE OF DEFERRED TAX ASSETS INCREASED IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT PROVI SION FOR GRATUITY HAS ALREADY BEEN PAID DURING THE YEAR. HENCE THERE IS NO QUESTI ON OF DISALLOWANCE OF THE SAME U/S 43B OF THE ACT. IN RESPECT OF PROVISION FOR LEA VE ENCASHMENT THE ASSESSEE SUBMITTED THAT AS PER KOLKATA HIGH COURT JUDGMENT I N EXIDE INDUSTRIES LTD, (2007) 292 ITR 470 (CAL) AND AS PER ORDER OF THE SUPREME C OURT IN THE CASE OF BHARAT EARTH MOVERS (2000), 295 ITR 428, THE PROVISION OF LEAVE ENCASHMENT IS AN ALLOWABLE EXPENSE. THE ASSESSEE HAS FURTHER SUBMITT ED THAT STAY ON OPERATION OF THE AFORESAID JUDGMENT OF CALCUTTA HIGH COURT IN THE CA SE OF EXIDE INDUSTRIES WAS GRANTED BY THE SUPREME COURT VIDE ORDER DATED 08.09 .2008 AND SUBSEQUENTLY THE SUPREME COURT VIDE ORDER DATED 08.05.2009 FURTHER C LARIFIED THAT DURING THE PENDENCY OF APPEAL, THE ASSESSEE WILL BE LIABLE TO PAY ADVANCE TAX ON LEAVE ENCASHMENT AS IF SECTION 43B(F) IS ON THE STATUTE B OOK BUT AT THE SAME TIME IT WILL BE ENTITLED TO CLAIM THE SAME DEDUCTION ON PROVISIO N BASIS. AS REGARDS PROVISION FOR POST-RETIREMENT MEDICAL SCHEME, THE ASSESSEE SU BMITTED THAT THE SAME WAS MADE AS PER ACTUARIAL VALUATION REPORT. THE ASSESSE E ALSO REFERRED TO NOTE NO. 1(IX)(1)(E) OF SCHEDULE-L7 [ NOTES ON ACCOUNTS] OF THE AUDITED ACCOUNTS WHEREIN IT IS MENTIONED THAT THE ASSESSEE HAS A SINGLE PREMIUM INSURANCE POLICY TOWARDS INSURANCE COVER FOR POST-RETIREMENT MEDICAL TREATME NT. THE ASSESSEE ALSO CLARIFIED THAT SINCE THE ABOVE MENTIONED EXPENSES HAVE NOT BE EN ROUTED THROUGH PROFIT & LOSS ACCOUNT, THE SAME HAS BEEN CLAIMED IN COMPUTAT ION OF TOTAL INCOME U/S 37(1) OF THE ACT. HOWEVER, AO REJECTED THE CONTENTION OF THE ASSESSEE AND MADE ADDITION RS.1,95,78,000/-. 24. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A), WHO HAS PAR TLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER OBSERVING THE FOLLOWING: M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 24 44 4 FINDINGS OF LD. CIT(A) IN RESPECT OF PROVISION FOR LEAVE ENCASHMENT: I HAVE CONSIDERED THE FINDINGS OF THE LD. ASSESSIN G OFFICER AND THE WRITTEN SUBMISSION AND CASE LAWS/ JUDICIAL PRECEDENTS FILED BY THE LD. A.R.S. THE PROVISION FOR LEAVE ENCASHMENT IS SPECIFICALLY COVERED BY CLAUSE (F) OF SEC. 43B AND DEDUCTION FOR THE SAME CAN BE ALLOWED ONLY ON PAYMENT BASIS. 2. THE ASSESSEE CHALLENGED THE DISALLOWANCE OF PROV ISION OF LEAVE ENCASHMENT RELYING ON THE JUDGMENT OF HON'BLE CALCUTTA HIGH COURT IN EXID E INDUSTRIES LTD V. UOI-292 ITR 470 (CAL) AND ALSO THE JUDGMENT OF KERALA HIGH COURT IN HINDUSTAN LATEX PRODUCTS. IT IS TRUE THAT THE HON'BLE CALCUTTA HIGH COURT HAS STRUCK DOW N PROVISION OF SEC. 43B(F) WHILE DECIDING HE CASE OF EXIDE INDUSTRIES V. UNION OF IN DIA 292 ITR 470 (CAL). HOWEVER, THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. M/S EXI DE INDUSTRIES LTD. IN SLP (CIVIL). CC 12060/2008 DURING HEARING ON 8.9.2008 RENDERED THE FOLLOWING ORDER: - 'UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING ORDER, ISSUE NOTICE, IN THE MEANTIME, THERE SHALL BE STAY OF THE IMPUGNED JUDGM ENT, UNTIL FURTHER ORDERS. ' 3. THE HON'BLE SUPREME COURT DURING THE HEARING IN THE SAME CASE FURTHER ON 8.5.2009 HELD AS UNDER: - UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING ORDER :'- DELAY CONDONED. LEAVE GRANTED. PENDING HEARING AND FINAL DISPOSAL OF THE CIVIL APPEAL, DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AN D INTEREST WHICH HAS ACCRUED TILL DATE. IT IS MADE CLEAR THAT AS FOR AS THE OUTSTANDI NG INTEREST DEMAND AS OF DATE IS CONCERNED, IT WOULD BE OPEN TO THE DEPARTMENT TO RE COVER THAT AMOUNT IN CASE CIVIL APPEAL OF THE DEPARTMENT IS ALLOWED. WE FURTHER MAKE IT CLEAR THAT THE ASSESSEE WOULD DU RING THE PENDENCY OF THIS CIVIL APPEAL, PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK BUT AT THE SAME TIME IT WOULD BE ENTITLED TO MAKE A CLAIM IN ITS RETURNS. ' 4. THUS, VIDE ORDER DATED 8.9.2008 IN CIT V. EXIDE INDUSTRIES LTD. THE HON'BLE SUPREME COURT HAD GRANTED STAY ON THE HIGH COURT JUDGMENT A ND FURTHER ORDER. IN THE SUBSEQUENT ORDER DATED 8.5.2009 IN PETITION FOR SPECIAL LEAVE TO APPEAL (CIVIL) NO. 22889/2008, IT WAS DIRECTED BY HON'BLE SUPREME COURT THAT DURING T HE PENDENCY OF THE CIVIL APPEAL, THE ASSESSEE WOULD PAY TAX AS IF SECTION43B(F) IS ON TH E STATUTE BOOK THOUGH IT WOULD BE ENTITLED TO MAKE CLAIM IN THE RETURN. IN MY CONSIDE RED VIEW THE STAY GRANTED EARLIER HAS NOT BEEN VACATED BY THE HON'BLE APEX COURT. THEREFO RE, I DO NOT AGREE WITH THE ASSESSEE THAT HON'BLE SUPREME COURT HAS NOT STAYED THE ORDER OF HON'BLE HIGH COURT, AS THE STAY GRANTED VIDE ORDER DATED 8.9.2008 CONTINUES TO REMA IN IN FORCE. COMING NOW TO THE OTHER CONTENTION OF THE ASSESSEE, GENERALLY SPEAKING IT I S TRUE, THAT STAY OF AN ORDER OF LOWER COURT AFFECTS ONLY THE PARTIES OF THE CONCERNED SUI T AND THE STAY DOES NOT NECESSARILY MEAN THAT RATIO OF THE ORDER OF LOWER COURT DOES NOT REM AIN IN FORCE. HOWEVER, THE ISSUE UNDER CONSIDERATION IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA) WAS THE VERY LEGALITY AND CONSTITUTIONAL VALIDITY OF THE PROVISIONS, AND THER EFORE THE HON'BLE COURT ORDER HAS WIDER RATIFICATION AND ITS SCOPE IS NOT LIMITED ONLY TO T HE PARTIES TO THE SUIT. THEREFORE, THE ORDER OF HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA) IS AT PRESENT NOT OPERATIONAL. RATHER, THE PROVISION OF SECTION 43B(F) IS TO BE CO NSIDERED TO BE IN FORCE KEEPING IN VIEW M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 25 55 5 THE INTERIM ORDER OF HON'BLE SUPREME COURT. CONSIDE RING THIS LEGAL POSITION, WITH DUE RESPECT TO HON'BLE HIGH COURT, I AM FOLLOWING THE I NTERIM ORDER OF HON'BLE SUPREME COURT. CONSIDERING THE SAME THIS GROUND TAKEN BY TH E ASSESSEE IS DISMISSED, WITH A RIDER THAT THIS ORDER IS SUBJECT TO MODIFICATION IN A SIT UATION WHETHER THE HONBLE APEX COURT ULTIMATELY DECIDES THE ISSUE IN FAVOUR OF THE ASSES SEE. FINDING OF LD. CIT(A) IN RESPECT OF AS-15 ADJUSTMEN TS: I HAVE CAREFULLY CONSIDERED THE FINDINGS OF THE LD . ASSESSING OFFICER AND THE WRITTEN SUBMISSION AND CASE LAWS FILED BY THE LD. A.R.S FOR THE ASSESSEE. THE ASSESSEE-COMPANY HAS MADE PROVISION FOR EMPLOYEE BENEFITS BY ADJUSTI NG THE OPENING GENERAL RESERVE AND DEFERRED TAX ASSETS IN ACCORDANCE WITH ACCOUNTING S TANDARD-15 (REVISED-2005). THE LD. ASSESSING OFFICER HAD DISALLOWED THE SAME ON THE RE ASONING THAT THE IMPUGNED EXPENSES DO NOT PERTAIN TO THE YEAR UNDER CONSIDERATION AND THAT PROVISIONS ARE CONTINGENT IN NATURE. THE LD. AR.S HAVE SUBMITTED THAT THE PROVIS IONS HAVE BEEN MADE BECAUSE OF THE APPLICABILITY OF THE REVISED AS-15, AND THAT THE EX PENSES WHICH CRYSTALLIZED DURING THE RELEVANT ASSESSMENT YEAR ARE TO BE ALLOWED IN THE C URRENT YEAR. 2. FURTHER, THE AFORESAID PROVISIONS HAVE BEEN WORK ED OUT AS PER THE ACTUARIAL VALUATION REPORT. COPY OF ACTUARIAL VALUATION REPORTS HAS ALS O BEEN DULY SUBMITTED BY THE. LD. A.R. ALONG WITH THE WRITTEN SUBMISSIONS. THEREFORE, THE SAID PROVISIONS CANNOT BE SAID TO BE CONTINGENT IN NATURE. THE VARIOUS ITEMS ARE DECI DED ALONG THE FOLLOWING LINES: 3. PROVISION FOR POST-RETIREMENT MEDICAL SCHEME OF RS.98,82,000/-. I FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE-COMPA NY BY THE DECISIONS OF THE HON'BLE TRIBUNAL IN GLAXO SMITHKLINE CONSUMER HEALTHCARE LT D. -VS.- ACIT (2013) 36 CCH 21 (CHD) AND BOKARO POWER SUPPLY CO. (P) LTD. -VS.- DC IT (2013) 35 CCH 293 (DEL). THIS ISSUE IS ACCORDINGLY ALLOWED IN FAVOUR OF THE ASSES SEE. 4. AS REGARDS THE PROVISION FOR GRATUITY OF RS.51,9 9,000/-, IT WAS SUBMITTED BY THE LD. A.R. THAT THE PAYMENT FOR THE SAME HAS ALREADY BEEN MADE DURING THE RELEVANT PREVIOUS YEAR AND AS PER THE PROVISIONS OF SUB-SECTION (B) O F SEC,43B, GRATUITY IS ALLOWABLE IN THE YEAR IN WHICH PAYMENT IS MADE. THE LD. AO IS THEREB Y DIRECTED TO VERIFY THE PAYMENT, AND WHERE THE CONTENTION OF THE ASSESSEE FOUND CORRECT, TO ALLOW THE SAME. ACCORDINGLY, THIS ITEM OF EXPENSE IS ALLOWED FOR STATISTICAL PURPOSE. 5. PROVISION FOR LEAVE ENCASHMENT OF RS.44,97,000/- : PROVISION FOR LEAVE ENCASHMENT IS SPECIFICALLY COVERED BY CLAUSE (F) OF SEC. 43B AND DEDUCTION FOR THE SAME CAN BE ALLOWED ONLY ON PAYMENT BASIS. FURTHER, THE HON'BLE SUPREME COURT VIDE ITS INTERIM ORDER DATED 08-09-2008 AND 08-05-2009 AGAINST THE ORDER OF EXID E INDUSTRIES LTD. (2007) 292 ITR 470 (CAL) HAS ALLOWED THE OPERATION OF SEC. 43B(F) TO CONTINUE UNTIL FURTHER ORDERS. ACCORDINGLY, THIS CLAIM OF THE ASSESSEE IS NOT TENA BLE, AND REQUIRES TO BE DISMISSED, SUBJECT TO SUCH FINDING BEING AMENABLE FOR MODIFICA TION IN A SITUATION WHERE THE HON'BLE APEX COURT ULTIMATELY DECIDES THE ISSUE IN FAVOUR O F THE ASSESSEE. 25. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE A SSESSEE IS IN APPEAL BEFORE US AGAINST THE ADDITION CONFIRMED BY CIT(A), IN RESPEC T OF PROVISION OF LEAVE ENCASHMENT OF RS. 34,33,302/-. M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 26 66 6 WHEREAS THE REVENUE IS IN APPEAL BEFORE US AGAINST THE PARTLY RELIEF GRANTED BY CIT(A) IN RESPECT OF, TRANSITIONAL PROVISION AS PER AS-15, FOR POST RETIREMENT MEDICAL SCHEME OF RS. 98,82,000/-, TRANSITIONAL PRO VISION AS PER AS-15, FOR GRATUITY OF RS. 51,99,000/- AND TRANSITIONAL PROVIS ION AS PER AS-15, FOR LEAVE ENCASHMENT OF RS. 54,97,000/-, ( NOTE: THESE TRANSI TIONAL PROVISIONS WERE CREATED ON ACCOUNT OF ADOPTION OF REVISED ACCOUNTING STANDA RD -15, BY ASSESSEE). 26. THE LD. DR FOR THE REVENUE HAS PRIMARILY REITER ATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OU R EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 27. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE SUBMITTED BEFORE US THAT DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAS MADE PROVISION FOR EMPLOYEE BENEFIT OF RS.L,95,78,000/- BY ADJUSTING THE OPENING GENERAL RESERVE AND DEFERRED TAX ASSETS IN ACCORDANCE WITH ACCOUNTING STANDARD -15 (REVISED 2005) 'EMPLOYEE BENEFITS'. TH E AFORESAID PROVISION OF RS. 1,95,78,000/- COMPRISES OF PROVISION FOR POST RETIR EMENT MEDICAL SCHEME OF RS. 98,82,000/-, PROVISION FOR GRATUITY OF RS.51,99,000 /- AND PROVISION FOR LEAVE ENCASHMENT OF RS.44,97,000/-. THE AFORESAID PROVISI ON FOR EMPLOYEE BENEFITS IS MADE AS PER THE ACTUARIAL VALUATION. IN THIS REGARD A COPY OF THE ACTUARIAL VALUATION REPORT IN RESPECT OF PROVISION FOR POST RETIREMENT MEDICAL SCHEME, PROVISION FOR GRATUITY AND PROVISION FOR LEAVE ENCASHMENT HAS ALR EADY BEEN FURNISHED DURING THE APPELLATE STAGE BEFORE THE LD CIT(A). AS REGARD PRO VISION FOR GRATUITY WHICH IS ONLY ALLOWABLE ON PAYMENT BASIS AS PER SEC. 43B(B), THE LDCOUNSEL SUBMITTED THAT THE SAME HAS ALSO BEEN PAID DURING THE YEARUNDER CO NSIDERATION AND HENCE ALLOWABLE U/S 43B OF THE ACT. THE LD. COUNSEL FOR T HE ASSESSEE ALSO SUBMITTED THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAD REVISED ACCOUNTING STANDARD - 15 IN 2005. THE OBJECTIVE OF AS-15 (REVISED) IS TO PRESCRIBE THE ACCOUNTING AND DISCLOSURE FOR EMPLOYEE BENEFITS. THE STATEMENT REQ UIRES AN ENTERPRISE TO RECOGNIZE: M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 27 77 7 (A) A LIABILITY WHEN AN EMPLOYEE HAS PROVIDED SERVI CE IN EXCHANGE FOR EMPLOYEE BENEFITS TO BE PAID IN THE FUTURE; AND (B) AN EXPENSE WHEN THE ENTERPRISE CONSUMES THE ECO NOMIC BENEFIT ARISING FROM SERVICE PROVIDED BY AN EMPLOYEE IN EXCHANGE FOR EMP LOYEE BENEFITS. AS PER AS-15 (REVISED), POST EMPLOYMENT BENEFIT PL AN I.E. PENSION, ETC ARE CLASSIFIED AS EITHER 'DEFINED BENEFIT SCHEME' OR 'D EFINED CONTRIBUTION SCHEME'. UNDER 'DEFINED BENEFIT SCHEME' AN ENTERPRISE OBLIGA TION IS TO PROVIDE THE AGREED BENEFITS TO CURRENT AND FORMER EMPLOYEES. THE ACTUA RIAL RISK AND INVESTMENT FALL IN SUBSTANCE ON THE EMPLOYEE. THE AS-15 (REVISED) PROV IDES IN DETAIL ABOUT THE ACTUARIAL VALUATION METHOD AND ACTUARIAL ASSUMPTION S TO BE USED FOR MEASURING THE LIABILITY FOR EMPLOYEE BENEFITS UNDER THE 'DEFINED BENEFIT SCHEME'. THIS WAY, LD COUNSEL DEFENDED THE ORDER PASSED BY LD CIT(A) AND PRAYED BEFORE THE BENCH TO ALLOW PROVISION FOR LEAVE ENCASHMENT. 28. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GO NE THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT SO FAR PROVISION FOR POST-RETIREMENT MEDICAL SCHEME OF RS.98,82,000/- IS CONCERNED, WE NOTE THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSE E COMPANY BY THE DECISIONS OF THE TRIBUNAL IN GLAXO SMITHKLINE CONSUMER HEALTHCAR E LTD. -VS.- ACIT (2013) 36 CCH 21 (CHD) AND BOKARO POWER SUPPLY CO. (P) LTD. - VS.- DCIT (2013) 35 CCH 293 (DEL). WE ARE OF THE VIEW THAT LD CIT(A) HAS R IGHTLY ALLOWED THE CLAIM OF THE ASSESSEE COMPANY. THAT BEING SO, WE DECLINE TO INTE RFERE WITH THE ORDER OF LD. CIT(A) IN DELETING THE AFORESAID ADDITION,HIS ORDER ON THIS ADDITION IS, THEREFORE, UPHELD AND THE GROUNDS OF APPEAL OF THE REVENUE IS DISMISSED. 29. AS REGARDS, PROVISION FOR GRATUITY OF RS. 51,99 ,000/- ADJUSTED WITH THE OPENING GENERAL RESERVE AND DEFERRED TAX ASSETS AS PER AS-1 5 (REVISED 2005), IT IS M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 28 88 8 SUBMITTED BY THE COUNSEL FOR THE ASSESSEE THAT THE PAYMENT FOR THE SAME HAS ALREADY BEEN MADE DURING THE PREVIOUS YEAR RELEVANT TO THE INSTANT ASSESSMENT YEAR AND AS PER THE PROVISIONS OF SUB-SECTION (B) OF SEC 43B, GRATUITY IS ALLOWABLE IN THE YEAR IN WHICH PAYMENT IS MADE. WE NOTE THAT LD CIT( A) HAS ALREADY DIRECTEDTHE AO TO VERIFY THE PAYMENT, AND WHERE THE CONTENTION OF THE ASSESSEE COMPANY FOUND CORRECT, TO ALLOW THE SAME. ACCORDINGLY, THIS ITEM OF EXPENSE WAS ALLOWED BY LD CIT(A) FOR STATISTICAL PURPOSE. WE DO NOT FIN D ANY INFIRMITY IN THE ORDER PASSED BY THE LD CIT(A), THEREFORE, ON THIS ISSUE, WE CONFIRM THE ORDER OF LD CIT(A). 30. WE NOTE THAT PROVISION FOR LEAVE ENCASHMENT OF RS.44,97,000/- PERTAINS TO TRANSITIONAL PROVISIONS OF AS-15, AND AN AMOUNT OF RS. 34,33,302 PERTAINS TO CURRENT YEAR PROVISION FOR LEAVE ENCASHMENT. WE NOT E THAT ISSUE UNDER CONSIDERATION IS NO LONGER RES INTEGRA , IT IS COVERED BY THE JUDGMENT OF THE COORDINATE BENCH IN THE CASE OF ITC LIMITED, IN ITA NO. 1222/KOL/2015, FOR A.Y. 2009-10, ORDER DATED 04.10.2017 WHEREIN IT WAS HELD AS FOLLOWS: 2. THE SOLE GROUND OF APPEAL OF THE ASSESSEE IS AG AINST THE ACTION OF LD. CIT(A) IN CONFIRMING THE ACTION OF THE AO IN DISALL OWING A SUM OF RS.7,32,113/- BEING THE PROVISION MADE FOR LEAVE ENCASHMENT IN TH E CURRENT ASSESSMENT YEAR ON THE BASIS OF ACTUARIAL VALUATION. 3. AT THE OUTSET ITSELF, THE LD. COUNSEL BROUGHT TO OUR NOTICE THAT THE SIMILAR ISSUE HAD COME UP BEFORE THIS TRIBUNAL IN M/S. S. R . BATLIBOI & CO. VS. DCIT, ITA NO. 1598/KOL/2011 FOR AY 2007-08 WHEREIN THE TRIBUN AL VIDE PARA 4 HAS HELD AS UNDER: 4. AFTER HEARING RIVAL SUBMISSIONS AND GOING THROU GH THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE ORDER OF THE TRIBUNAL CITED SUPRA, WE FIND THAT THE ISSUE IS DEALT BY THE COORDINATE BENCH OF THIS TRIBUNAL AS UNDER: 3. AT THE OUTSET, LD. SENIOR COUNSEL FOR THE ASSES SEE SUBMITTED THAT IN ALL THESE THREE APPEALS, THE ISSUE RELATES TO ALLOWABILITY OF PROVISION FOR LEAVE ENCASHMENT IN TERMS OF SUB-SECTION (F) OF SECTION 4 3B OF THE INCOME TAX ACT. THE ASSESSEE HAD ADVANCED ITS CLAIM RELYING ON THE DECISION OF THE HONBLE KOLKATA HIGH COURT IN THE CASE OF M/S. EXIDE INDUST RIES LTD. REPORTED IN 292 ITR 470. HOWEVER, THE ASSESSING OFFICER DID NOT ACC EPT THE ASSESSEES CLAIM OBSERVING THAT DEPARTMENT HAS PREFERRED A SPECIAL L EAVE PETITION BEFORE THE HONBLE SUPREME COURT AND STAY OF THE ORDER OF THE HONBLE KOLKATA HIGH COURT WAS GRANTED BY THE HONBLE APEX COURT. LD. SE NIOR COUNSEL SUBMITTED THAT UNDER IDENTICAL CIRCUMSTANCES, TRIBUNAL HAS RE STORED THE MATTER TO THE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 2 22 29 99 9 FILE OF ASSESSING OFFICER TO DECIDE THE ISSUE IN AC CORDANCE WITH THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF DCIT, CIRCLE- 8, KOLKATA VS.- M/S. ERNST & YOUNG PVT. LTD. IN ITA NO. 1787/KOL./2008. HE, THEREFORE, SUBMITTED THAT THE MATTER MAY BE RESTORED BACK TO THE FILE OF ASSESSING OFFICER. 4. LEARNED DEPARTMENTAL REPRESENTATIVE DID NOT RAIS E ANY OBJECTION. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORDS OF THE CASE. WE FIND THAT TRIBUNAL ON I DENTICAL ISSUE IN ITA NO. 1787/KOL./2008 IN THE CASE OF M/S. ERNST & YOUNG PV T. LTD. HAS OBSERVED AT PARA 12 IN PAGE 6 AS UNDER :- 12. GROUND NO. 5 OF THE REVENUES APPEAL IS AGAINS T THE RELIEF ALLOWED BY THE CIT(A.) IN RESPECT OF PROVISION FOR LEAVE EN CASHMENT WHICH WAS DELETED BY THE CIT(A.) FOLLOWING THE DECISION OF TH E HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S. EXIDE INDUSTRIES LTD. (SUPRA). IT WAS POINTED OUT BY THE LD. DR THAT THE HONBLE APEX COURT IN SLP (CIVIL) 22889 OF 2008 HAS STAYED THE OPERAT ION OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT. IN VIEW O F THE ABOVE, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW ON THIS P OINT AND RESTORE THE MATTER BACK TO THE FILE OF THE AO WITH THE DIRECTIO N THAT HE WILL READJUDICATE THIS ISSUE AS PER DECISION OF THE HON BLE APEX COURT IN THE CASE OF M/S. EXIDE INDUSTRIES LTD. (SUPRA). RESPECTFULLY FOLLOWING THE SAME WE SET ASIDE THE OR DERS OF AUTHORITIES BELOW ON THIS POINT AND RESTORE THE MATTER BACK TO THE FI LE OF ASSESSING OFFICER FOR ADJUDICATION AS PER THE DECISION OF THE HONBLE APE X COURT IN THE CASE OF M/S. EXIDE INDUSTRIES LTD.(SUPRA). 4. IN VIEW OF THE AFORESAID DECISION OF THE COORDIN ATE BENCH ON A SIMILAR ISSUE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE T HE MATTER BACK TO THE FILE OF THE AO FOR ADJUDICATION TO AWAIT THE FINAL OUTCOME OF THE HON BLE APEX COURT IN SLP (CIVIL) 22889 OF 2008 IN M/S. EXIDE INDUSTRIES LTD. CASE AND DECI DE THIS ISSUE AS PER THE DECISION OF HONBLE APEX COURT IN M/S. EXIDE INDUSTRIES LTD., S UPRA. THUS, THIS GROUND OF APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. THEREFORE, RESPECTFULLY FOLLOWING THE JUDGMENT OF THE COORDINATE BENCH IN THE CASE OF ITC LIMITED (SUPRA), WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR ADJUDICAT ION TO AWAIT THE FINAL OUTCOME OF THE HONBLE APEX COURT IN SLP (CIVIL) 22889 OF 2008 IN M/S. EXIDE INDUSTRIES LTD. CASE AND DECIDE THIS ISSUE AS PER THE DECISION OF HONBLE APEX COURT IN M/S. EXIDE INDUSTRIES LTD., (SUPRA). THUS, THIS GROUND OF APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 30 00 0 31. WE SHALL TAKE GROUND NO. 1 RAISED BY THE REVENU E IN I.T.A. NO. 1333/KOL/2017, WHICH READS AS FOLLOWS: 1. WHETHER THE LD. CIT(A) WAS CORRECT IN DELETING T HE DISALLOWANCE OF CLUB EXPENSES FOR RS.5,96,933/- DESPITE THE FACT THAT TH E ELEMENT OF COMMERCIAL EXPEDIENCY HAS NOT BEEN ESTABLISHED BY THE ASSESSEE COMPANY WHETHER BEFORE THE LD. ASSESSING OFFICER OR BEFORE THE LD. CIT(A)? SHO ULD NOT BE ELEMENT OF COMMERCIAL EXPEDIENCY THAT FACILITATES THE BUSINESS THE THURST POINT IN DECIDING THE ISSUE BY THE LD. CIT(A)? 32. BRIEF FACTS QUA THE ISSUE ARE THAT DURING THE A SSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAS INCURRED EXPENDITURE ON CLUB SUBSCRIPTION AND CATERING SERVICE FEES OF RS. 5,96,933/-. THE PARTIC ULARS AND DETAILS OF THESE EXPENSES ARE MENTIONED IN CLAUSE 17(D) R.W.ANNEXURE -8 OF THE TAX AUDIT REPORT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE WAS ASKED TO EXPLAIN HOW THE SAID EXPENSE WERE WHOLLY AND EXCLUSIVELY IN CURRED FOR THE PURPOSE OF BUSINESS. IN RESPONSE TO THE SAME THE ASSESSEE VIDE LETTER DATED 09.12.2011 SUBMITTED A WRITTEN REPLY. HOWEVER,DISREGARDING THE SUBMISSION MADE BY THE ASSESSEE, THE AO IN THE ORDER U/S 143(3) DISALLOWED THE EXPENDITURE INCURRED ON CLUB SUBSCRIPTION AND CATERING SERVICE FEES BY HOLD ING THAT THE SAME IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 33. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A), WHO HAS DEL ETED THE ADDITION MADE BY AO OBSERVING THE FOLLOWING: I HAVE CONSIDERED THE FINDINGS OF THE LD. A.O. AND THE WRITTEN SUBMISSION AND CASE LAWS FILED BY THE LD. A.R. FOR THE ASSESSEE. T HE LD. A.O. IN THE ASSESSMENT ORDER HAS DISALLOWED THIS AMOUNT HOLDING THAT THE S AME WAS NOT EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE LD . A.R. IN THE WRITTEN SUBMISSION HAVE BROUGHT ON RECORD THAT THE ASSESSEE HAS INCURR ED EXPENDITURE OF RS. 5,96,933/- TOWARDS CORPORATE MEMBERSHIP FEES AND SU BSCRIPTION CHARGES OF CLUB. MOREOVER, THE SAID EXPENDITURE HAVE BEEN INCURRED T O RUN THE BUSINESS MORE EFFICIENTLY BY PROVIDING AN OPPORTUNITY TO ITS EMPL OYEES TO GET TOGETHER WITH THEIR BUSINESS ASSOCIATES AND IN THE PROCESS ADVANCE THEI R BUSINESS INTEREST. THUS, THE SAID EXPENDITURE CAN BE STATED TO HAVE BEEN INCURRE D FOR THE PURPOSE OF BUSINESS. SIMILAR ISSUE HAS ALSO BEEN DECIDED IN FAVOUR OF TH E ASSESSEE BY THE DECISION OF THE HONBLE TRIBUNAL IN A.Y. 2000-01 AND 2001-02 AND AL SO BY MY PREDECESSORS IN A.Y. 2003-04, A.Y. 2004-05AND A.Y. 2006-07. ACCORDI NGLY, FOLLOWING THE ORDER OF M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 31 11 1 THE HONBLE TRIBUNAL AND ORDER OF LD. CIT(A) IN EAR LIER YEARS, THIS GROUND OF APPEAL IS ALLOWED. 34. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE R EVENUE IS IN APPEAL BEFORE US. 35. THE LD. DR HAS PRIMARILY REITERATED THE STAND T AKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY AND ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER OF THE LD. CIT(A). 36. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GO NE THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT THE ASSESSEE HAS INCURRED RS.5,96,933/- TOWARDS THE CORPORATE MEMBER SHIP OF VARIOUS CLUBS AND CATERING SERVICE CHARGES. THE AFORESAID EXPENDITURE IS INCURRED TO RUN THE BUSINESS MORE EFFICIENTLY. THE MEMBERSHIP OF A CLUB GIVES AN OPPORTUNITY TO THE DIRECTORS AND OTHER EMPLOYEES OF THE ASSESSEE TO GET TOGETHER WITH THEIR BUSINESS ASSOCIATES AND IN THAT PROCESS, ADVANCE THEIR BUSINESS INTERES T. THE CLUB PROVIDES PLATFORM FOR BUSINESS INTERACTIONS TO IMPROVE BUSINESS RELATIONS AND PROSPECTS. THUS, CLUB MEMBERSHIP HELPS IN MAINTAINING BUSINESS CONNECTION /CONTACTS BY THE DIRECTORS AND SENIOR EXECUTIVES OF THE ASSESSEE AND THEREFORE CONSTITUTES REVENUE EXPENDITURE. WE NOTE THAT THE HON`BLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT STATE EXPORT CORPORATION LTD -VS.- CIT (1994) 209 I TR 649 (GUJ), HELD AS UNDER: 'FOR DECIDING THE QUESTION AS TO WHETHER THE EXPEND ITURE IS OF CAPITAL NATURE OR REVENUE NATURE, ONE OF THE RELEVANT CRITERIA IS WHE THER IT IS FOR ACQUISITION OF A CONCERN OR ASSETS OR WHETHER THE EXPENDITURE IS FOR CARRYING ON A CONCERN OR FOR RUNNING THE BUSINESS. IF THE AIM AND OBJECT OF THE EXPENDITURE IS FOR CARRYING ON THE CONCERN, THEN IT IS REVENUE EXPENDITURE. HENCE, IN OUR VIEW, IT WOULD BE DIFFICULT FOR US TO ACCEPT THE CONTENTION OF THE RE VENUE THAT THE ENTRANCE FEE PAID BY THE ASSESSEE FOR GETTING THE MEMBERSHIP OF THE S PORTS CLUB CAN BE TERMED AS CAPITAL EXPENDITURE. ' THEREFORE, WE ARE OF THE VIEW THAT EXPENDITURE INCU RRED BY ASSESSEEOF RS.5,96,933/-TOWARDS THE CORPORATE MEMBERSHIP OF VA RIOUS CLUBS AND CATERING M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 32 22 2 SERVICE CHARGES IS FOR BUSINESS PURPOSE AND ALLOWAB LE UNDER SECTION 37(1) OF THE ACT. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF LD CIT(A), HIS ORDER ON THIS ISSUE IS HEREBY ACCEPTED AND GROUNDS OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 37. GROUND NO. 3 RAISED BY THE REVENUE IN I.T.A. NO . 1333/ KOL/2017, READS AS FOLLOWS: 3. WHETHER THE LD. CIT(A) WAS CORRECT IN DELETING T HE ADDITION OF RS. 1,61,18,861/- ON ACCOUNT OF BOGUS PURCHASE ON THE GROUND THAT NO PURCHASES FOR RS. 1,61,18,861/- WAS MADE FROM M/S OCL INDIA LTD. AS T HE LATER HAS CATEGORICALLY DENIED SUCH TRANSACTION HAVING BEEN MADE WITH THE A SSESSEE COMPANY? WAS NOT THE LD. CIT(A) INCORRECT IN NOT ENQUIRING INTO THE VERACITY OF M/S OCL INDIA LTD.S LETTER DATED 29.12.2011 AND WHETHER IT WAS NOT AN A FTERTHOUGHT? 38. WE NOTE THAT ASSESSING OFFICER IN HIS ASSESSMEN T ORDER DEALT THE ISSUE AS FOLLOWS: THE ASSESSEE WAS ASKED TO FURNISH THE NAME, ADDRES S AND AMOUNT IN RESPECT OF PURCHASE PARTIES. AS THE ASSESSEE DID NOT FURNISH THE SAID D ETAILS, SHRI HARISH AGARWAL, THE AUTHORIZED REPRESENTATIVE WAS ASKED THEFOLLOWING VI DE ORDER SHEET NOTING DATED 02.12.2011- 'SHRI AGARWAL WAS REMINDED OF THE FACT THAT DETAILS OF SUNDRY DEBTORS WHICH INCLUDE PURCHASE DETAILS HAVE NOT BEEN FILED SO FAR AND THEREFORE, DERIVING THE REVENUE OF MAKING ENQUIRY OF PURCHASES. HENCE, REASONABLE VIEW IN RESPECT OF PURCHASES MAY BE TAKEN.' IN RESPONSE, A LIST OF PURCHASE PARTIES WAS SUBMITT ED BY THE ASSESSEE. IN THIS CONNECTION NOTICE U/S. 133(6) WAS SENT TO M/S. OCL INDIA LTD AT THE ADDRESS 12A, STEPHEN HOUSE, 4, B.B.D.BAG, KOLKATA-700 001. IN RE SPONSE, A LETTER DATED 13.12.2011 HAS BEEN RECEIVED FROM M/S. OCL INDIA LT D ON 26.12.2011. THE SAID LETTER HAS BEEN SIGNED BY SHRI CHINMOY MAJUMDER, DY . GENERAL MANAGE-ACCOUNTS WHICH IS AS UNDER: 'THIS IS IN RESPONSE TO YOUR ABOVE LETTER DIRECTING US TO PRODUCE INFORMATION U/S 133(6) BEFORE YOU IN CONNECTION WITH THE TRANSACTIONS WE H AD WITH M/S VESUVIUS INDIA LTD. FOR THE F. Y. 2007-08 RELEVANT TO THE ASSESSMENT YEAR 2 008-09. WE WOULD LIKE TO INFORM YOUR HONOUR THAT WE DO NOT HAD ANY TRANSACTIONS WITH M/S . VESUVIUS INDIA LTD FOR THE F.Y. 2007-08'. M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 33 33 3 SHRI HAISH AGARWAL, A/R WAS CONFRONTED WITH THE ABO VE REPLY RECEIVED FROM M/S. OCL INDIA LTD VIDE ORDER SHEET NOTING DATED 27.12.2011. IN RESPONSE SHRI AGARWAL, A/R OF THE ASSESSEE HAS SUBMITTED THE FOLLOWING EXPLANATION VI DE LETTER DATED 29.12.2011: 'AS REGARDS OCL INDIA LTD IT IS HUMBLY SUBMITTED TH AT THE PARTY HAS INADVERTENTLY STATED IN ITS LETTER THAT THERE WAS NO TRANSACTION WITH TH E ASSESSEE IN THE F. Y. 2007-08. IN THIS REGARD COPY OF THE LEDGER ACCOUNT OF OCL INDIA LTD ALONG WITH THE SPECIMEN COPY OF INVOICE OF F. Y. 2007-08 IS MARKED AND COLLECTIVELY ENCLOSED AS ANNEXURE-7'. IT IS SEEN THAT THE ASSESSEE HAS FURNISHED THE FOLL OWING DETAILS IN RESPECT OF M/S. OCL INDIA LTD. BALANCE AS ON 01.04.2007 TRANSACTION DURING THE YEAR PAYMENT DURING THE YEAR BALANCE AS ON 31.3. 2008 10,56,039 1,61,18,861 1,39,49,450 32,25,450 THE PARTY M/S. OCL INDIA LTD HAS CATEGORICALLY DENI ED OF ANY TRANSACTION WITH THE ASSESSEE COMPANY. SINCE THE ASSESSEE HAS CLAIMED TH E PURCHASE EXPENSES ONUS WAS ALWAYS ON THE ASSESSEE TO PROVE THAT THE TRANSACTIO N GENUINE AND FOR THE PURPOSE OF THE BUSINESS. MERELY SUBMITTING THE LEDGER ACCOUNT AND PHOTO COPY OF CERTAIN DOCUMENTS WHICH ARE NOT PROPERLY LEGIBLE CANNOT MAKE THE CLAI M OF THE ASSESSEE ADMISSIBLE AND ACCEPTABLE. HENCE, THE ABOVE EXPLANATION OF THE ASS ESSEE CANNOT BE ACCEPTED. CONSIDERING THE ABOVE, THE PURCHASE EXPENSES OF RS. 1,61,18,861/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 39. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A), WHO HAS DEL ETED THE ADDITION OBSERVING THE FOLLOWING: 1. I HAVE CAREFULLY CONSIDERED THE FINDINGS OF THE A.O. AND THE WRITTEN SUBMISSION AND CASE LAWS FILED BY THE A.R. THE A.O. IN THE ASS ESSMENT ORDER HAS DISALLOWED THE TOTAL PURCHASES MADE FROM OCL INDIA LTD. OF RS. 1,61,18,861/- ON THE BASIS OF REPLY SUBMITTED BY OCL IN RESPONSE TO NOTICE U/S 13 3(6) ISSUED DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3). THE RELEVANT PORTION OF THE LD. A.O.S ORDER IS REPRODUCED BELOW: M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 34 44 4 2.HOWEVER, DURING THE COURSE THE APPELLATE PROCEEDI NGS, THE LD. AR. SUBMITTED THAT OCL BY AN INADVERTENT ERROR REPLIED THAT IT DI D NOT HAVE ANY TRANSACTIONS WITH THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR AND THAT IT HAD DULY FILED A REVISED LETTER DATED 29.12.2011 ACCEPTING ITS TRANS ACTIONS WITH THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. FURTHER, THE A.R. HAD A LSO PRODUCED A LETTER DATED 23.02.2016 ALONG WITH LEDGER ACCOUNT SUBSTANTIATING THE GENUINENESS OF THE TRANSACTIONS OF THE ASSESSEE WITH OCL INDIA LIMITED . ON VERIFICATION OF THE DETAILS FURNISHED BY THE A.R., I FIND THE TRANSACTIONS BETW EEN THE ASSESSEE AND OCL INDIA LTD. TO BE GENUINE. THEREFORE, I DELETE THE DISALLO WANCE MADE BY THE A.O. AND ACCORDINGLY, THIS GROUND IS ALLOWED IN FAVOUR OF TH E ASSESSEE. 40. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE R EVENUE IS IN APPEAL BEFORE US. 41. THE LD. DR HAS PRIMARILY REITERATED THE STAND T AKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY AND ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER OF THE LD. CIT(A). 42. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GO NE THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT DURING THE APPELLATE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 35 55 5 PROCEEDINGS THE ASSESSEEHAD PRODUCED A LETTER DATE D 23.02.2016 ALONG WITH LEDGER ACCOUNT SUBSTANTIATING THE GENUINENESS OF THE TRANS ACTIONS OF THE ASSESSEE WITH OCL INDIA LIMITED. ON VERIFICATION OF THE DETAILS F URNISHED BY THE ASSESSEE, THE LD CIT(A) NOTICED THAT THE TRANSACTIONS BETWEEN THE AS SESSEE AND OCL INDIA LTD. TO BE GENUINE. WE NOTE THAT IN THE COURSE OF ASSESSMENT PROCEEDING S, THE AO HAD ISSUED NOTICES U/S 133(6) TO MANY PARTIES WITH WHOM THE ASSESSEE HAD TRANSACTIONS DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDE R CONSIDERATION AND ASKED THEM TO FURNISH DETAILS OF THE TRANSACTIONS WITH THE ASS ESSEE. AS AND WHEN THE REPLIES WERE RECEIVED FROM THE PARTIES THE AO ASKED THE ASS ESSEE TO RECONCILE THE CLOSING BALANCES IF THERE WAS ANY DIFFERENCE IN THE BALANCE S. IN RESPONSE TO THE SAME THE ASSESSEE VIDE LETTER DATED 23-12-2011, 28-12-2011 & 29-12-2011 SUBMITTED DETAILED RECONCILIATION. HOWEVER, ONE OF THE PARTI ES, OCL INDIA LTD IN ITS REPLY TO THE LETTER ISSUED BY THE AO STATED THAT THERE WAS N O TRANSACTION WITH THE ASSESSEE DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMEN T YEAR UNDER CONSIDERATION. THEREAFTER THE ASSESSEE WAS ASKED TO PROVIDE AN EXP LANATION FOR THE SAME. IN RESPONSE TO THE SAME, THE ASSESSEE VIDE LETTER DATE D 29-12-2011 FILED DETAILED REPLY ALONG WITH THE LEDGER COPY OF OCL INDIA LTD AND SPE CIMEN COPIES OF THE INVOICES. THE LD COUNSEL SUBMITTED BEFORE US THATDURING THE A SSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PURCHASED ITEMS FRO M THE REFRACTORY DIVISION OF OCL BUT THE LETTER U/S 133(6) WAS RECEIVED BY THE C EMENT DIVISION AND THE CEMENT DIVISION WITHOUT CONSULTING THE REFRACTORY DIVISION HAS INADVERTENTLY REPLIED TO THE AFORESAID LETTER STATING THAT THERE WAS NO TRANSACT ION WITH THE ASSESSEE DURING THE AFORESAID PERIOD. BUT SUBSEQUENTLY, OCL FILED A REV ISED LETTER DATED 29-12-2011 WHEREIN IT SAID THAT THE INFORMATION FURNISHED VIDE LETTER DATED 13-12-2011 DECLARING THAT THE ASSESSEE DID NOT HAVE ANY TRANSA CTION PERTAINS TO THE CEMENT DIVISION. HOWEVER, OCL HAS AGREED THAT THE ASSESSEE HAD PURCHASED REFRACTORY ITEMS FROM THEM AND ACCORDINGLY, THEY WILL BE PROVI DING DETAILS FOR THE SAME. COPY OF THE LETTER DATED 29-12-2011 WAS SUBMITTED B Y ASSESSEE DURING THE APPELLATE PROCEEDINGS. THE LD COUNSEL BASED ON THES E EVIDENCES SUBMITTED BEFORE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 36 66 6 US THAT THE OCL INDIA LTD. IS A GENUINE PARTY AND T HE ASSESSEE HAD ENTERED INTO VARIOUS TRANSACTIONS WITH THE SAID PARTY. THE PAYME NTS TO THE SAID PARTIES WERE DULY MADE BY ACCOUNT PAYEE CHEQUES THEREFORE THE GE NUINENESS OF THE TRANSACTION SHOULD NOT BE DOUBTED. THAT BEING SO, WE DECLINE TO INTERFERE WITH THE ORDER OF ID. C.I T.(A) IN DELETING THE AFORESAID ADDITION,HIS OR DER ON THIS ADDITION IS, THEREFORE, UPHELD AND THE GROUNDS OF APPEAL OF THE REVENUE IS DISMISSED. 33. GROUND NO. 1 RAISED BY THE REVENUE IN I.T.A. NO . 206/KOL/2018 FOR A.Y. 2009- 10 WHICH IS REPRODUCED BELOW: 1. THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLO WANCE OF RS. 23,58,959/- TOWARDS RELINING OF KILNM AT MEHSANA UNIT IGNORING THE FACT THAT THE ASSESSEE ITSELF HAS RECOGNIZED THE SAID EXPENDITURE AS CAPITAL EXPENDITURE IN ITS BOOKS OF ACCOUNT INSTEAD OF DEBITING THE SAM E TO P & L A/C AS REVENUE EXPENDITURE. THE LD. CIT(A) HAS ERRED IN NOT ACCEPT ING THE FACT THAT THE SAID EXPENDITURE HAS ENDURING BENEFIT FOR THE ASSES SEE WHICH IS SQUARELY WITHIN THE MEANING OF CAPITAL EXPENDITURE. 34. BRIEF FACTS QUA THE ISSUE ARE THAT THE COMPANY HAD INCURRED AN EXPENDITURE OF RS. 23,58,959/- TOWARDS RELINING OF KILN AT ITS MEH SANA UNIT. VIDE LETTER DATED 02- 01-2013, THE ASSESSEE WAS ASKED TO EXPLAIN THE NATU RE OF SUCH EXPENDITURE AND EXPLAIN WHY IT SHOULDNT BE CAPITALIZED. IN RESPONS E TO THE SAME, THE ASSESSEE FILED REPLY DATED 12-03-2013 WHICH IS AS UNDER: IN THE INSTANT ASSESSMENT YEAR, THE COMPANY HAS IN CURRED AN EXPENDITURE OF RS. 23,58,959/- TOWARDS RELINING OF KILN AT ITS MEHSANA UNIT. THE AFORESAID EXPENDITURE HAS BEEN INCURRED TO PROTECT AND PRESER VE THE INSULATION LAYER OF THE KILN WHICH GETS DAMAGED AND WORN OUT ON ACCOUNT OF HIGH TEMPERATURE AND CONSTANT WEAR AND TEAR, THE AFORESAID EXPENDITURE I S ALLOWABLE AS REVENUE EXPENDITURE. THE SUBMISSION MADE BY THE ASSESSEE WAS DULY EXAMIN ED BY AO. ON EXAMINATION OF THE COMPUTATION OF TOTAL INCOME, IT WAS NOTED T HAT THE ASSESSEE HAS SEPARATELY CLAIMED DEDUCTION IN RESPECT OF THEIR LINING EXPENS ES. IT CLEARLY SHOWS THAT THE ASSESSEE HAS CAPITALIZED THE SAME IN THE BOOKS OF A CCOUNTS. ASSESSEE ITSELF ADMITTED THAT THE AFORESAID EXPENDITURE HAS BEEN IN CURRED TO PROTECT AND PRESERVE THE INSULATION LAYER OF THE KILN WHICH GETS DAMAGED AND WORN OUT ON ACCOUNT OF HIGH TEMPERATURE AND CONSTANT WEAR AND TEAR. FURTHE R IT IS CLEAR THAT AFORESAID M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 37 77 7 EXPENDITURE PROVIDES LONG LASTING BENEFIT TO THE AS SESSEE BY PREVENTING THE KILN FROM WEAR AND TEAR THEREBY INCREASING ITS LIFE SUBS TANTIALLY. HENCE, THERE LINING EXPENDITURE CANNOT BE TREATED AS EXPENDITURE ON REP AIR BUT THE SAME SHOULD BE CAPITALIZED AS DONE IN ITS BOOKS OF ACCOUNT. THUS, CLAIM OF THE ASSESSEE ON ACCOUNT OF RELINING EXPENDITURE OF RS. 23,58,959/- IS DISAL LOWED AND ADDED BACK IN THE COMPUTATION. 35. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DEL ETED THE ADDITION MADE BY THE ASSESSING OFFICER OBSERVING THE FOLLOWING: 1. I HAVE CONSIDERED THE FINDINGS OF THE LD. A.O. AND THE WRITTEN SUBMISSION AND CASE LAWS / JUDICIAL PRECEDENTS FILED BY THE LD. A. R.S FOR THE APPELLANT. 2. IN MY CONSIDERED VIEW OF THE MATTER, NORMALLY IN ITIAL INVESTMENT ON MACHINES AND THEIR PARTS ARE IN THE NATURE OF CAPITAL EXPEND ITURE BUT REPLACEMENT OF PARTS OF EXISTING MACHINERY IN THE COURSE OF THEIR WORKING W ILL BE A REVENUE EXPENDITURE. THE EXPENDITURE INCURRED ON RELINING OF KILNS DOES NOT SUBSTANTIALLY CHANGE THE IDENTITY OF THE PLANT NOR IT EFFECTS ANY IMPROVEMEN T IN THE EFFICIENCY OF THE PLANT, SO THE SAME CAN BE SAID TO AN EXPENDITURE ON CURRENT R EPAIRS. THE SAID VIEW HAS BEEN UPHELD BY HONBLE DELHI HIGH COURT IN THE CASE OF A DDL. CIT VS. DYERS STONE LIME CO. P LTD. (1982) 136 ITR 8 (DEL) AND CIT VS. BHARAT ALUMINUM CO. LTD. (2007) 292 ITR 600 (DEL). FURTHER, IT IS A WELL SET TLED PROPOSITION OF LAW THAT ACCOUNTING ENTRIES ARE SINE-QUA-NON FOR TAXATION PU RPOSES. MOREOVER, THE CAPITALIZATION OF THE SAID EXPENDITURE IN THE BOOKS OF ACCOUNT CANNOT BE A DETERMINATIVE FACTOR REGARDING THE ALLOWABILITY OF THE SAID EXPENDITURE WHICH IS TO BE DECIDED ONLY AS PER PROVISIONS OF THE I.T. AC T. 3. FURTHER, EXPENSES INCURRED ON RELINING OF KILN W HICH DID NOT BRING INTO EXISTENCE ANY ASSET OR SECURED ANY DISTINCT ADVANTA GE TO THE APPELLANT OR RESULTED IN ANY STRUCTURAL CHANGE AND HENCE, RELINING OF KIL N IS REVENUE EXPENDITURE. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 36. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 37. THE LD. DR HAS PRIMARILY REITERATED THE STAND T AKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY AND ON THE OTHER HAND THE L D. COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER OF THE LD. CIT(A). M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 38 88 8 38. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GO NE THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF REFRACTORIES WHICH AR E MATERIAL THAT CAN WITHSTAND VERY HIGH TEMPERATURES 3000COR MORE WITHOUT DEGRADI NG OR SOFTENING. REFRACTORIES REQUIRE SPECIAL HEAT-UP TECHNIQUES TO ENSURE THAT THEY PERFORM AS INTENDED, AND AVOID DAMAGE DUE TO DRYING STRESSES ( SPALLING) AND THERMAL SHOCK UNTIL THE OPERATIONAL STATUS IS ACHIEVED. THE MANUF ACTURING PROCEDURE REQUIRES A NUMBER OF STEPS TO BE FOLLOWED WHICH INCLUDES GRIND ING, MIXING, MOULDING, DRYING, FIRING ETC. THE 'FIRING' PROCEDURE REQUIRES TEMPERATURE WHICH IS USUALLY HIGHER THAN THEIR USAGE TEMPERATURE. THIS 'FIRING' PROCEDURE IS CARRIED OUT IN KILNS. FURTHER, ON ACCOUNT OF SUCH HIGH TEMPERATURE, THE K ILN IS SUBJECT TO CONTINUOUS WITHERING AND DAMAGE. IN ORDER TO ENSURE OPERATIONA L EFFICIENCY OF KILN IT IS IMPERATIVE TO ENSURE REGULAR RELINING OF THE WALLS OF THE KILN. THIS RELINING IS REQUIRED TO MAINTAIN THE FUNCTIONING OF THE KILN. T HUS, THIS IS IN THE NATURE OF CURRENT REPAIRS. FURTHER, IT IS HUMBLY STATED THAT EXPENDITURE ON ACCOUNT OF CURRENT REPAIRS IS AN ALLOWABLE EXPENDITURE AS PER SEC. 31( I) OR U/S 37(1) AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 'CURRENT REPAIRS' MEANS REPAIRS NECESSARY FOR PRESERVING OR MAINTAINING AN ALREADY EXISTING ASSET WHICH DOES NOT BRING A NEW ASSET INTO EXISTENCE OR DOES N OT GIVE TO THE ASSESSEE A NEW OR DIFFERENT ADVANTAGE. THEY ARE SUCH REPAIRS AS ARE A TTENDED TO AS AND WHEN THE NEED FOR THEM ARISES. AS ITERATED ABOVE, THE SAID EXPEND ITURE HAS BEEN INCURRED TO PROTECT AND PRESERVE THE INSULATION LAYER OF THE KI LN WHICH GETS DAMAGED AND WORN OUT ON ACCOUNT OF HIGH TEMPERATURE AND CONSTANT WEA R AND TEAR. THE RELINING WAS DONE TO PRESERVE AND MAINTAIN THE EXISTING ASSET AN D NO NEW ASSET OR ADVANTAGE HAS ACCRUED TO THE APPELLANT. SUCH EXPENDITURE IS ALLOW ABLE AS REVENUE EXPENDITURE. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION I N THE CASE OF ADDL. CIT -VS.- DYER'S STONE LIME CO. (P) LTD. (1982) 136 ITR 8 (DE L. ) WHEREIN IT HAS BEEN HELD THAT THE EXPENDITURE INCURRED ON RELINING OF KILNS DOES NOT SUBSTANTIALLY CHANGE THE IDENTITY OF THE PLANT NOR IT EFFECTS ANY IMPROVEMEN T IN THE EFFICIENCY OF THE PLANT, M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 3 33 39 99 9 SO THE SAME IS AN EXPENDITURE ON CURRENT REPAIRS AN D HENCE ALLOWABLE AS REVENUE EXPENDITURE. FURTHER, RELIANCE IN THIS REGARD COULD ALSO PLACED IN THE DECISION OF CIT -VS.- BHARAT ALUMINUM CO. LTD. (2007) 292 ITR 6 00 (DEL.) WHEREIN IT HAS BEEN HELD THAT RELINING OF SMELTER POTS UNDERTAKEN BY THE ASSESSEE WAS ONLY MEANT TO TAKE CARE OF WEAR AND TEAR AND IT DOES NOT CREAT E ANY NEW ASSET OR ADVANTAGE, SO THE SAME IS A REVENUE EXPENDITURE IN THE NATURE OF CURRENT REPAIRS. THAT BEING SO, WE DECLINE TO INTERFERE IN THE ORDER PASSED BY THE LD. CIT(A), HIS ORDER ON THIS ISSUE, IS HEREBY UPHELD AND THE GROUN D NO. 1 RAISED BY THE REVENUE IS DISMISSED. 39. NOW WE SHALL TAKE GROUND NO. 2 RAISED BY THE RE VENUE IN ITA NO. 206/KOL/2018 FOR AY 2009-10 WHICH READS AS UNDER: 2. THE LD. CIT(A) HAS ERRED IN TREATING THE LAN CAB LING, WHICH IS ONLY A NETWORK OF WIRE FOR TRANSMISSION OF DATA, AS COMPUT ER PERIPHERAL AND DELETING THE ADDITION ON THE SAID GROUND. 40. BRIEF FACTS QUA THE ISSUE ARE THAT THIS GROUND RELATES TO DISALLOWANCE MADE BY THE LD. A.O. OF AN AMOUNT OF RS. 6,80,264/- ON ACCO UNT OF CLAIM OF DEPRECIATION @ 60% ON LAN CABLING. THE IMPUGNED DISALLOWANCE HAS BEEN MADE BY THE LD. ASSESSING OFFICER IN THE ASSESSMENT ORDER BY OBSERV ING AS FOLLOWS: 8.1 THE COMPANY ALSO CLAIMED DEPRECIATION @ 60% ON LAN CABLING IN COMPUTERS SHOWN AT RS. 27,21,055/-. ON EXAMINATION OF THE SAME, IT IS SEEN THAT LAN CABLING CANNOT BE TREATED AS COMPUTER PERIPHERA LS RATHER THE SAME WILL BE CONSIDERED AS ELECTRICAL FITTINGS ELIGIBLE FOR DEPR ECIATION @ 10%. HENCE, THE CLAIM OF DEPRECIATION ON THE LAN CABLING IS RESTRIC TED TO 10%. THE AMOUNT OF DEPRECIATION TO BE DISALLOWED IS (60% -10%) I.E. 50 % FOR HALF YEAR ON RS. 27,21,055/- I.E. RS. 6,80,264/-. 41. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER / TPO, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DEL ETED THE ADDITION MADE BY THE ASSESSING OFFICER OBSERVING THE FOLLOWING: M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 4 44 40 00 0 1. I HAVE CONSIDERED THE FINDINGS OF THE LD. ASSES SING OFFICER AND THE WRITTEN SUBMISSION AND CASE LAWS / JUDICIAL PRECEDENTS FILE D BY THE LD. A.R.S FOR THE APPELLANT. THE LD. A.O. IN THE ASSESSMENT ORDER HAS DISALLOWED THE DEPRECIATION @ 60% ON LAN CABLING HOLDING THAT THE SAME CANNOT BE TREATED AS COMPUTER OR COMPUTER PERIPHERALS RATHER SHALL BE CONSIDERED AS ELECTRICAL FITTINGS. THE LD. A.RS IN THE WRITTEN SUBMISSION HAVE BROUGHT ON RECORD TH AT THE LAN COMPONENTS BEING NETWORK CABLES, NETWORK ADAPTER, ROUTERS, NETWORK C ONNECTOR LIKE ETHERNET PORT ETC HAVE BEEN CLASSIFIED UNDER THE HEAD COMPUTERS SINCE THE COMPUTER PERIPHERALS FROM INTEGRAL PART OF THE COMPUTER SYST EM AND THEY CANNOT BE USED WITHOUT COMPUTER. HENCE THEY ARE TO BE TREATED AS C OMPUTER FOR THE PURPOSE OF ALLOWING HIGHER RATE OF DEPRECIATION. 2. I FIND THAT LAN CABLINGS USED FOR INTERCONNECTIN G COMPUTER. IN ORIENTAL BANK OF COMMERCE- VS- ADDL. CIT (ITA NO. 1937/DEL/2011 DATE D 04-11-2015) AND NOKIA INDIA PVT. LTD. VS. ASST. CIT (2012) 20 ITR (TRIB) 198 (DEL) (ITAT) IT HAS BEEN HELD THAT COMPUTER ACCESSORIES AND PERIPHERALS ARE PART OF COMPUTERS. ACCORDINGLY, IN MY CONSIDERED VIEW THE SAME WOULD B E ELIGIBLE FOR DEPRECIATION @ 60% BEING PART OF COMPUTERS. RESPECTFULLY, FOLLOW ING THE AFORESAID JUDGMENTS, THIS GROUND OF APPEAL IS ALLOWED. 42. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE R EVENUE IS IN APPEAL BEFORE US. 43. THE LD. DR HAS PRIMARILY REITERATED THE STAND T AKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY AND ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESSEE HAS DEFENDED THE ORDER OF THE LD. CIT(A). 44. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GO NE THROUGH THE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCU MENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACT OF THE CASE INCLUDING THE FINDINGS OF THE LD CIT(A) AND OTHER MATERIALS AVAILABLE ON RECORD. WE NOTE THAT IN THIS REGARD, A LOCAL AREA NETWORK (LAN) CONNECTS COMPUTERS TO EXCHANGE D ATA. THE ESSENTIAL COMPONENTS OF LAN (IN TAR REPORTED AS LAN CABLING) ARE NETWORK CABLES, NETWORK CONNECTOR LIKE ETHERNET PORT ETC. THE LAN ( HEREINAFTER REFERRED TO AS COMPUTER PERIPHERALS) HAVE BEEN CLASSIFIED UNDER THE HEAD COMPUTERS SINCE THE COMPUTER PERIPHERALS FORM INTEGRAL PART OF THE COMP UTER SYSTEM AND THEY CANNOT BE USED WITHOUT COMPUTER. HENCE, THEY ARE TO BE TREATE D AS COMPUTER FOR THE PURPOSE OF ALLOWING HIGHER RATE OF DEPRECIATION. RELIANCE I N THIS REGARD IS PLACED ON THE M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 4 44 41 11 1 DECISION OF SPECIAL BENCH OF HONBLE MUMBAI ITAT IN THE CASE OF DCIT VS. DATACRAFT INDIA LTD. (2010) 40 SOT 295 (MUMBAI) (SB ) WHEREIN IT HAS BEEN THAT THE COMPUTER, IN COMMON SENSE AND AS A POPULARLY UN DERSTOOD, REFERS TO ANY ELECTRONIC OR OTHER HIGH SPEED DATA PROCESSING DEVI CE WHICH PERFORMS LOGICAL, ARITHMETIC AND MEMORY FUNCTIONS ON DATA AND INCLUD ES ALL INPUT AND OUTPUT DEVICES WHICH ARE CONNECTED TO OR RELATED TO IT. IN ORDER TO DETERMINE WHETHER A PARTICULAR MACHINE CAN BE CLASSIFIED AS A COMPUTER OR NOT, THE PREDOMINANT FUNCTION, USAGE AND COMMON PARLANCE UNDERSTANDING, WOULD HAVE TO BE TAKEN INTO ACCOUNT. IN ORDER TO BE CALLED AS COMPUTER, IT IS S INE-QUA-NON THAT THE PRINCIPAL OUTPUT/OBJECT/FUNCTION OF SUCH MACHINE SHOULD BE AC HIEVABLE ONLY THROUGH COMPUTER FUNCTIONS. ACCORDINGLY, IT HAS BEEN HELD THAT ROUTER AND SWITCHERS CANBE CLASSIFIED AS COMPUTER HARDWARE WHEN THEY ARE USED ALONG WITH A COMPUTER AND WHEN THEIR FUNCTIONS ARE INTEGRATED WITH A COM PUTER. IN SUCH A SITUATION, ROUTERS AND SWITCHERS ARE TO BE INCLUDED IN BLOCK O F COMPUTER FOR PURPOSE OF DETERMINING RATE OF DEPRECIATION APPLICABLE TO THEM I.E. 60%. RELIANCE IS ALSO PLACED ON THE DECISIONS IN THE CASE OF EXPEDITORS I NTERNATIONAL (INDIA) PVT. LTD. VS. ADDL. CIT (2008) 118 TTJ 652 (DEL) WHEREIN THE HON BLE TRIBUNAL HAS HELD THAT PERIPHERALS SUCH AS NT SERVER ETC. FORM INTEGRAL PA RT OF COMPUTER AND THE SAME, THEREFORE, ARE ELIGIBLE FOR DEPRECIATION AT THE RAT E OF 60% AS APPLICABLE TO COMPUTER. RELIANCE IN THIS REGARD IS ALSO PLACED IN THE CASE OF CIT VS. BSES YAMUNA POWER LIMITED (2010-TIOL-636-HC-DEL-IT) WHER EIN THE DELHI HIGH COURT FOLLOWING THE DECISION OF THE EXPEDITORS INTE RNATIONAL (INDIA) (P) LTD. (SUPRA) HAS HELD THAT: WE ARE IN AGREEMENT WITH THE VIEW OF THE TRIBUNAL THAT COMPUTER ACCESSORIES AND PERIPHERALS SUCH AS, PRINTERS, SCANNERS AND SE RVER ETC. FORM AN INTEGRAL PART OF THE COMPUTER SYSTEM. IN FACT, THE COMPUTER ACCES SORIES AND PERIPHERALS CANNOT BE USED WITHOUT THE COMPUTER. CONSEQUENTLY, AS THEY ARE THE PART OF THE COMPUTER SYSTEM, THEY ARE ENTITLED TO DEPRECIATION AT THE HIGHER RATE OF 60%. [EMPHASIS ADDED] M/S VESUVIUS INDI A LTD. ITA NOS.1333&1289/KOL/2017 ITA NOS.206 & 207/KOL/2018 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 P PP PA AA AG GG GE EE E | || | 4 44 42 22 2 THAT BEING SO, WE DECLINE TO INTERFERE IN THE ORDER PASSED BY THE LD. CIT(A), HIS ORDER ON THIS ISSUE, IS HEREBY UPHELD AND THE GROUN D OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 45. IN THE RESULT, THE APPEALS OF THE REVENUE ARE D ISMISSED AND THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE COURT ON 26.02.2020 SD/- ( S.S.GODARA ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / DATE: 26/02/2020 ( SB, SR.PS ) COPY OF THE ORDER FORWARDED TO: 1. I) ACIT, CIRCLE-10(2), KOLKATA II) ACIT, RANGE-10, KOLKATA 2. M/S VESUVIUS INDIA LTD. 3. C.I.T(A)- 4. C.I.T.- KOLKATA. 5. CIT(DR), KOLKATABENCHES, KOLKATA. 6. GUARD FILE. TRUE COPY BY ORDER ASSIST ANT REGISTRAR ITAT, KOLKA TA BENCHES