DCIT, CHENNAI V. M/s Assab Sripad Steels Pvt. Ltd., CHENNAI

ITA 2221/CHNY/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61333 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 12-06-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 04-12-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR YOG ESH KAMAT IRS
• Assessee Lawyers: R MEENAKSHISUNDARAM

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.2221/MDS/2008 (ASSESSMENT YEAR: 2004-05) DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(1), CHENNAI-600 034. VS. M/S. ASSAB SRIPAD STEELS PVT. LTD., PADMALAYA TOWERS, JANAKI AVENUE, MRC NAGAR, CHENNAI-600 028. PAN:AAACA3076F (APPELLANT) (RESPONDENT) APPELLANT BY : DR. YOGESH KAMAT, IRS., JCIT RESPONDENT BY : MR. R.M EENAKSHISUNDARAM, ADVOCATE DATE OF HEARING : 12 TH JUNE, 2012 DATE OF PRONOUNCEMENT : 20 TH JULY, 2012 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE APPEAL HAS BEEN PREFERRED BY THE REVENUE IMPUGNING THE ORDER OF THE CIT(A)-III, CHENNAI DATE D 19.08.2008. THE ONLY GROUND RAISED IN AN APPEAL I S THAT THE CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MADE TOWARDS EXCHANGE LOSS COMPENSATION AND TERMINATION FEE. 2. THE FACTS OF THE CASE AS CULLED OUT FROM THE DOC UMENTS ON RECORD ARE THAT THE ASSESSEE FILED RETURN OF INC OME FOR THE ASSESSMENT YEAR 2004-05 ON 30.10.2004 ADMITTING IN COME OF ITA NO.2221/MDS /2008 2 ` 92,91,066/-. THE CASE OF THE ASSESSEE WAS TAKEN UP FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS DULY S ERVED ON THE ASSESSEE ON 19.10.2005. VIDE ASSESSMENT ORDER D ATED 27.12.2006, THE ASSESSING OFFICER MADE CERTAIN ADDITIONS/DISALLOWANCES IN THE ANNUAL INCOME OF THE ASSESSEE. ONE OF THE CLAIMS OF THE ASSESSEE WAS EXP ENDITURE UNDER THE HEAD ADMINISTRATIVE & OTHER EXPENSES ON ACCOUNT OF EXCHANGE LOSS COMPENSATION AMOUNTING TO ` 45,67,071/- AND TERMINATION FEE AMOUNTING TO ` 35,00,000/- AGGREGATING TO ` 80,67,071/-. THE ASSESSEE HAD ENTERED INTO AN AGREE MENT WITH M/S. STERLING METCHEM TRADE (P) LTD. (HEREINAF TER REFERRED TO AS SMTPL). M/S. SMTPL WAS CARRYING ON T HE BUSINESS OF IMPORTS OF ALL GRADES OF FERROUS AND NO N-FERROUS METALS. THE ASSESSEE HAD REQUESTED M/S. SMTPL TO IM PORT STEEL FOR ITS BUSINESS. AN AGREEMENT WAS ENTERED BE TWEEN THE PARTIES FOR THE SAME. THE RELEVANT TERMS & CONDITI ONS OF THE AGREEMENT ARE REPRODUCED HEREIN BELOW:- A. SMTPL SHALL IMPORT ALL MATERIALS ON BEHALF OF THE ASSESSEE ON ITS ACCOUNT, AFTER COMPLYING WITH ALL LEGAL FORMALITIES AND AFTER PAYMENT OF CUSTOMS DUTY AND OTHER PORT AND HANDLING CHARGES FROM ITS ITA NO.2221/MDS /2008 3 OWN FUNDS AND WILL NOT RECEIVE ANY ADVANCE FROM THE ASSESSEE. B. SMTPL SHALL TRANSPORT THE GOODS TO ITS WAREHOUSE, STORE IT AT ITS RISK AND DISPATCH AS AND WHEN REQUIRED BY THE ASSESSEE. C. SMTPL SHALL MAKE REMITTANCE IN FOREIGN EXCHANGE TO ASSOCIATED SWEDISH STEELS AB WITHIN SIX MONTHS FROM THE DATE OF DISPATCH OF THE MATERIA L FROM SWEDEN. D. SMTPL IS NOT ENTITLED TO ANY ADVANCE FROM THE ASSESSEE FOR MAKING SUCH REMITTANCES. E. SMTPL SHALL BEAR THE COST OF TRANSPORTATION OF THE MATERIAL FROM ITS WAREHOUSE TO ANY LOCATION SPECIFIED BY THE ASSESSEE. F. SMTPL SHALL RAISE AN INVOICE ON THE ASSESSEE FOR THE MATERIALS DESPATCHED. THE INVOICE SO RAISED SHALL INCLUDE THE RUPEE COST OF MATERIAL AS SUPPLIED BY THE SWEDISH COMPANY, THE CUSTOMS DUTY AND PORT AND THE CHARGES INCURRED BY IT BESIDES INCLUDING A FEE MUTUALLY AGREED UPON AS COMPENSATION FOR SERVICES RENDERED. G. SMTPL SHALL ALLOW A CREDIT PERIOD OF SIX MONTHS FROM THE DATE OF DESPATCH OF THE MATERIAL FOR REMITTANCE OF PAYMENT FOR THE MATERIAL FOR WHIC H SEPARATE COMPENSATION WILL BE PAID ON MUTUAL AGREEMENT. ITA NO.2221/MDS /2008 4 H. SMTPL SHALL NOT BE ENTITLED TO ADVANCE PAYMENT FROM THE ASSESSEE FOR MAKING ANY FOREX REMITTANCE TO M/S. ASSOCIATED SWEDISH STEELS AB. I. ASSESSEE RESERVES THE RIGHT AT ITS OPTION TO IMPORT MATERIAL DIRECTLY, IN CASE OF URGENT NEED OR AS CIRCUMSTANCES WARRANT. NO COMPENSATION SHALL BE PAID TO SMTPL IN SUCH CASES. J. EITHER PARTY SHALL COMPENSATE THE OTHER IN THE EVENT OF LOSS OF PROFITS DUE TO PREMATURE TERMINATION OF THE AGREEMENT. THE QUANTUM OF COMPENSATION SHALL BE MUTUALLY AGREED UPON. THE ASSESSEE WAS FORCED TO TERMINATE THE AGREEMENT WITH SMTPL FOR THE REASON THAT ONE OF THE SISTER CONCERN S OF THE ASSESSEE HAD BECOME 70% SHAREHOLDER IN THE ASSESSEE COMPANY AND HAD FORCED TO TERMINATE THE CONTRACT PREMATURELY. AS PER THE ALLEGED TERMS AND CONDITIO NS OF THE AGREEMENT, THE ASSESSEE PAID AMOUNT TOWARDS THE TERMINATION FEE AND COMPENSATED SMTPL ON ACCOUNT OF LOSS SUFFERED BY IT DUE TO FLUCTUATION IN EXCHANGE RATES . THE ASSESSING OFFICER DISALLOWED THE PAYMENT ON THE GRO UND THAT AS PER THE TERMS & CONDITIONS, THE ASSESSEE WAS NOT LIABLE TO COMPENSATE SMTPL FOR LOSS SUFFERED ON ACCOUNT OF ITA NO.2221/MDS /2008 5 EXCHANGE RATES AND THE TERMINATION FEE PAID BY THE ASSESSEE WAS IN THE FINANCIAL YEAR 2005-06. THEREFORE, THE D EDUCTION WOULD BE ALLOWABLE TO THE ASSESSEE IN THE ASSESSMEN T YEAR 2006-07 AND NOT IN THE ASSESSMENT YEAR 2004-05. 3. AGGRIEVED AGAINST THE ASSESSMENT ORDER, THE ASSE SSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) A LLOWED THE APPEAL OF THE ASSESSEE. 4. THE REVENUE HAS COME IN APPEAL BEFORE THE TRIBU NAL ASSAILING THE ORDER OF THE CIT(A). THE DR SUBMITTE D THAT A PERUSAL OF THE RECORD WOULD SHOW THAT THERE ARE NO TERMS & CONDITIONS IN THE AGREEMENT RELATING TO COMPENSATIO N FOR EXCHANGE LOSS. HE FURTHER CONTENDED THAT TERMINAT ION FEE WAS PAID BY THE ASSESSEE IN THE FINANCIAL YEAR 2005 -06. THEREFORE, THE SAME WOULD BE ADMISSIBLE AS EXPENDIT URE TO THE ASSESSEE IN THE ASSESSMENT YEAR 2006-07 AND NOT IN THE ASSESSMENT YEAR 2004-05 AS CLAIMED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAD CA TEGORICALLY STATED IN THE ASSESSMENT ORDER THAT SMTPL, WHO HAD RECEIVED THE COMPENSATION /TERMINATION FEE, HAD SHO WN THE ITA NO.2221/MDS /2008 6 AMOUNT OF COMPENSATION IN ITS BOOKS OF ACCOUNT RELE VANT TO THE ASSESSMENT YEAR 2006-07. 5. ON THE OTHER HAND, SHRI R.MEENAKSHISUNDARAM, ADVOCATE APPEARING ON BEHALF OF THE ASSESSEE SUBMIT TED THAT THE ASSESSEE QUANTIFIED THE LOSS ON THE BASIS OF LE TTER DATED 19.03.2004 WITH RESPECT TO PREMATURE TERMINATION OF THE AGREEMENT. ACCORDINGLY, ENTRIES WERE MADE IN THE BO OKS OF ACCOUNT TREATING THE AMOUNT AS CONTINGENT LIABILITY . HE FURTHER SUBMITTED THAT THE ASSESSEE WAS FORCED TO TERMINATE THE CONTRACT PREMATURELY AS PER THE SWEDISH SUPPLIER OF THE ASSESSEE, WHO IS HOLDING 70% STAKE IN THE ASSESSEE COMPANY. THE COUNSEL FOR THE ASSESSEE STRONGLY SUPP ORTED THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE IMPU GNED ORDER NEEDS TO BE CONFIRMED AND APPEAL OF THE REVENUE BE DISMISSED. 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RESPEC TIVE PARTIES AND HAVE GONE THROUGH THE DOCUMENTS ON RECO RD AS WELL AS THE ORDERS OF THE LOWER AUTHORITIES. A PERU SAL OF THE RELEVANT TERMS & CONDITIONS OF THE AGREEMENT BETWEE N THE ITA NO.2221/MDS /2008 7 ASSESSEE AND M/S. SMTPL WOULD SHOW THAT THERE IS NO CLAUSE FOR COMPENSATION ON ACCOUNT OF LOSS SUFFERED DUE TO FLUCTUATION IN EXCHANGE RATES. THE CLAUSES RELATING TO THE COMPENSATION ARE G & J. AS PER CLAUSE G, THE COMPENSATION WOULD BE PAID FOR THE CURRENT PERIOD O F SIX MONTHS FROM THE DATE OF DESPATCH OF MATERIAL FOR RE MITTANCE OF PAYMENT AND AS PER CLAUSE J, COMPENSATION WAS TO BE PAID BY EITHER OF THE PARTIES ON ACCOUNT OF PREMATURE TE RMINATION OF THE AGREEMENT. SINCE BOTH THE PARTIES WERE BOUND B Y THE TERMS AND CONDITIONS OF THE AGREEMENT, NO COVENANT, WHICH IS NOT PART OF THE AGREEMENT, COULD NOT BE INTERPRETED FOR THE SAKE OF CONVENIENCE OF EITHER OF THE PARTIES. THE AGREEMENT IS SILENT WITH REGARD TO COMPENSATION SUFFERED ON A CCOUNT OF LOSS OF EXCHANGE RATES. SINCE THERE IS NO WRITTEN C OVENANT WITH REGARD TO THE SAME, IT CANNOT BE CONSTRUED THA T EITHER OF THE PARTIES ARE LIABLE TO COMPENSATE FOR LOSS ON A CCOUNT OF FLUCTUATION IN EXCHANGE RATES. THEREFORE, THE AMOUN T PAID BY THE ASSESSEE TO M/S.SMTPL ON ACCOUNT OF COMPENSATIO N FOR LOSS SUFFERED DUE TO EXCHANGE RATES CANNOT BE HELD TO BE AN ALLOWABLE EXPENSES IN THE HANDS OF THE ASSESSEE. ITA NO.2221/MDS /2008 8 7. AS REGARDS TERMINATION FEE ON ACCOUNT OF PREMAT URE TERMINATION OF THE AGREEMENT IS CONCERNED, IT HAS B EEN ACCEPTED BY SMTPL THAT THE AMOUNT HAS BEEN RECEIVED ALTHOUGH THE BOOKS OF ACCOUNTS OF SMTPL SHOWED PART OF THE AMOUNT HAS BEEN RECEIVED IN THE FINANCIAL YEAR RELE VANT TO THE ASSESSMENT YEAR 2006-07. AS PER THE CONTENTIONS OF THE ASSESSEE THE PROVISIONS FOR PAYMENT OF CONTINGENT L IABILITY ARISING OUT OF THE PREMATURE TERMINATION OF THE AGR EEMENT WAS MADE IN THE FINANCIAL YEAR 2003-04 WHICH IS RELEVAN T TO THE ASSESSMENT YEAR 2004-05. THUS, THE ASSESSEE IS ENTI TLED FOR THE AMOUNT PAID AS COMPENSATION FOR THE TERMINATION OF THE AGREEMENT. HOWEVER, IT IS MADE CLEAR THAT THE ASSES SEE IS ENTITLED FOR THE EXPENDITURE ONLY ONCE. THE ASSESSE E HAS NOT CLAIMED THE EXPENDITURE IN SUBSEQUENT ASSESSMENT YE AR I.E. 2005-06 OR 2006-07 OR THEREAFTER. THE HONBLE SUPR EME COURT OF INDIA IN THE CASE OF BHARAT EARTH MOVERS V S. CIT REPORTED AS 245 ITR 428(SC) HAS HELD THAT IF A BUS INESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING Y EAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. TH EREFORE, IN ITA NO.2221/MDS /2008 9 THE INTEREST OF JUSTICE AND EQUITY, AND IN THE LIGH T OF THE JUDGEMENT OF THE HONBLE SUPREME COURT OF INDIA, T HE AMOUNT PAID AS TERMINATION FEE HAS TO BE ALLOWED TO THE ASSESSEE IN THE ASSESSMENT YEAR 2004-05. 8. IN VIEW OF THE ABOVE, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED IN THE ABOVE TERMS. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 20 TH DAY OF JULY, 2012 AT CHENNAI. SD/- SD/- ( DR. O.K.NARAYANAN) ( VIKAS AWASTHY ) VICE PRESIDENT JUDICIAL MEMBER CHENNAI, DATED THE 20 TH JULY , 2012. SOMU COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F .