DCIT Circle 4 (1), V. Lear Automotive India (P) Ltd,

ITA 578/DEL/2008

• Counselvise Citation: 57820114 RSA 2008
• Duration Of Justice: 7 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-01-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 15-02-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P DA MKAUNAJMA
• Assessee Lawyers: KHIRENDER MOHAN GUPTA; VIKAS BANSAL RESPO
• Keywords: Capital asset; Business expenditure; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI D BENCH, NEW DELHI [CORAM: I.C. SUDHIR, JM AND PRAMOD KUMAR, AM] I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEAR: 2004-05 DEPUTY COMMISSIONER OF INCOME TAX, .APPEL LANT NEW DELHI VS. M/S LEAR AUTOMOTIVE INDIA PVT. LTD., .RESPONDENT (FORMERLY LEAR SEATING PVT. LTD.), SUITE NO.268, TAJ PALACE HOTEL, 2, SARDAR PATEL MARG, NEW DELHI. [PAN: AAACL1978K] APPEARANCES BY: P. DAM KAUNAJMA FOR THE APPELLANT KHIRENDER MOHAN GUPTA & VIKAS BANSAL FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING: 29 TH JANUARY, 2015 DATE OF PRONOUNCING THE ORDER: 27 TH MARCH, 2015 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL THE ASSESSING OFFICER HAS CHALLENGED THE CORRECTNESS OF THE LD. CIT(A)S ORDER DATED 8 TH OCTOBER, 2007 IN THE MATTER OF ASSESSMENT UNDER SE CTION 143 (3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR THE ASSESSMENT YEAR 2004-05 ON THE FOLLOWING GROUNDS :- 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN DELETING DISALLOWANCE OF RS.4 CR. CLAIMED AS COMPENSATION PAID TO M/S L&T FOR NOT HONOURING ITS COMMITMENT FOR PROCURING SEAT FRAME AND TRIM COVERS FROM VENDORS M/S L&T IGNORING THAT THE SAID PAYMENT IS NO T ADMISSIBLE UNDER SECTION 37(1) AND IS CAPITAL EXPENDITURE IN VIEW OF THE FOLL OWING: A) THE ASSESSEE COMPANY STRENGTHENED AND CONSOLIDATED ITS BUSINESS BY WAY OF ASSIMILATING ALL THE PROCESSES ITSELF WHICH WERE EARLI ER OUTSOURCED TO OTHER PARTIES. I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 2 OF 7 B) ACTUAL DUES IN RESPECT OF SUPPLIES BY L&T TO ASS ESSEE COMPANY WHICH FORM PART OF THE COMPENSATION, HAVE NOT BEEN STATED. C) THE ASSESSEE COMPANY CERTAINLY BENEFITED OF ENDUR ING NATURE BY CESSATION OF THE AGREEMENT. D) HAD IT BEEN A SIMPLE DISCONTINUANCE OF BUSINESS ARRANGEMENT BETWEEN THE PARTIES, THERE WAS NO NEED TO ENTER INTO THE AGREEMEN T BECAUSE ITS ACCOUNT COULD HAVE BEEN SETTLED ON ACTUAL TRANSACTIONS/TERMS . E) BY VIRTUE OF CESSATION OF ALLEGED BUSINESS ARRAN GEMENTS, THE ASSESSEE COMPANY HAS ELIMINATED COMPETITION, WHICH IS AN ENDUR ING BENEFIT. F) THE TERMS OF THE ARRANGEMENT ARE VAGUE. 2. BRIEFLY STATED, THE RELEVANT MATERIAL FATS ARE L IKE THIS. THE ASSESSEE COMPANY, A WHOLLY OWNED SUBSIDIARY OF LEAR CORPORATION, USA, I S ENGAGED IN MANUFACTURING/ASSEMBLY OF AUTOMOTIVE SEATING AND IN TERIOR PARTS AND IN DESIGNING AND DEVELOPMENT OF AUTOMOTIVE SEATING SYSTEM AND INTERI ORS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE A SSESSEE HAS MADE A PAYMENT OF RS.4 CRORES IN RESPECT OF COMPENSATION FOR LOSS OF BUSIN ESS LODGED BY AN ERSTWHILE SUPPLIER OF RAW MATERIALS AND CLAIMED THE SAME AS DEDUCTION. IT WAS IN THIS BACKDROP THE ASSESSEE WAS ASKED TO FURNISH COMPLETE DETAILS OF T HE NATURE OF SAID PAYMENT AND SUBSTANTIATE HIS CLAIM OF DEDUCTION IN RESPECT OF T HE SAME. THE A.O. ALSO REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE SAID EXPENDITU RE NOT BE REGARDED AS A CAPITAL EXPENDITURE. THE REPLY FILED IN RESPONSE TO THE SH OW CAUSE NOTICE DID NOT IMPRESS THE A.O. AS EVIDENT FROM HIS FOLLOWING OBSERVATION IN S UPPORT OF HIS STAND THAT THE AMOUNT SO PAID SHOULD BE TREATED AS CAPITAL EXPENDITURE RATH ER THAN REVENUE DEDUCTION :- 4.3 WRITTEN SUBMISSION WAS FILED ON 17.10.2006. A COPY OF AGREEMENT/SETTLEMENT DATED 18.06.2003 BETWEEN SHRI M OHAN V. KAMAT AND M/S LEATHER & TRIM (REFERRED TO AS L&T), A PROPRIETA RY CONCERN OF SHRI MOHAN V. KAMAT, WAS ALSO FILED. THE DETAILS OF PAYME NT VIDE LETTER DATED 19.05.2004 ADDRESSED TO SHRI MOHAN V. KAMAT, IN PURSU ANCE OF THE AGREEMENT WERE ALSO FILED. THE EXPENDITURE WAS CLAI MED AS REVENUE ITEM AND ADMISSIBLE DEDUCTION UNDER SECTION 37(1) OF INC OME TAX ACT, 1961. I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 3 OF 7 WHEREAS WRITTEN SUBMISSION IS BASED ON CERTAIN JUDIC IAL PRONOUNCEMENTS WITHOUT STATING THE BACKGROUND OF THE SETTLEMENT, THE C OPY OF THE SETTLEMENT REVEALS A FEW RELEVANT FACTS. L&T WAS SUPPLIER OF SEAT FRAMES & TRIM COVERS TO THE ASSESSEE COMPANY. THE BUSINESS ARRANGEMENT BE TWEEN THE TWO PARTIES WAS DISCONTINUED SOME TIME BACK. IN PURSUA NCE OF THE AGREEMENT, L&T WAS UNDER OBLIGATION TO CEASE THE USE OF INTELL ECTUAL PROPERTY INCLUDING TRADE MARK OF LEAR, RETURN ALL ORIGINAL DOCUMENTS, SAMPLES, PUBLICITY MATERIAL TO LEAR. IT WAS OUT OF COURT SETTLEMENT B ETWEEN THE PARTIES. THE FOLLOWING FACTS EMANATE FROM THE WRITTEN SUBMISSION AND THE AGREEMENT :- (A) ACTUAL DUES IN RESPECT OF SUPPLIES BY L&T TO LE AR WHICH FORM PART OF THE COMPENSATION, HAVE NOT BEEN STATED. THE QUANTUM O F BUSINESS WITH L&T IN LAST FEW YEARS AND THE STANDING OF L&T IN THIS FIELD, HAS NOT BEEN BROUGHT ON RECORD TO SUBSTANTIATE REASONABL ENESS & GENUINENESS OF THE COMPENSATION. (B) THE ASSESSEE COMPANY STRENGTHENED AND CONSOLIDATE D ITS BUSINESS BY WAY OF ASSIMILATING ALL THE PROCESSES ITSELF, WHICH WE RE EARLIER OUT- SOURCED TO OTHER PARTIES. (C) THE ASSESSEE COMPANY WAS CERTAINLY BENEFITED OF ENDURING NATURE BY CESSATION OF THE AGREEMENT. (D) HAD IT BEEN A SIMPLE DISCONTINUANCE OF BUSINESS ARRANGEMENTS BETWEEN THE PARTIES, THERE WAS NO NEED TO ENTER INTO THE AGREEMENT BECAUSE ITS ACCOUNT COULD HAVE BEEN SETTLED ON ACTUA L TRANSACTIONS/TERMS. (E) BY VIRTUE OF CESSATION OF ALLEGED BUSINESS ARRA NGEMENTS, THE ASSESSEE COMPANY HAS ELIMINATED COMPETITION, WHICH IS AN ENDUR ING BENEFIT. (F) THE TERMS OF THE AGREEMENT ARE VAGUE IN VIEW OF ABOVE FACTS, IT IS HELD THAT PAYMENT OF C ONSIDERATION OF RS.4,00,00,000/- TO L&T IS A CAPITAL EXPENDITURE WHI CH IS NOT ADMISSIBLE UNDER SECTION 37(1) OF INCOME TAX ACT, 1961. 3. AGGRIEVED BY THE STAND SO TAKEN BY THE A.O., THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). 4. THE LD CIT(A) UPHELD THE CONTENTIONS OF THE ASSE SSEE AND REVERSED THE STAND OF THE A.O. AND HELD THAT THE COMPENSATION WAS PAID TO THE ERSTWHILE VENDOR WHICH IS I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 4 OF 7 REQUIRED TO BE TREATED AS REVENUE EXPENDITURE. WHI LE HOLDING SO, THE LD. CIT(A) OBSERVED AS FOLLOWS :- RIVAL CONTENTIONS HAVE CAREFULLY BEEN CONSIDERED. A FTER CONSIDERING THE RIVAL SUBMISSIONS I FIND A SUBSTANTIAL SUPPORT I N THE CONTENTION OF THE LD. A.R. OF THE APPELLANT. IT IS AN UNDISPUTED FACT THAT RS.4 CRORE HAS BEEN PAID BY THE ASSESSEE COMPANY TO M/S L&T AS A COMPENSATIO N WHICH IS BUSINESS EXPENDITURE ONLY. THE ONLY ISSUE IS TO BE DECIDED W HETHER THE COMPENSATION AMOUNT IS A CAPITAL EXPENDITURE OR A REVENUE EXPEND ITURE. OUT OF RS,.4 CRORE, RS.1.25 CRORE HAS BEEN PAID FOR THE SUPPLY OF 61,671 UNITS OF SEAT FRAMES MADE BY L&T AND THEREFORE, IT BECOME NECESSA RILY PART OF TRADING ACCOUNT. SAME CAN NOT BE CONSIDERED AS A CAPITAL E XPENDITURE BY ANY STRETCH OF IMAGINATION. THE ONLY DISPUTE IS ABOUT T HE PAYMENT OF 1.34 CRORE PAID AS A COMPENSATION FOR VOLUME LOSS. IN THAT RE SPECT, IT HAS BEEN NOTICED THAT ALL THE OBSERVATIONS MADE BY THE ASSESSING OFFIC ERS IN ARRIVING AT HIS CONCLUSION FOR HOLDING IT AS A CAPITAL EXPENDITURE A RE TOTALLY CONTRARY TO THE FACTS AND BASED ON PRESUMPTIONS, ASSUMPTIONS AND CO NJECTURES AND SURMISES. THE DECISION FOR SUSPENDING THE PROCUREMEN T OF THE SEAT FRAMES ETC. FROM M/S L&T WAS A COMMERCIAL DECISION IN A VI EW TO HAVE BUSINESS ADVANTAGE TO THE ASSESSEE COMPANY. THE ASSUMPTION BY THE ASSESSING OFFICER THAT BY DISCONTINUING THE PROCUREMENT OF SUP PLIES FROM M/S L&T, THE ASSESSEE COMPANY HAD ASSIMILATED ALL THE MANUFACTURIN G PROCESSES IN ITS OWN UNIT WAS A FACT WHICH WAS NOT TRUE. IT WAS MERE LY A PRESUMPTION. IN FACT, AFTER DISCONTINUING THE PROCUREMENT FROM M/S L &T, THE ASSESSEE COMPANY HAD PURCHASED THE SIMILAR SUPPLIES FROM OTHER V ENDORS WHICH WAS ADVANTAGEOUS TOO. ALTHOUGH SUCH DETAILS WERE NOT AVA ILABLE ON THE RECORD BECAUSE SAME WAS NOT CALLED BY THE ASSESSING OFFICER BUT THIS FACT HAS BEEN REITERATED BY THE A.RS OF THE ASSESSEE COMPANY BEFORE ME. IT IS ALSO TRUE THAT AFTER CESSATION OF THE PROCUREMENT OF SUPPLIES FROM M/S L&T, NO NEW CAPITAL ASSET HAS BEEN GENERATED BY THE ASSESSEE COMPANY. THE RE HAS NOT BEEN ANY PRESERVATION OF ANY CAPITAL ASSET ON ACCOUNT OF DIS CONTINUATION OF THE PROCUREMENT DEED ENTERED BY THE ASSESSEE COMPANY WI TH M/S L&T. THEREFORE, THE OBSERVATION OF THE ASSESSING OFFICER TH AT THE DISCONTINUATION OF THE DEED HAS RESULTED INTO BENEFIT TO THE ASSESSEE COMPANY OF ENDURING NATURE, IS CONTRARY TO THE FACTS. MAKING A LUMP SU M PAYMENT WHICH WOULD ELIMINATE A DISADVANTAGEOUS PAYMENT CAN NOT BE DISA LLOWED ON THE GROUND THAT AN ENDURING BENEFIT HAS BEEN OBTAINED BY THE ASSE SSEE. THIS PRINCIPLE HAS BEEN LAID DOWN BY VARIOUS COURTS OF LAW. RELIANC E IS PLACED ON THE DECISION OF WESTERN INDIA OIL DISTRIBUTING COMPANY LTD. VS. CIT 77 ITR 140. AS FAR AS THE OBSERVATION OF THE ASSESSING OFFI CER IN RESPECT OF THE TERMS OF AGREEMENT ABOUT THE RETURN OF SAMPLES AND PUBLICI TY MATERIAL, CEASE TO USE IN INTELLECTUAL PROPERTY, RETURN AND ORIGINAL C OPIES OF ALL DOCUMENTS, INFORMATION ON INTELLECTUAL PROPERTY ARE CONCERNED, SAME HAS BEEN FOUND FOR THE REASONS THAT THESE MATERIALS WERE GIVEN TO L&T AS PER THE TECHNICAL SPECIFICATION REQUIRED BY THE ASSESSEE COMPANY. HOW EVER, SUCH RETURN BY I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 5 OF 7 THE SUPPLIER HAD NOT PUT ANY CONDITION TO RESTRICT THE M IN ANY MANNER TO CONTINUE ITS BUSINESS. THE TOTALITY OF ALL THE FACTS AND CIRCUMSTANCES IT APPEARS THE ASSESSING OFFICER HAD PRESUMED HAT THE APPE LLANT AFTER THE CESSATION OF BUSINESS WITH M/S L&T HAS GONE INTO MANU FACTURING OF THE SAME ITEM, WHICH IS NOT CORRECT. THE ASSESSEE COMPANY HAD MERELY SUBSTITUTED M/S L&T AS A VENDOR WITH OTHER VENDORS. FURTHER, IN NOT PART OF SETTLEMENT AGREEMENT, THERE IS ANY RESTRAINT ON THE L &T TO COMPETE WITH THE APPELLANT. OTHERWISE ALSO, THE SUPPLIER AND A PURCHAS ER OF GOODS CAN NOT BE COMPETITORS OF EACH OTHER. THEREFORE, IN THE ABSENC E OF ANY SUCH RESTRICTING COMPETITION IN THE AGREEMENT ITSELF, THE DECISION OF THE ASSESSING OFFICER APPEARS TO BE BASED ON SURMISES AND CONJECTURES. C ONSIDERING THE TOTALITY OF ALL THE FACTS AND CIRCUMSTANCES, I AM OF THE CONSIDE RED VIEW THAT THE COMPENSATION FOR VOLUME LOSS OF RS.1.34 CRORE IS A REVENUE EXPENDITURE ONLY. SINCE THE OUTSTANDING AMOUNT OF RS.1.25 CRORES PAID FOR SUPPLIES MADE BY L&T AND COMPENSATION FOR VOLUME LOSS OF RS.1.34 CRO RES HAS BEEN HELD AS A REVENUE EXPENDITURE, THE INTEREST PAID ON THESE OUT STANDING AMOUNT IS ALSO CONSIDERED AS A REVENUE EXPENDITURE ONLY. IN THE CO NCLUSION, I AM OF THE CONSIDERED VIEW THAT THE EXPENDITURE OF RS.4 CRORES I NCURRED BY WAY OF COMPENSATION BY THE ASSESSEE COMPANY IS REVENUE IN N ATURE WHICH IS ALLOWABLE UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961. APPELLANTS SUCCEED ON THIS GROUND OF APPEAL. 5. THE A.O. IS AGGRIEVED AND IS IN APPEAL BEFORE US . 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. WE HAVE NOTICED THAT THERE IS NO DISPUTE ABOUT THE BONAFIDE S AND COMMERCIAL EXPEDIENCY OF THE COMPENSATION HAVING BEEN PAID TO THE ERSTWHILE VEND OR. WHILE THE NECESSITY AND BONAFIDES OF EXPENDITURE IS NOT IN DISPUTE, THE ONL Y OBJECTION WHICH HAS BEEN TAKEN BY THE A.O. IN DECLINING THE DEDUCTION OF THIS EXPENDI TURE IS THAT THE SAID EXPENDITURE IS CAPITAL IN NATURE AND, AS SUCH, DOES NOT CONSTITUTE PERMISSIBLE DEDUCTION UNDER SECTION 37(1) OF THE ACT. IN THIS VIEW OF THE MATTER, ALL THAT WE REQUIRED TO ADJUDICATE IN THIS APPEAL IS, WHETHER OR NOT EXPENDITURE IN QUESTION C AN BE TREATED AS REVENUE EXPENDITURE. IN THE LIGHT OF THIS POSITION LET US NOW REVERT TO THE FACTS OF THIS CASE. THERE IS NO DISPUTE THAT THE COMPENSATION HAS BEEN PAID T O AN ERSTWHILE VENDOR AND IT IS SO I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 6 OF 7 PAID IN ACCORDANCE WITH THE AGREEMENT DATED 18 TH JUNE, 2003 ENTERED INTO BY THE APPELLANT WITH THE SAID VENDOR. A COPY OF THIS AGR EEMENT WAS ALSO PLACED BEFORE US AT PAGE NOS.58 TO 62 OF THE COMPILATION OF PAPERS. AS EVIDENT FROM THE SAID AGREEMENT, THE SETTLEMENT WAS ARRIVED AT BECAUSE THE ASSESSEE HAD DISCONTINUED THE BUSINESS ARRANGEMENT WITH THE VENDOR AND DESIRED TO ENTER IN TO A COMPLETE SETTLEMENT IN RESPECT OF OR ARISING OUT OF SUCH CESSATION OF THE BUSINESS RELATIONSHIP ON A FULL AND FINAL BASIS. IT IS THUS BEYOND DOUBT THAT THE PAYMENT WAS MADE W ITH RESPECT TO OBLIGATION UNDER AN ARRANGEMENT WITH THE VENDOR. IN THIS VIEW OF THE M ATTER, THE NATURE OF PAYMENT UNDER SETTLEMENT IS WITH RESPECT TO SUPPLIES BY VENDORS T O THE ASSESSEE WHICH ARE INHERENTLY IN REVENUE FIELD. WHILE WE HAVE NOTED THAT THE A.O. H AS ALLEGED THAT THE ASSESSEE COMPANY WAS CERTAINLY BENEFITED BY ENDURING NATURE BY THE VIRTUE OF THIS AGREEMENT. WE ARE UNABLE TO SEE ANY FACTUAL SUPPORT FOR THIS ALLEGATI ON. AS THE LD. CIT(A) HAS RIGHTLY NOTED, THE EXISTENCE OF SUCH AN ENDURING BENEFIT WAS MEREL Y A PRESUMPTION AND BASED ON NOTHING ON RECORD TO DEMONSTRATE ANY SUCH ENDURING BENEFIT. AS TO WHETHER THE PAYMENT IS CAPITAL OR REVENUE IS DETERMINED BY THE PURPOSE FOR WHICH THE PAYMENT IS MADE AND WHEN, AS IN THIS CASE, THE PAYMENT IS CLEA RLY RELATABLE TO THE REVENUE FIELD SUCH AS SUPPLIES BY VENDORS, THE PURPOSE OF PAYMENT IS C LEARLY REVENUE IN NATURE. IN THESE CIRCUMSTANCES, UNLESS THERE IS ANY COGENT MATERIAL OR EVIDENCE TO DEMONSTRATE THAT THE PAYMENT IS CAPITAL FIELD, THE EXPENDITURE IN QUESTI ON REQUIRED TO BE TREATED AS REVENUE EXPENDITURE. AS WE HAVE MENTIONED EARLIER, THERE IS NOTHING ON RECORD WHATSOEVER, TO SUGGEST THAT THE ASSESSEE DERIVED ANY ENDURING BENE FIT BY MAKING THE PAYMENT FOR THIS COMPENSATION. IN VIEW OF THESE DISCUSSIONS AND BEA RING IN MIND THE ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE PAYMENT IN Q UESTION HAVING BEEN MADE TO I.T.A. NO.: 578/DEL/2008 ASSESSMENT YEARS 2004-05 PAGE 7 OF 7 ENHANCE THE SUPPLIES AND IN CONNECTION WITH SUPPLIE S RECEIPT DURING THE NORMAL COURSE OF BUSINESS, WAS REVENUE IN NATURE. THE LD. CIT(A) WAS, THEREFORE, JUSTIFIED IN DELETING THE IMPUGNED DISALLOWANCE. WE UPHOLD HIS ACTION AN D DECLINE TO INTERFERE IN THE MATER. 7. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT TODAY ON 27 TH MARCH, 2015. SD/- SD/- I.C. SUDHIR PRAMOD KUMA R (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NEW DELHI, THE 27 TH DAY OF MARCH, 2015 COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) DRP (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI