G-TEKT INDIA PVT. LTD., NEW DELHI V. DCIT, CIRCLE- 10(2), NEW DELHI

ITA 5922/DEL/2018

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G-Tekt India Pvt. Ltd. appealed against the order of the CIT(A)-35, New Delhi, which sustained the addition made by the DCIT, Circle-10(2), New Delhi, regarding a trading loss of Rs. 22.99 crores on tools and dies. The company argued that the loss was incurred to remain competitive in securing contracts with Honda Car India Limited (HCIL), which required the company to procure and sell tools and dies at a lower cost. The tax authorities contended that the transaction was a sham, primarily because both the supplier and the purchaser were part of the same business group, and the loss was known to the assessee from the outset. The Tribunal, however, found that the transaction was genuine and necessary for the business, noting that the company had reported profits in other years and had substantial business dealings with HCIL.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113760 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-06-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 12-09-2018
• Other Referred Cases: Dhakeshwari Cotton Mills Ltd. vs. CIT, Nitin Sales Corporation vs. ITO, Friends Clearing Agency (P) Ltd. vs. CIT, Omar Salay Mohamed Sait vs. CIT, State of Orissa v. Maharaja Shri B.P. Singh Deo
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Commercial expediency
• Section: 143(3); 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘C’ : NEW DELHI) BEFORE SH. N.K.BILLAIYA, ACCOUNTANT MEMBER AND SH.ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. 5922/Del/2018, A.Y. 2014-15 G-Tekt India Pvt. Ltd. 317, 3 rd Floor, Rectangle One, D-4, Saket District, Saket New Delhi PAN : AAECG5244P Vs. DCIT, Circle-10(2), New Delhi Appellant Respondent Appellant by Sh. Vishal Kalra, Adv. & Ms. Sumisha Murgai, CA Respondent by Mohd. Gayasuddin Ansari, CIT(DR) Date of hearing: 06.06.2023 Date of Pronouncement: 19.07.2023 ORDER Per Anubhav Sharma, JM : The appeal has been preferred by the Assessee against the order dated 18/06/2018 of CIT(A)-35, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 534/2016-17 arising out of an appeal before it against the order dated 26.12.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Circle-10(2), New Delhi (hereinafter referred as the Ld. AO). 2. The assessee company is engaged in the business of manufacturing auto motive parts and components and was incorporated on 23.11.2011. The return 2 ITA no. 5922/Del/2018 2 of income for relevant year was filed declaring total loss of Rs. 28,09,72,605/- and the case of assessee was selected for scrutiny u/s 143(3) of the Act and apart from various additions the ld. AO had made an addition on account of trading loss on sale of tools and dies of Rs.22.99 crores. The Ld. AO observed in para no. 6.1 to 6.5 as under : “6 Addition on account of trading loss of Rs. 22.99 crores on tools and dies:- 6.1 From a perusal of the financial statements (Note 34 thereof), it has been observed that the assessee has incurred a loss of Rs. 22,99,07,558/- on trading of tools and dies. During the year, the company has entered into a contract with Honda Car India Limited (HCIL) for sale of tools and dies for its new car models. These tools and dies (purchased by the company from other vendors) sold to HCIL were then provided back to assessee for manufacture of parts using the said items. 6.2 The assessee during the course of the assessment proceedings submitted that HCIL had asserted that it had lower quotes for the subjected goods from" other vendors which forced the assessee to lower its quote and enter into a loss making transaction. The factum of the transaction being a loss making one was known to the assessee from the outset. 6.3 In respect of the said loss, the assessee company was show caused as to why the said loss must not be disallowed being sham transaction on the following grounds; a. Majority of the traded goods (tools and dies) were purchased from M/s Honda Trading Corporation India Pvt. Ltd. i.e. a sister concern of HCIL to whom these products were ultimately sold at a loss. The supplier to assessee and the purchaser both belonged to the same business group and in ordinary course should have been aware of the commercial caveats including the price of traded goods. The submission of the assessee that HCIL had lower quotes remains unsubstantiated and untenable. b. There could have been no- necessity to have first sold the tools and dies to HCIL and then to have received them back for manufacture of parts. The whole transaction thus seemed to be a colorable device. 6.4 In response to the show cause notice, the assessee filed reply dated 14.12.2016, vide which the following submissions were made in rebuttal; 1. With reference to Note 34 of the Notes forming part of financial statements, we hereby submit that the Company manufactures the parts for Honda Cars India Limited as per specification and design submitted by them. The Company requires the dies to manufacture such'parts and in industry. Hence, either the Company who manufactures the parts purchases the dies as required to manufacture those parts and capitalize such Dies and charge the depreciation on the same. However, there are many risks and cost associated in this case as mentioned below:- a. The Company has to arrange funds to purchase the dies and tools and has to bear the interest cost on the same. 3 ITA no. 5922/Del/2018 3 b. The Dies for every parts are separate and hence, if due to any reasons, the order is discontinued form that particular party, then the same is total loss and that Dies has no use. Hence, our Company emphasis and request the customer to provide the Dies to manufacture the specific parts as required by them to minimize the risk/cost as mentioned above. In this case, when we requested the Honda Cars India Limited to provide the Dies to manufacture the parts, they told us to provide the quotation of Dies and get the Dies manufactured by ourselves and sale the same to them and they will pay for the same. Further, they informed us, that they has taken the quotation for manufacture of Dies from different parties and they will give the order for supply of the parts to that vendor, who will give the lowest quotation for the cost of Die. Accordingly, after negotiation and discussion, our Company has sold the Dies to them and those dies were provided by Honda Cars India Limited to out Company for manufacture of parts using said items. 14. As regard to your query that the loss incurred on sale of Dies is the sham transaction, we have already submitted the details and requirement of the said transactions. As regard the justification of having got in to deal is already mentioned in paint no. 1, that to get the order for supply of parts, the Company has sold the Dies and it was business decision and in current year also, the turnover from supply of parts has increased to Rs. 112.12 Crores from Rs. 74.13 Crores i.e. by 51%. If the Company has to purchase the Dies on its own, it has to arrange the funds and has to pay the interest on the same and has also to bear the risk of Dies being obsolete in case of discontinuance of order. Further, we like to submit that the Company has purchased the Dies not only from Honda, but also purchased the Dies from Tri Inter Thailand. The Company has incurred loss of Rs.8,47,33,202/- on purchased made form Honda Trading India Private Limited and loss of Rs.14,51,74,656/- on the purchases made form Tri Inter Thailand. Hence, it is evident that the cost of material is almost same of both the suppliers, from whom we have purchased the Dies and also our major purchase is not from Honda Trading India Private Limited, which is Rs. 30.42 Crores, but from Tri Inter Thailand, which is Rs. 52.13 Crores. The crux of the submissions of the assessee as reproduced herein above is as below:- a. In ordinary course, tools and dies would be provided by the customer for manufacture of parts. However, in a special case with respect to the transaction under consideration, HCIL had requested assessee to procure the dies and tools on its own accord after providing the quotation to HCIL, sell them to HCIL at the pre-agreed quote and then re-obtain these for manufacturing auto parts. b. That HCIL had lower quotes from other vendors basis which the assessee had to lower its quote for the subject tools and dies. This compelled the assessee to enter into a loss making transaction. c. That the subject transaction was a business decision keeping in view the future business outlook of the management. 6.5 The submission of the assessee has been considered but has been found unacceptable on the following grounds- a. That in ordinary course, it would have been HCIL who would have purchased tools and dies. However, only for this transaction, assessee was compelled to deviate from this ordinary course of business practice. No reasons have been given for this one time exception made by the assessee. 4 ITA no. 5922/Del/2018 4 b. That assessee’s assertion that HCIL had lower quotes is yet unsubstantiated as no business correspondence to this effect has been submitted before the undersigned. In ordinary course, particularly when the subject products had to be purchased from a sister concern of HCIL and HCI1 would have been aware dt the prevailing prices of the goods, it seems highly unlikely for HCIL to have made such an assertion. Further, the assessee chose to undertake substantial loss of 22.99 crores only on the basis of a hoax assertion by HCIL seems unlikely untenable.” 3. This addition was sustained by Ld. CIT(A) with following relevant observations of para 4.4.3.1 and 4.4.3.3 :- 4.4.3.1. “The facts of the case are that in the financial statements (Note 34 thereof), the AO observed that the appellant had incurred a loss of Rs. 22,99,07,558/- on trading of tools and dies. During the year, the company has entered into a contract with Honda Car India Limited (HCIL) for sale of tools and dies for its new car models. These tools and dies (purchased by the company from other vendors) sold to HCIL were then provided back to appellant for manufacture of parts using the said items. The appellant during the course of the assessment proceedings submitted that HCIL had asserted that it had lower quotes for the subjected goods from other vendors which forced the appellant to lower its quote and enter into a loss making transaction. The AO has stated that the nature of the transaction being a loss making one was known to the appellant from the outset. The AO has commented that the supplier to the appellant and the purchaser both belonged to the same business group and the AO found the submission of the appellant that HCIL had lower quotes to be unsubstantiated and untenable as there could have been no necessity for the appellant company to have first sold the tools and dies to HCIL and then to have received them back for manufacture of parts, therefore, the AO concluded that the entire transaction was a colourable device. 4.4.3.3. The AO was not satisfied with the reasons given by the appellant company for deviating from the ordinary course of business practice. The AO has observed that the appellant’s assertion that HCIL had lower quotes was unsubstantiated as no business correspondence to this effect has been submitted before the AO. In ordinary course, particularly when the subject products had to be purchased from a sister concern of HCIL and HCIL would have been aware of the prevailing prices of the goods, it seems highly unlikely for HCIL to have made such an 5 ITA no. 5922/Del/2018 5 assertion. Further, the AO has commented that the appellant chose to undertake substantial loss of 22.99 crores only on the basis of a hoax assertion by HCIL to be unlikely/untenable. The AO therefore, disallowed the loss of Rs. 22,99,07,558/-. In respect of the said loss, it is seen that majority of the traded goods (tools and dies) were purchased from M/s Honda Trading Corporation India Pvt. Ltd. i.e. a sister concern of HCIL to whom these products were ultimately sold at a loss. I find no reason to interfere with the AO's order on this issue, the appeal on this ground is dismissed.” 4. The assessee is in appeal raising following grounds :- “Appeal under section 253(l)(a) of the Income Tax Act, 1961 against the order dated 18 June 2018 (received on 19 July 2018) passed under section 250 of the Income Tax Act, 1961 (‘the Act') by the Commissioner of Income Tax (Appeals) - 4, New Delhi (hereinafter referred to as 'CIT(A)'). 1. That on facts and in the circumstances of the case and in law, the Assessing Officer ("AO") erred in completing the assessment of the Appellant at a loss of INR 3,88,91,980 as against returned loss of INR 28,09,72,605. 2. That on facts and in the circumstances of the case and in law, the CIT(A) has erred in arbitrarily confirming the disallowance of INR 22,99,07,558 made by the AO in respect of the trading loss on tools and dies, on the premise that such loss arose out of a sham transaction entered by the Appellant. 2.1 That on the facts and circumstances of the case and in law, the CIT(A) / AO have erred in ignoring the documentary evidences and submissions filed by the Appellant to establish commercial expediency / rationale behind the alleged sham trading transaction of tools and dies undertaken during the instant year. 3. That the above grounds of appeal are without prejudice to each other. 4. That the Appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.” 5. Heard and perused the record. 6. It was submitted on behalf of the assessee that the transaction of purchasing tools and dies was in the ordinary course of business practice which 6 ITA no. 5922/Del/2018 6 has not been doubted by the ld. Tax Authorities and necessary evidence of the genuineness of transaction were produced but insisting on the quotations from other vendors available with Honda Car India Ltd (HCIL), the presumption was drawn that the transaction was sham. It was submitted that the tax authorities have failed to appreciate the business and commercial benefit. A statement was submitted at the time of arguments showing sales and profits of the appellant from 2013-14 till 2022-23. It was submitted that the assessee is having major transactions with HCIL only and in that context the detail of sales to Honda Car India Ltd., in proportion to total sales has also been filed. It was also submitted that in fact the major purchase of dies was from Tri Inter Thailand and not from Honda Trading Corporation India Pvt. Ltd. It was further submitted that out of total trading loss of 22.99 crores of Rs. 14.51 crores was on account of purchases made from Tri inter Thailand however, only the transactions with Honda Trading Corporation India Pvt. Ltd. were examined and considered to be sham and whole of the loss disbelieved. It was submitted that considering the business volume involved and the prospective profits in the future the dies were sold to HCIL on losses to have a competitive edge. Ld. Counsel relied following judgments is support of his contention that Revenue cannot challenge the commercial expediency and wisdom of assessee. - Dhakeshwari Cotton Mills Ltd. vs. CIT : (1954) 26 ITR 775 (SC) - Nitin Sales Corporation vs. ITO : [2008] 212 Taxation 49 (Delhi HC) - Friends Clering Agency (P) Ltd. vs. CIT : [2011] 237 CTR 464 (Del) - Omar Salay Mohamed Sait vs. CIT : [1959) 37 ITR 151 - State of Orissa v. Maharaja Shri B.P. Singh Deo : (1970) 76 ITR 690 6.1 It was also submitted that appellant has sold dies to HCIL at loss of Rs. 39,43,12,558/- and after negotiating recovered foreign exchange loss of Rs. 16,44,05,000/- incurred on account of purchases of dies and consequently reduced the loss to Rs. 22,99,07,858/- which shows genuineness of the transaction. 7 ITA no. 5922/Del/2018 7 7. On the other hand, Ld. Dr submitted that findings of Ld. Tax Authorities are correct and require no interference. 8. All the grounds being connected on facts they are taken up together for disposal. Giving thoughtful consideration to the matter on record and submissions, it can be observed that Ld. Tax Authorities have not doubted the transaction of purchase as sham but have doubted the intention of the assessee for incurring loss as Ld. AO observed that “the factum of the transaction being loss making one was known to the assessee from the outset”. 9. The Bench is of considered opinion that Ld. Tax Authorities below have not appreciated the fact that the company was incorporated on 23.11.2011 and its existence and sustenance primarily was dependent upon the contract to manufactures certain parts to be used in the cars manufactured by HCIL. The case of assessee is that as there were competitor who had quoted lower rates of the dies thus, it decided to purchase the dies and sell the same at loss. Ld. Tax Authorities have failed to appreciate the substantial business of assessee in terms of sales was outcome of the contract with HCIL. It failed to appreciate that except for the present assessment year 2014-15, the assessee company has in the year 2013-14 and thereafter from 2015-16 onwards till 2022-23, has reported profit from the business it had transacted with HCIL. The Ld. Tax Authorities have tagged the transaction to be sham without pointing out anything suspicious in the purchase documents. 10. Ld. AO had fallen in error in drawing an adverse inference on the basis of failure of assessee to produce the correspondences between HCIL and the other parties who had quoted the lower rates. Ld. AO was supposed to examine the evidence available and the business prudence as coming from the assessee instead of washing out everything from the assessee for failure to produce one particular evidence which was not in the hands of assessee as it was with a third 8 ITA no. 5922/Del/2018 8 party record and HCIL may have its reservation to not provide third party information to the assessee. 11. The Bench is of considered opinion that Ld. CIT(A) has failed to appreciate the aforesaid and sustained the addition made by Ld. AO. It appears that the primary consideration in the mind of Ld. CIT(A) was that product was purchased from the sister concern of HCIL so that tainted the transaction of loss. However, as appreciated by the Bench the Tax Authorities had failed to take into consideration the business prudence of the assessee for incurring certain losses in initial year for a sustainable and longer partnership with HCIL and which has given rise to generation of profits in subsequent years and which have been tendered for taxation. 12. There is substance in the contention of Ld. Counsel that the major purchase of dies were from Tri Inter Thailand and not from Honda Trading Corporation India Pvt. Ltd. thus, alleging that the transaction was to benefit Honda Trading Corporation India Pvt. Ltd., which is subsidiary of HCIL is based on mere conjectures. 13. Consequent to aforesaid discussion the ground raised are sustained and the appeal of assessee is allowed. Order pronounced in the open court on 19 th July, 2023. Sd/- Sd/- (N.K.BILLAIYA) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:- 19 th .07.2023 *Binita, SR.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI