DYSTAR INDIA P. LTD, MUMBAI V. DCIT 8(1), MUMBAI

ITA 7120/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88059 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 27-11-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 15-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JEETENDRA KUMAR
• Keywords: Depreciation; Business expenditure; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

1 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO , JM AND SHRI N.K. BILLAIYA, AM ! I.T.A. NO.7120/MUM/2010 ( ASSESSMENT YEAR : 2006-07 ) M/S. DYSTAR INDIA PVT. LTD. R-855, TTC INDUSTRIAL AREA, RABALE, NAVI MUMBAI-400 701. ! VS. DY. COMM. OF INCOME TAX - 8(1) AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. ' ! # ! PAN/GIR NO. : AABCD 0295 N ( '$ APPELLANT ) .. ( %&'$ ! RESPONDENT ) '$' ! APPELLANT BY : SHRI VIJAY MEHTA (AR) %&'$ ( ' / RESPONDENT BY : SHRI JEET ENDRA KUMAR (DR) )*(+ DATE OF HEARING : 27/11/2014 ,-./ ( + / DATE OF PRONOUNCEMENT : 14/01/2015 0! O R D E R PER VIJAY PAL RAO, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ASS ESSMENT ORDER DATED 20/08/2010 PASSED UNDER SECTION 143(3) R.W.S. 144C( 13 ) OF THE INCOME TAX ACT, 1961 (THE ACT), IN PURSUANT TO THE DIRECTION O F DRP DATED 16/07/2010 PASSED UNDER SECTION 144C(5) OF THE INCOME TAX ACT FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS RAISED THE FOLLOWING GROU NDS :- 2 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. 1. THE DEPUTY COMMISSIONER OF INCOME TAX - 8(1), M UMBAI (HEREINAFTER REFERRED TO AS THE DCIT) ERRED IN ASSE SSING THE TOTAL INCOME AT RS.8,35,47,520/- AS AGAINST RETURNED IN COME OF RS.6,15,47,524/- BY THE APPELLANT. 2.THE DCIT ERRED IN DISALLOWING RS. 2,20,00,000/- B EING AMOUNT PAID TOWARDS 'SHORT NOTICE PAY FOR TERMINATION OF T OLL MANUFACTURING AGREEMENT' AND TREATING THE SAME AS NEITHER REVENUE EXPENDITURE NOR CAPITAL EXPENDITURE. YOUR APPELLANT SUBMITS THAT, PAYMENT MADE BY APPELL ANT TO COLOUR CHEM LTD. ON ACCOUNT OF SHORT NOTICE PAY FOR TERMIN ATION OF TOLL MANUFACTURING AGREEMENT, IN VIEW OF THE FACTS OF TH E CASE, ARE REVENUE IN NATURE AND SHALL BE ALLOWED AS DEDUCTIBL E REVENUE EXPENDITURE U/S 37 OF THE I.T. ACT. IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO ABOVE, THE APPELLANT SUBMITS THAT THE PAYMENT MADE TO COLOUR CHEM LTD. O N ACCOUNT OF SHORT NOTICE PAY FOR TERMINATION OF TOLL MANUFACTUR ING AGREEMENT BE TREATED AS CAPITAL EXPENDITURE AS HELD BY THE DCIT IN DRAFT ASSESSMENT ORDER AND DEPRECIATION ON THE SAME SHALL BE ALLOWED. 3. THE DCIT ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE I.T. ACT. 2. APPEAL OF THE ASSESSEE IS DISPOSED OF BY THIS T RIBUNAL VIDE ORDER DATED 01/06/2012. THE ASSESSEE CHALLENGED THE ORDER OF TH E TRIBUNAL BEFORE THE HON'BLE HIGH COURT IN APPEAL. THE HON'BLE HIGH COU RT SET ASIDE THE ORDER DATED 01/06/2012 OF THIS TRIBUNAL AND REMANDED THE MATTER TO THE TRIBUNAL FOR FRESH ADJUDICATION ON MERITS VIDE ORDER DATED 2 4/01/2013 AS UNDER :- 2. THE COUNSEL FOR APPELLANT-ASSESSEE AT THE VERY OUTSET POINTS OUT THAT THE TRIBUNAL IN THE IMPUGNED ORDER DATED 01.06.201 2 HAS PROCEEDED ON INCONSISTENT RECORDING OF FACT WHICH HAS LED TO MIS CARRIAGE OF JUSTICE. THE COUNSEL FOR THE APPELLANT- . ASSESSEE INVITES OUR ATTENTION TO PARAGRAPH 5 OF THE IMPUGNED ORDER, WHEREIN THE TRIB UNAL RECORDS AS ONE OF THE UNDISPUTED FACTS FOR THE CONSIDERATION OF APPEA L BEFORE IT WAS THAT THE APPELLANT- ASSESSEE HAD TERMINATED ITS TOLL MANUFAC TURING AGREEMENT WITH M/S. COLOUR CHEM LTD W.E.F. 24.03.2006. WHILE, AT PARAGRAPH 10.2 OF ITS ORDER, THE TRIBUNAL RECORDS THAT HAD THE TOLL M ANUFACTURING AGREEMENT WITH M/S. COLOUR CHEM LIMITED BEEN TERMI NATED BY THE APPELLANT THEN THE SITUATION WOULD HAVE BEEN TOT ALLY DIFFERENT. THUS, IT 3 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. APPEARS THAT THERE IS INHERENT CONTRADICTION ON THE FACTS RECORDED, WHICH CERTAINLY MAKES THE CONCLUSION PRIMA FACIE SU SPECT. 3. TEJVEER SINGH, COUNSEL FOR THE REVENUE DOES NO T DISPUTE THAT THERE IS INCONSISTENCY IN PARAGRAPH 5 AND PARAGRAPH 10.2 OF THE IMPUGNED ORDER. HOWEVER, HE STATES THAT THE APPELLANT-ASSESSEE HAS FILED A MISCELLANEOUS APPLICATION FOR RECTIFICATION BEFORE THE TRIBUNAL A ND THE SAME IS PENDING. IN THE ABOVE CIRCUMSTANCES, IT IS HIS SUBMISSION THAT THE APPEAL SHOULD NOT BE ENTERTAINED AT THIS STAGE. 4. WE FIND THAT THE MISCELLANEOUS APPLICATION FOR R ECTIFICATION IS PENDING WITH THE TRIBUNAL SINCE 03.-8.2012 AND HAS NOT YET BEEN DISPOSED OF. IN VIEW OF THE FACT THAT ADMITTEDLY THERE ARE MUTUALLY CONTRADICTORY RECORDING OF THE FACT BY THE TRIBUNAL, WE DEEM IT PROPER THAT THE IMPUGNED ORDER DATED 01.06.2012 BE SET ASIDE AND THE TRIBUNAL IS D IRECTED TO HEAR THE MATTER AFRESH ON MERITS AND PASS A FRESH ORDER. THE TRIBUNAL IS REQUESTED TO DECIDE THE APPEAL AT ITS EARLIEST CONVENIENCE. 2.1 THE ASSESSEE ALSO FILED A MISCELLANEOUS APPLICA TION NO.513/2013 WHICH WAS DISPOSED OF VIDE ORDER DATED 15/03/2014 IN VIEW OF THE ORDER OF THE HON'BLE HIGH COURT. 3. THUS THE APPEAL OF THE ASSESSEE WAS LISTED BEFOR E US FOR FRESH HEARING AND ADJUDICATION AS PER DIRECTION OF THE HON'BLE HI GH COURT. THE ONLY ISSUE ARISING FOR OUR CONSIDERATION AND ADJUDICATION IS W HETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE AO/DRP ERRED IN DISAL LOWING RS.2.2 CRORES TOWARDS SHORT-NOTICE PAYMENT FOR TERMINATION OF TOL L MANUFACTURING AGREEMENT (TMA) AND TREATING THE SAME AS NEITHER REVENUE EXPE NDITURE NOR CAPITAL EXPENDITURE. 3.1 THE RELEVANT FACTS GIVING RISE TO THE DISPUTE A RE THAT THE ASSESSEE AND COLOUR CHEM LIMITED (CCL IN SHORT) ENTERED INTO A T OLL MANUFACTURING AGREEMENT (TMA) ON 29/08/1997 WHEREBY CCL AGREED TO UNDERTAKE THE PRODUCTION OF TEXTILE DYESTUFF FOR AND ON BEHALF OF THE ASSESSEE COMPANY AT CCLS PLANT. AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT THIS ARRANGEMENT WAS FOR AN INITIAL PERIOD OF 5 YEARS W. E.F. 01/09/1992 BUT CANNOT BE TERMINATED BEFORE A MINIMUM PERIOD OF TWO YEARS. THE TMA WAS TERMINATED VIDE AGREEMENT DATED 29/04/2006. DURING THE YEAR UN DER CONSIDERATION THE 4 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. ASSESSEE DEBITED AN AMOUNT OF RS.2.20 CRORES TOWARD S SHORT-NOTICE PAYMENT ON ACCOUNT OF TERMINATION OF TMA. THE AO ASKED THE ASS ESSEE TO EXPLAIN THE NATURE OF EXPENSES AND ALSO SUPPORT ITS CLAIM AS RE VENUE EXPENSES. THE ASSESSEE EXPLAINED VIDE LETTER DATED 30/11/2009 AND CLAIMED THAT THE PAYMENT UNDER AGREEMENT IS ALLOWABLE REVENUE EXPENDITURE. T HE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND DISALLOWED RS.2.20 C RORES PAID BY THE ASSESSEE ON ACCOUNT OF TERMINATION OF TMA BY TREATING THE SA ME AS CAPITAL EXPENDITURE. ACCORDINGLY THE AO PASSED AN ASSESSMENT ORDER DATED 30/11/2009. THE ASSESSEE FILED ITS OBJECTION BEFORE THE DRP. THE DR P HELD THAT THIS EXPENDITURE IS NEITHER ALLOWABLE AS REVENUE EXPENDITURE NOR ALL OWABLE TO THE ASSESSEE AS CAPITAL EXPENDITURE, AS THE EXPENDITURE HAS NOT BEE N INCURRED FOR ANY BUSINESS REQUIREMENT AND IT IS AGAINST THE TERMS OF THE AGRE EMENT. THUS THE DRP CONFIRMED THE DISALLOWANCE ON THE GROUND THAT THE E XPENDITURE CANNOT BE HELD TO BE EXCLUSIVE AND NECESSARILY FOR THE BUSINESS OF THE ASSESSEE. 3.2 BEFORE US, THE LD. AR OF THE ASSESSEE SUBMITTE D THAT THE ASSESSEE ENTERED INTO AGREEMENT WITH CCL FOR PURCHASE OF RAW MATERIAL PRODUCED BY CCL FOR AND ON BEHALF OF THE ASSESSEE. THE AGREEMEN T CONTAINED THE PROVISION OF COMPENSATION IN CASE OF PRIOR TERMINATION OR ON EXPIRY. HE REFERRED TO VARIOUS CLAUSES OF THE AGREEMENT AND SUBMITTED THAT DURING THE TENURE OF THE AGREEMENT CCL SHALL PRODUCE EXCLUSIVELY FOR THE ASS ESSEE AS PER THE SPECIFICATION AND REQUIREMENT OF THE ASSESSEE. ALL THE TERMS AND CONDITIONS OF MANUFACTURING OF THE PRODUCT WERE PUT AND INCORPORA TED BY THE ASSESSEE IN THE AGREEMENT AS PER ITS REQUIREMENT. THE QUALITY CONTR OL CONFIRMATION AS WELL AS THE STANDARD OF THE PRODUCT WERE MUTUALLY AGREED BE TWEEN THE PARTIES. HE HAS REFERRED TO CLAUSE-13 OF THE AGREEMENT AND SUBMITTE D THAT EITHER PARTY MAY TERMINATE THE AGREEMENT BY GIVING 12 MONTHS PRIOR N OTICE. IN CASE OF TERMINATION IN PART, WITH RESPECT TO A SPECIFIC PRO DUCT, THE TERMINATION MAY BE BY SIX MONTHS PRIOR NOTICE. HE THEN REFERRED TO CLA USE 13.6 AND SUBMITTED THAT ON EXPIRY OR TERMINATION OF THE AGREEMENT THE ASSES SEE SHALL BE BOUND AND LIABLE TO PAY TO CCL COMPENSATION ON ACCOUNT OF COS T OF DISCHARGING PERSONNEL 5 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. AND ANY OTHER COST AND LIABILITY INCIDENTAL THERETO ARISING OUT OF SUCH TERMINATION OF AGREEMENT. THE REMNANT COST WILL BE DETERMINED BY A PROFESSIONAL ACCOUNTANT ACCEPTABLE TO BOTH PARTIES AND SHALL BE FINAL AND BINDING ON THE PARTIES. SINCE CCL DECIDED TO AMALGA MATE WITH CLARIANT INDIA LIMITED; VANAVIL DYES & CHEMICALS LTD.; BTP INDIA P RIVATE LTD. AND KUNDALIKA INVESTMENT PVT. LTD. INTO A NEW COMPANY CALLED CL ARIANT CHEMICALS LTD. THE ASSESSEE IN ITS OWN BUSINESS INTEREST TERMINATED TH E CONTRACT BY GIVING SHORT- NOTICE. THE AGREEMENT WAS TERMINATED BY MUTUALLY DE CIDING COMPENSATION TO BE PAID TO CCL. LD. AR HAS SUBMITTED THAT THE ASSES SEE IN THE NORMAL COURSE HAS TO GIVE NOTICE OF 12 MONTHS FOR TERMINATION OF THE TMA OR BEAR FIXED COST OF PLANT AND MACHINERY, LABOUR UTILITIES AND OTHER FIX ED COST DEPLOYED BY CCL FOR MANUFACTURING WHICH WILL AMOUNT TO RS.6.95 CRORES T O BE PAID BY THE ASSESSEE. THE LD. AR REITERATED THAT THIS AMOUNT OF RS.2.20 C RORES IS ALLOWABLE EXPENDITURE AS INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE . HE HAS RELIED UPON THE FOLLOWING JUDGMENTS:- 1. CIT VS. NAINITAL BANK LTD. (62 ITR 638)(SC); 2. CIT VS. SALES MAGNESITE (PVT.) LTD. (214 ITR 1)(BOM .) 3. S.A. BUILDERS VS. CIT (288 ITR 1)(SC) 3.3 IT WAS CONTENDED THAT THIS WAS A PRUDENT BUSINE SS DECISION OF THE ASSESSEE WHICH CANNOT BE QUESTIONED ON THE GROUND O F PARTICULAR REQUIREMENT OR JUSTIFICATION BY THE REVENUE AUTHORITIES. THE EX PENDITURE WAS INCURRED EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE AND F OR COMMERCIAL EXPEDIENCY. 4. ON THE OTHER HAND THE LD. DR HAS SUBMITTED THAT VIDE AN AGREEMENT DATED 31.3.98 THE CCL TRANSFERRED ALL BUSINESS CARR IED ON BY CCL OF MANUFACTURING, PRODUCING AND DEALING OF TEXTILE-DYE S TOGETHER WITH BENEFICIAL INTEREST AND GOODWILL AS A GOING CONCERN WITH ALL L ICENCE, PERMITS, QUOTA RIGHTS TO THE ASSESSEE. PURSUANT TO THE TRANSFER OF THE B USINESS, CCL UNDERTOOK NOT TO CARRY-ON OR COMMENCE THE BUSINESS OF MANUFACTURI NG, PRODUCING OF TEXTILE 6 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. DYES EXCEPT FOR WITH THE ASSESSEE FOR A PERIOD OF 5 YEARS. THE CCL ALSO UNDERTOOK FOR A SECRECY OF 5 YEARS TO KEEP CERTAIN INFORMATION AND NOT TO ACT IN ANY MANNER WHICH IS LIKELY TO JEOPARDIZE OR AFFECT THE BUSINESS OF THE ASSESSEE WHICH IS TRANSFERRED UNDER DEED OF ASSIGNMENT. THER EAFTER, IN A SEPARATE TOLL AGREEMENT DATED 18/09/2003, IT IS AGREED TO RELOCAT E PRODUCTION FROM THANE TO ROHA. THE AGREEMENT WAS TERMINATED ON ACCOUNT OF AM ALGAMATION OF CCL WITH VARIOUS OTHER COMPANIES. THEREFORE, THE CCL DECIDED TO TERMINATE THE TMA AND THERE WAS NO QUESTION OF PAYING ANY COMPENSATION BY THE ASSESSEE. THE COMPENSATION PAID BY THE ASSESSEE IS NOT FOR TERMIN ATION OF TMA BUT SHIFTING OF ASSETS WHICH IS TAKEN OVER. THUS, THE LD. DR SUBMIT TED THAT IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE. HE HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE BREACH OF AGREEMENT WA S NOT BECAUSE OF THE ASSESSEE BUT BECAUSE OF CCL WHO TOOK A UNILATERAL D ECISION OF AMALGAMATION. 4.1 IN THE REJOINDER THE LD. AR SUBMITTED THAT VIDE BUSINESS TRANSFER AGREEMENT (BTA), THE ASSESSEE PURCHASED BUSINESS, T EXTILE DYES AND NOT PLANT AND MACHINERY OF CCL THATS WHY THE TMA FOR PRODUCT ION OF THE PRODUCT WAS ENTERED INTO BETWEEN THE PARTIES AND IT WAS ONLY FO R THE ASSESSEES REQUIREMENT. THE CCL COULD NOT DO BUSINESS OF TEXTILE DYES EXCEP T MANUFACTURING FOR THE ASSESSEE. HE HAS FURTHER CONTENDED THAT THE AGREEME NT ITSELF MANIFEST THE COMMERCIAL EXPEDIENCY OF PAYMENT OF COMPENSATION. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE ASSESSEE PURCHASED BUSINESS OF TEXTILE DYES FROM CCL VIDE RECITALS OF BUSINESS TRANSACTION AGREEMENT (BTA) DATED 26/06 /97. CLAUSE 7 OF BTA READS AS UNDER :- 7. THE ASSIGNOR HAS CONSIDERED THE PROPOSAL PUT FORWAR D BY THE ASSIGNEE AND HAD AGREED TO ASSIGN AND TRANSFER TO T HE ASSIGNEE THE SAID BUSINESS OF MANUFACTURING, PRODUCING AND DEALING IN TEXTILE DYES TO THE ASSIGNEE BUT EXCLUDING ALL THE FIXED ASSETS ATTRIBU TABLE TO THE BUSINESS OF TEXTILE DYES AT OR FOR THE PRICE AND ON CERTAIN TER MS AND CONDITIONS MUTUALLY AGREED UPON BY AND BETWEEN THEM. 7 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. 5.1 IT IS CLEAR FROM CLAUSE-7 OF THE RECITALS OF TH E BTA THAT THE BUSINESS OF MANUFACTURING, PRODUCING AND DEALING IN TEXTILE- DY ES WAS TRANSFERRED BY CCL TO THE ASSESSEE EXCEPT THE FIXED ASSETS. THEREFORE, THE PLANT AND MACHINERY OR THE MANUFACTURING FACILITIES OF CCL WAS NOT TRANSFE RRED UNDER BTA. IT WAS ALSO A TERM AND CONDITION OF THE BTA THAT PARTIES WOULD ENTER INTO A TOLL MANUFACTURING AGREEMENT (TMA) SO THAT CCL WOULD UTI LIZE MANPOWER AND MANUFACTURING FACILITY FOR PRODUCTION OF THE PRODUC T FOR AND ON BEHALF OF THE ASSESSEE. CLAUSE A OF BTA FURTHER REITERATES THE E XCLUSION OF FIXED ASSETS FROM TRANSFER UNDER BTA WHICH READS AS UNDER :- A. THE ASSIGNOR AGREES TO SELL, TRANSFER AND ASSIGN TO THE ASSIGNEE AND THE ASSIGNEE SHALL PURCHASE AND ACQUIRE FROM THE AS SIGNOR THE RIGHT AND THE BUSINESS OF THE ASSIGNOR OF MANUFACTURING, PROD UCING AND DEALING IN TEXTILE DYES (WHICH SHALL MEAN AND AMONGST OTHERS INCLUDE PIGMENT EMULSIONS, REACTIVE DYES AND DISPENSE DYES) TOGETHE R WITH THE RIGHT TO USE AND AVAIL OF ALL LICENCES, PERMITS, QUOTA RIGHT S, TRADE-MARKS, TRADE- NAMES HELD BY THE ASSIGNOR BUT SHALL EXCLUDE ALL TH E FIXED ASSETS OF THE ASSIGNOR CONNECTED WITH THE BUSINESS OF TEXTILE DYE S IN INDIA AT OR FOR THE LUMPSUM CONSIDERATION OF INDIAN RS.295,047 MIOS . T HE SAID CONSIDERATION SHALL COMPRISE OF :- (I) INDIAN RS.136.431 MIOS FOR THE ASSIGNMENT OF THE RI GHT TO MANUFACTURE, PRODUCE AND DEALING IN TEXTILE DYES; (II) INDIAN RS.76.923 MIOS AS GOODWILL FOR THE ASSIGNED BUSINESS; AND (III) INDIAN RS.81.693 MIOS. FOR THE ASSIGNOR UNDERTAKING AND AGREEING NOT TO COMPETE WITH THE ASSIGNEE IN TERMS OF CLAUSE E(I) AND E(II) OF THIS AGREEMENT. 5.2 FURTHER CLAUSE-M OF THE BTA STIPULATES THE RES PECTIVE OBLIGATIONS FOR TOLL MANUFACTURING AGREEMENT AS UNDER :- M. THE ASSIGNEE HEREBY AGREES AND UNDERTAKES TO TH E ASSIGNOR THAT ON AND FROM THE DATE OF THE ASSIGNMENT OF THE SAID BUS INESS, THE ASSIGNEE SHALL CARRYOUT AND COMPLY WITH ALL OBLIGATIONS THAT ARE REQUIRED TO BE CARRIED OUT AND COMPLIED WITH BY IT AS PER THE TERM S AND CONDITIONS OF THE TOLL MANUFACTURING AGREEMENT AND THE ASSIGNEE SHALL INDEMNIFY FROM AND AGAINST ALL CLAIMS AND FROM AND AGAINST ALL COSTS, CHARGES AND EXPENSES THAT THE ASSIGNOR MAY INCUR, SUFFER OR BE PUT TO ON ACCOUNT OF ANY CLAIM MADE ON THE ASSIGNOR ON ACCOUNT OF THE ASSIGNEE NOT CARRYING OUT OR COMPLYING WITH THE OBLIGATIONS THAT ARE REQUIRED TO BE CARRIED OUT BY THE ASSIGNEE. 8 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. 5.3 THUS, IT IS CLEAR THAT IT WAS A CONDITION OF BT A THAT THE PARTIES TO ENTER INTO A TOLL MANUFACTURING AGREEMENT. CLAUSE-P OF B TA AGAIN PROVIDES FOR COMPENSATION IN THE EVENT OF TERMINATION OR EXPIRY OF TOLL AGREEMENT WHICH READS AS UNDER:- P. IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES H ERETO THAT ON THE EXPIRY OR TERMINATION OR SOONER DETERMINATION OF TH E TOKK MANUFACTURING AGREEMENT REFERRED TO HEREIN ABOVE, THE ASSIGNEE SH ALL BE BOUND AND LIABLE TO PAY TO THE ASSIGNOR REMANANT COST FOR DISCHARGIN G PERSONNEL AND ANY OTHER COSTS AND LIABILITIES INCIDENTAL THERETO AND ARISING OUT OF SUCH TERMINATION OR SOONER DETERMINATION OF THE TOLL MAN UFACTURING AGREEMENT. THE REMANANT COST WILL BE DETERMINED BY A PROFESSIO NAL ACCOUNTANT ACCEPTABLE TO THE PARTIES HERETO AND THE FEES OF TH E ACCOUNTANT SHALL BE PAID BY THE ASSIGNEE ALONE. THE VALUE SO DETERMINED BY THE PROFESSIONAL ACCOUNTANT SHALL BE FINAL AND BINDING ON THE PARTIE S HERETO AND THE AMOUNT SO DETERMINED BY THE PROFESSIONAL ACCOUNTANT SHALL BE PAID BY THE ASSIGNEE ON WRITTEN DEMAND WITHOUT DELAY IN SO FAR AND AT THE TIMES AS THEY OCCUR. THE ASSIGNOR WILL USE ITS BEST EFFORT T O KEEP REMANANT COST AT A MINIMUM BY TRANSFERRING EMPLOYEES INTO OTHER FUNCTI ONS AND MAKING USE OF ASSETS FOR OTHER PURPOSES AS FAR AS THIS IS POSSIBL E WITHIN THE ASSIGNORS OTHER BUSINESS ACTIVITIES. 5.4 THE TOLL MANUFACTURING AGREEMENT WAS ENTERED IN TO IN PURSUANT TO AND IN COMPLIANCE OF BTA AND THEREFORE, THE AGREEMENT BETW EEN THE PARTIES WAS BASED ON COMMERCIAL EXPEDIENCY. THE CCL UNDERTOOK MANUFAC TURING ONLY ON BEHALF OF THE ASSESSEE AND AGREED TO THE OWNERSHIP OF THE PRODUCT WITH THAT OF THE ASSESSEE AS PER CLAUSE 6.4 AS UNDER :- 6.4 THE PROCESSOR RECOGNIZES UNCONDITIONALLY:- - THAT THE PROCESSOR WILL UNDERTAKE THE PRODUCTION ON BEHALF OF THE PRINCIPAL SO THAT THE PRINCIPAL RETAINS TITLE TO TH E MATERIALS SUPPLIED BY IT AND ACQUIRES TITLE TO SEMI-MANUFACTU RED PRODUCTS AND FINISHED PRODUCTS; - THAT THE PROCESSOR WILL NOT ACQUIRE ANY RIGHT OR TI TLE WITH REGARD TO THE DOCUMENTS RECEIVED FROM THE PRINCIPAL AND THAT THE PROCESSOR WILL HAVE NO LEGAL CLAIM TO THE INFORMATION; - THAT THE PROCESSOR WILL USE THESE DOCUMENTS ONLY FO R THE PURPOSE OF THIS AGREEMENT; AND - THAT AFTER TERMINATION OF THIS AGREEMENT OR ON RENU NCIATION OF THE FURTHER PRODUCTION OF AN AGREEMENT PRODUCT, THE PRO CESSOR WILL RETURN TO THE PRINCIPAL WITHOUT DELAY ALL DOCUMENTS RECEIVED; 9 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. 5.5 CLAUSE-13 OF THE TMA CONTAINS THE DURATION, TER MINATION AND COMPENSATION TO BE PAID BY THE ASSESSEE TO CCL. THE RELEVANT CLAUSES OF TMA ARE 13.1, 13.2 AND 13.6 WHICH ARE REPRODUCED AS UND ER :- 13.1 THIS AGREEMENT TAKES EFFECT ON 1.9.1997 WITH T HE INTENTION TO CONTINUE UNTIL 31.8.2002 BUT NOT TO BE TERMINATED B EFORE 31.8.1999. THEREAFTER, THIS AGREEMENT WILL CONTINUE TO BE EFFE CTIVE FOR FURTHER PERIODS OF ONE YEAR EACH UNLESS TERMINATED BY EITHER PARTY TO THE /AGREEMENT GIVING TWELVE MONTHS PRIOR NOTICE. 13.2 EITHER PARTY MAY TERMINATE THIS AGREEMENT IN P ART WITH RESPECT TO A SPECIFIC AGREEMENT PRODUCT WITH SIX MONTHS ADVANCE WRITTEN NOTICE OR BY MUTUAL AGREEMENT. 13.6 IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO THAT ON THE EXPIRY OR TERMINATION OR SOONER DETERMINATION OF TH E TOLL MANUFACTURING AGREEMENT REFERRED TO HEREIN ABOVE, THE PRINCIPAL S HALL BE BOUND AND LIABLE TO PAY TO THE PROCESSOR REMANANT COST FOR DISCHARGI NG PERSONNEL AND ANY OTHER COSTS AND LIABILITIES INCIDENTAL THERETO AND ARISING OUT OF SUCH TERMINATION OR SOONER DETERMINATION OF THE TOLL MAN UFACTURING AGREEMENT. THE REMANANT COST WILL BE DETERMINED BY A PROFESSIO NAL ACCOUNTANT ACCEPTABLE TO THE PARTIES HERETO AND THE FEES OF TH E ACCOUNTANT SHALL BE PAID BY THE PRINCIPAL ALONE. THE VALUE SO DETERMINE D BY THE PROFESSIONAL ACCOUNTANT SHALL BE FINAL AND BINDING ON THE PARTIE S HERETO AND THE AMOUNT SO DETERMINED BY THE PROFESSIONAL ACCOUNTANT SHALL BE PAID BY THE PRINCIPAL OR WRITTEN DEMAND WITHOUT DELAY IN SO FAR AND AT THE TIME AS THEY OCCUR. THE PROCESSOR WILL USE ITS BEST EFFORT TO KE EP REMANANT COST AT A MINIMUM BY TRANSFERRING EMPLOYEES INTO OTHER FUNCTI ONS AND MAKING USE OF ASSETS FOR OTHER PURPOSES AS FAR AS THIS IS POSSIB LE WITHIN THE PROCESSOR OTHER BUSINESS ACTIVITIES. 5.6 A COMBINED READING OF BTA AND TMA MAKES IT CLEA R THAT THE ASSESSEE PURCHASED THE TEXTILE DYE BUSINESS OF CCL WITHOUT P LANT AND MACHINERY AND PRODUCTION WAS TO BE CONTINUED BY CCL FOR AND ON BE HALF OF THE ASSESSEE, AT LEAST FOR THE TENURE OF THE AGREEMENT SO THAT CCL C AN UTILIZE ITS FACILITY AND MANPOWER ALREADY WORKING IN THE PROCESS. ON THE EXP IRY OR TERMINATION OF TMA BY GIVING NOTICE, IT WAS AGREED BETWEEN THE PARTIES TO THE BTA AS WELL AS TMA THAT THE ASSESSEE WOULD COMPENSATE CCL REMANANT COS T FOR DISCHARGING PERSONNEL AND ALL OTHER INCIDENTAL COST THERETO. T HE COMPENSATION WAS TO BE WORKED OUT BY A THIRD PARTY AND WAS TO BE ACCEPTED AS BINDING AND FINAL ON THE PARTIES TO THE AGREEMENT. WHEN THE BUSINESS TRANSFE R DEED AND CONSEQUENTIAL 10 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. TMA WERE BETWEEN TWO UNRELATED PARTIES THEN THE BUS INESS DECISION OF THE ASSESSEE CANNOT BE QUESTIONED ON THE GROUND OF JUST IFICATION OR REQUIREMENT OF PAYMENT OF COMPENSATION. THE GENUINENESS OF THE AG REEMENT BETWEEN THE PARTIES AS WELL AS PAYMENT OF COMPENSATION IS NOT D OUBTED. THEREFORE, THE JUSTIFICATION AND REQUIREMENT OF PAYMENT OF COMPENS ATION BECOMES IRRELEVANT. ONLY IN CASE OF GENUINENESS OF TRANSACTION OF PAYME NT OF COMPENSATION, THE QUESTION OF JUSTIFICATION OF SUCH PAYMENT CAN BE RA ISED AS RELEVANT, BUT, WHEN THERE IS NO QUESTION OF GENUINENESS OF THE PAYMENT OF COMPENSATION THE ASSESSING AUTHORITY CANNOT SIT IN THE ARMS CHAIR OF A BUSINESSMAN AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITU RE. THE HON'BLE SUPREME COURT IN THE CASE OF S .A. BUILDERS (SUPRA), HAS OBSERVED IN PARA 35 AS UNDER :- 35.WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PUR POSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINES S OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PU T ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITU RE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN H E COMPELLED TO MAXIMIZE HIS PROFIT. THE INCOME-TAX AUTHORITIES MUS T PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINES SMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM TH EIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATE D ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PR OFITS. 5.7 THUS, THE TAX AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT, BUT THAT OF PRUDENT BUSINESSMAN. IN ANY CASE IF THE ASSESSEE TOOK A DECISION TO DISCONTINUE THE ARRANGEMENT UNDER THE T MA WITH CCL IN ITS BEST BUSINESS INTEREST THEN, SUCH DECISION OF THE BUSINE SSMAN CANNOT BE QUESTIONED WITHOUT DOUBTING THE GENUINENESS OF THE ARRANGEMENT AND CONSEQUENT PAYMENT OF COMPENSATION. IT IS NONE OF THE JOB OF T HE TAX AUTHORITIES TO SEE HOW THE ASSESSEE DOES BUSINESS, IN THE BEST INTEREST OF ITS BUSINESS. THE PAYMENT IN QUESTION HAS A DIRECT NEXUS WITH THE BUSINESS ACTIV ITY OF THE ASSESSEE AND, THEREFORE, IT WAS INCURRED FOR THE BUSINESS OF THE ASSESSEE AND FOR COMMERCIAL 11 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. EXPEDIENCY. THE HON'BLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. SALES MAGNESITE (PVT.) LTD. (SUPRA) HAS HELD AT PAGE-5 AND 6 AS UNDER :- WE HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. WE HAVE ALSO NOTED THE FINDING OF THE TRIBUNAL THAT THE PAYMENT MADE BY THE ASSESSEE TO ITS SOLE SELLING AGENTS AS COMPENSATION FOR TERM INATION OF THE SOLE SELLING AGENCY WAS A BUSINESS EXPENDITURE WHICH WAS INCURRE D BY THE ASSESSEE AFTER PROPER CONSIDERATION OF THE FACTS AND CIRCUMS TANCES OF THE CASE AND ON THE BASIS OF LEGAL OPINION OF ITS SOLICITORS. TH E TRIBUNAL HAS ALSO RECORDED A CLEAR FINDING OF FACT THAT THE PAYMENT WAS MADE FOR COMMERCIAL EXPEDIENCY. IN VIEW OF THIS CLEAR FINDIN G THAT THE PAYMENT FOR TERMINATION OF THE SOLE SELLING AGENCY WAS WHOLLY ON BUSINESS CONSIDERATIONS, WE DO NOT FIND ANY COGENT REASON T O HOLD THAT THE CLAIM OF THE ASSESSEE WAS NOT ALLOWABLE AS A BUSINESS DEDUC TION. THE PRINCIPLES GOVERNING THE ALLOWANCE OF DEDUCTION IN RESPECT OF SUCH EXPENDITURE ARE WELL-SETTLED BY NOW BY A CATENA OF DECISIONS OF THE SUPREME COURT AND THE VARIOUS HIGH COURTS. SUCH DED UCTIONS ARE ORDINARILY CLAIMED AND ALLOWED UNDER SECTION 37 OF THE ACT WHICH IS A RESIDUARY SECTION EXTENDING THE ALLOWANCE OF DEDUC TION TO ITEMS OF BUSINESS EXPENDITURE NOT COVERED BY ANY OF THE PRE CEDING SECTIONS (SECTIONS 30 TO 36) AND SECTION 80VV. THE ONLY CON DITIONS ARE THAT : (I) IT IS NOT AN EXPENDITURE, (A) IN THE NATURE OF CAPITAL EX PENDITURE, OR (B) PERSONAL EXPENSES OF THE ASSESSEE, AND (II) IT IS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PR OFESSION. VARIOUS TESTS HAVE BEEN EVOLVED BY THE COURTS FROM TIME TO TIME TO DECIDE WHETHER AN EXPENDITURE IS INCURRED FOR THE PURPOSES OF BUSINESS. ONE OF THE TESTS OFTEN APPLIED IS WHETHER IT IS INCURRED B Y THE ASSESSEE IN HIS CHARACTER AS A TRADER. TO HOLD IT TO BE AN EXPENDIT URE ALLOWABLE AS A DEDUCTION UNDER SECTION 37, IT IS NOT ESSENTIAL THA T IT SHOULD BE NECESSARY, LEGALLY OR OTHERWISE, TO INCUR THE SAME OR THAT IT SHOULD DIRECTLY AND IMMEDIATELY BENEFIT THE BUSINESS OF THE ASSESSEE. E VEN EXPENDITURE INCURRED VOLUNTARILY ON THE GROUND OF COMMERCIAL E XPEDIENCY AND IN ORDER INDIRECTLY TO FACILITATE THE CARRYING ON OF THE BU SINESS WOULD BE DEDUCTIBLE UNDER THIS SECTION. THE QUESTION WHETHER IT WAS NE CESSARY FOR COMMERCIAL EXPEDIENCY OR NOT IS A QUESTION THAT HAS TO BE DECI DED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT BY THE SUBJECTIVE STANDARD OF REASONABLENESS OF THE REVENUE. AS OBSERVED BY THE SUPREME COURT IN BOMBAY STEAM NAVIGATION CO. (1953) PVT. LTD. V. CI T [1965] 56 ITR 52, THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT OF B USINESS NECESSITY OR COMMERCIAL EXPEDIENCY. NO ABSTRACT OR PEDANTIC VIE W CAN BE TAKEN IN THE MATTER. 12 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. APPLYING THESE TESTS TO THE FACTS OF THE PRESENT CA SE, IT IS CLEAR THAT THE PAYMENT OF COMPENSATION MADE BY THE ASSESSEE TO ITS ERSTWHILE SOLE SELLING AGENTS FOR LOSS OF THE SOLE SELLING AGENCY IS ALLOWABLE AS A DEDUCTION UNDER SECTION 37 OF THE ACT IN THE COMPU TATION OF THE INCOME OF THE ASSESSEE. 5.8 THE HON'BLE HIGH COURT HELD THAT THE QUESTION WHETHER IT WAS NECESSARY FOR COMMERCIAL EXPEDIENCY OR NOT, IS A QUESTION THA T HAS TO BE DECIDED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT BY SUBJECT IVE STANDARD OF REASONABLENESS OF THE REVENUE. 5.9 IN VIEW OF THE ABOVE DISCUSSION, AND FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE PAYMENT OF COMPENSATION WAS A BUSI NESS CONTRACTUAL OBLIGATION OF THE ASSESSEE AND THEREFORE, THE EXPE NDITURE WAS INCURRED FOR BUSINESS AS WELL AS COMMERCIAL EXPEDIENCY OF THE AS SESSEE. ACCORDINGLY THE PAYMENT IS AN ALLOWABLE BUSINESS EXPENDITURE. THE O RDERS OF THE AUTHORITIES BELOW QUA THIS ISSUE ARE SET ASIDE. 6. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH JANUARY, 2015. . 0(,-./) 12 345!64!7648- (9* SD/- SD/- (N.K. BILLAIYA) (VIJAY PAL RAO ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER ) * MUMBAI; 2 DATED 14/01/2015 . . ./ JV, SR. PS 13 7120/MUM/1 0 DYSTAR INDIA PVT. LTD. !'#' !'#' !'#' !'#' ! COPY OF THE ORDER FORWARDED TO : 1. '$ / THE APPELLANT 2. %&'$ / THE RESPONDENT. 3. ): ; < / THE CIT(A)- 4. ) : / CIT 5. =9%+> > / ) * / DR, ITAT, MUMBAI 6. 9?@* ! GUARD FILE. $ $ $ $ / BY ORDER, &+%+ //TRUE COPY// % %% % $&' $&' $&' $&' (DY./ASSTT. REGISTRAR) ) * / ITAT, MUMBAI