Oriental Rubber Industries Ltd, Pune V. Addl CIT Rg-3 Pune, Pune

ITA 813/PUN/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 66876 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 18-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER, AND SHRI R.S.PADVEKAR, JUDICIAL MEMBER. ITA.NO.813/PN/2012 (ASSTT. YEAR : 2008-09) ORIENTAL RUBBER INDUSTRIES LTD., SHRAVANI GARDENS, 20, VIMAN NAGAR, PUNE 411014. .. APPELLANT PAN: AAACO1592L VS. ADDL.CIT, RANGE-3, PUNE. .. RESPONDENT ASSESSEE BY : SHRI KISHOR PHADKE DEPARTMENT BY : SHRI ACHAL SHARMA DATE OF HEARING : 17.04.2013 DATE OF PRONOUNCEMENT : 29.04.2013 ORDER PER R.S.PADVEKAR, JM : IN THIS APPEAL THE ASSESSEE HAS CHALLENGED THE IMP UGNED ORDER OF THE LD. CIT(A)-II, PUNE, DATED 12.01.2012 FOR TH E A.Y. 2008-09 BY TAKING THE FOLLOWING GROUND: 1. THE COMMISSIONER OF INCOME TAX (APPEALS) WAS WRONG IN CONFIRMING THE ADDITION OF RS.36,42,000/- ON ACCOUN T OF LATE DELIVERY CHARGES CLAIMED BY THE APPELLANT UNDER THE HEAD OTHER SELLING EXPENSE STATING THAT THE SAME WAS IN THE NATURE OF PENALTY AND WERE NOT DEDUCTIBLE. 2. BRIEFLY STATED THE FACTS ARE AS UNDER. THE ASSE SSEE COMPANY IS ENGAGED IN THE MANUFACTURE OF CONVEYOR BELTS, RUBBE R SHEETS AND SPECIALISED RUBBER MOULDED PARTS. THE ASSESSEE FIL ED RETURN OF INCOME FOR THE A.Y. 2008-09 IN WHICH THE ASSESSEE H AS CLAIMED DEDUCTION TOWARDS LATE DELIVERY CHARGES OF RS.36,42 ,000/- WHICH WAS DEBITED UNDER THE HEAD OTHER SELLING EXPENSES . THE ASSESSEE STATED BEFORE THE ASSESSING OFFICER THAT THE LIQUID ATED DAMAGES ARE IN THE NATURE OF LATE DELIVERY CHARGES WHICH ARE CH ARGED BY THE CUSTOMERS. THE ASSESSEE ALSO EXPLAINED THAT ASSESS EE IS INTO 2 MANUFACTURING OF RUBBER BELTS USED FOR VARIOUS APPL ICATIONS. APART FROM THE LEAD TIME IN MANUFACTURING AND RAW MATERI AL AVAILABILITY, THERE ARE MANY OTHER FACTORS WHICH LEAD TO DELAYED DELIVERIES. THE ASSESSEE WAS UNABLE TO DELIVER THE GOODS AS PER THE TIME SCHEDULES. THE TIME BOUND DELIVERY IS ONE OF THE CONDITION IN WORK CONTRACTS EXECUTED BETWEEN ASSESSEE AND ITS CUSTOMERS AND THO SE CHARGES ARE IN THE NATURE OF CONTRACTUAL CHARGES AND NOT A PENA LTY UNDER ANY ACT, AND HENCE BEING THE REVENUE IN NATURE SAID CHA RGES ARE ALLOWABLE. THE ASSESSEE FURTHER STATED THAT THE LA TE DELIVERY CHARGES HAS BEEN RECOVERED BY THE CUSTOMERS FROM THE BILL P AYMENTS AND ONLY THE NET AMOUNT OF BILLS HAS BEEN PAID TO THE A SSESSEE AT THE TIME OF PAYMENT. THE ASSESSEE ALSO EXPLAINED THAT AS THE CUSTOMERS HAVE MADE DEDUCTION AFTER DULY ACCEPTING THE MATERIAL, THE NATURE OF EXPENSES IS THAT IT DOES NOT EFFECT T HE SALES DIRECTLY AND HENCE, IT IS NOT NETTED AGAINST THE SALES. THE ASSESSEE ALSO RELIED ON THE DECISION IN THE CASE OF DCIT VS. META LLIZING EQUIPMENT CO. (P) LTD. 92 TTJ 95. THE EXPLANATION OF THE ASS ESSEE WAS NOT FOUND ACCEPTABLE AND THE ASSESSING OFFICER REJECTED THE SAME BY GIVING THE FOLLOWING REASONS: (I) THE AMOUNT WHICH IS REFLECTED UNDER THE HEAD ' OTHER SELLING EXPENSES' LATE DELIVERY CHARGES ARE ACTUALLY NOT EX PENSES THAT ARE INCURRED BY THE ASSESSEE ON ITS OWN TOWARDS SEL LING OF ITS PRODUCTS. ON THE CONTRARY FROM THE BILLS RAISED BY THE ASSESSEE BECAUSE OF CERTAIN DEFAULTS ON ACCOUNT OF DELAY, DE FAULT OF ANY OF THE TERMS AND CONDITIONS OF LETTER OF INTENT, TH E LIQUIDATED DAMAGES ARE DEDUCTED FROM THE INVOICE VALUE RAISED BY THE ASSESSEE. THE CLAUSE OF LIQUIDATED DAMAGES' IS SEEN IN CASE OF EVERY PURCHASE ORDER WHICH WAS ENCLOSED BY THE ASSE SSEE WITH ITS SUBMISSION DATED 3/12/2010. (II) THE ASSESSEE HAS CITED CASE LAW OF COMMISSIONE R OF INCOME- TAX VS NATIONAL STEEL 85 GENERAL MILLS (P) LTD. 199 0, 88 CTR (DEL) 13 AND HAS CONTENDED THAT THE HONBLE HIGH CO URT HAS HELD THAT THE DAMAGES PAID ON ACCOUNT OF NON SUPPLY OF GOODS WITHIN A SPECIFIED PERIOD BEING INCIDENTAL TO THE B USINESS AND ALLOWED AS SUCH, NO REFERENCE WAS CALLED FOR. IN THIS CASE THERE WAS A FACT RELATING TO NON SUPPLY OF CERTAIN GOODS WITHIN THE STIPULATED PERIOD WHEREBY DISPUTE AROSE AND DAMAGES CLAIMED BY THE PURCHASER AGREED TO BE PAID BY THE ASSESSEE. HOWEVER, IN THE CASE OF THE ASSESSEE THERE IS NO SUCH FACT O F ARISING OF ANY DISPUTE AND NO SUCH DETAILS OR DOCUMENTS ETC. H AVE BEEN PRODUCED. ACCORDINGLY, THE CASE CITED BY THE ASSESS EE IS FOUND TO BE DISTINGUISHABLE ON THE FACTS. 3 (III) THE ASSESSEE HAS ALSO RELIED ON THE CASE LAW OF COMMISSIONER OF INCOME-TAX VS RELIABLE WATER SERVICES OF INDIA (P) LTD. 124 ITR 199(ALLAHABAD) 1980 . IN THIS CASE IT HAS BEEN HELD THAT PENALTIES AND DAMAGES PAID FO R DELAY IN COMPLETING GOVERNMENT CONTRACT ARE ALLOWABLE AS DEL AY IS INCIDENTAL IN THE NATURE OF BUSINESS. FROM PARA 7 OF THE ORDER IT IS CLEAR THAT ON THE FACTS OF THE CASE TRIBUNAL HAS FOUND THAT THE DISPUTED PAYMENTS WERE INCIDENTAL TO THE CARRYING O N THE BUSINESS BY THE ASSESSEE BECAUSE THE DELAY IN EXECU TION OF THE CONTRACT WAS INHERENT IN THE NATURE OF THE BUSINESS ITSELF. THE ASSESSEE IS NOT INTO ANY EXECUTION OF CONTRACT, IT IS INTO THE MANUFACTURE OF RUBBER BELTS USED IN THE INDUSTRY FO R VARIOUS APPLICATIONS AND THESE MANUFACTURED RUBBER BELTS AR E TO BE SUPPLIED/SOLD BY THE ASSESSEE TO THE CUST OMER/ INDUSTRIES. THE ASSESSEE, IN ITS SUBMISS ION HAS GIVEN CERTAIN GENERAL REASONS FOR THE DELAY AND THE FACTS OF THE CASE OF THE ASSESSEE THEREFORE ARE DIFFERENT THAN THE FACTS OF THE CASE REFERRED BY THE ASSESSEE. (IV) IN THE CASE OF DCIT VS. METALLIZING EQUIPMENT CO. ( P). LTD. (92 TTJ 95), THE ISSUE BEFORE THE HONBLE JODHPUR B ENCH OF ITAT WAS IN RESPECT OF THE LATE DELIVERY CHARGES AND NOT IN RESPECT OF THE 'LIQUIDATED DAMAGES' AS IN THE CASE OF THE ASSESSEE. ACCORDINGLY, THE FACTS ARE FOUND TO BE DISTINGUIS HABLE. (V) IN THE FACTS OF THE CASE IT IS SEEN THAT ASSESSEE E NTERS INTO THE CONTRACT FOR SUPPLY OF ITS MANUFACTURED MATERIA L AS PER THE TERMS AND CONDITIONS AGREED UPON BY THE ASSESSEE AN D ITS CUSTOMERS. THE TERMS AND CONDITIONS GENERALLY AGREE D UPON BY THE ASSESSEE INCLUDING THE CLAUSE RELATING TO LIQUI DATED DAMAGES WHICH WOULD BE IN RESPECT OF THE SUPPLY AS PER AGREED DELIVERY SCHEDULED, THE DELAY IN CONTRACTUAL PERIOD OF COMPLETION AND IN RESPECT OF UNDELIVERED PORTION OF THE SUPPLI ES. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE THE SO CALLED L ATE DELIVERY CHARGES DEBITED AS OTHER SELLING EXPENSES BY THE AS SESSEE ARE NOT THE EXPENDITURE INCURRED BY THE ASSESSEE ON SAL E OF ITS MANUFACTURED PRODUCTS. THE CUSTOMERS DEDUCT CERTAIN AMOUNT OF INVOICE VALUE BASED ON THE DEFAULT COMMITTED BY THE ASSESSEE VIS-A-VIS' AGREED TERMS AND CONDITIONS FOR SUPPLY O F GOODS. IN THE CASE OF N. SUNDERESHWARAM VS CIT IT REFERENCE N O. 336 & 337 OF 1985 (JUNE 4, 1996) HONBLE KERALA HIGH COUR T HAS HELD THAT 'LOSS - DAMAGES FOR BREACH OF CONTRACT - WHEN A CLAIM IS MADE FOR DAMAGES FOR BREACH OF CONTRACT, IT HAS TO BE ADJUDICATED BY ARBITRATION OR BY ANY PROCESS KNOWN TO LAW ONLY WHEN THE DAMAGE IS SO DETERMINED IT CAN BE SAI D TO BE A LIQUIDATED DAMAGE - IN THE ABSENCE OF ANY MATERIAL EVIDENCING THE FINALIZATION OF SUCH PROCEEDINGS AND QUANTIFICA TION OF DAMAGE PAYABLE BY THE ASSESSEE THE CLAIM OF DEDUCTI ON ADVANCED BY THE ASSESSEE IS ONLY FOR 'UNLIQUIDATED DAMAGES'. IN THE CASE ON HAND IT IS NOT THE FACT THAT THE CLAIM OF DAMAGES BY CUSTOMERS HAVE BEEN ADJUDICATED BY ARBITRATION OR B Y ANY PROCESS KNOWN TO LAW. THE AMOUNT DEBITED AS LATE DELIVERY CHARGES HAVE BEEN UNILATERALLY DEDUCTED BY THE CUST OMER. ACCORDINGLY, SUCH UNILATERAL DEDUCTION FROM THE INV OICE RAISED 4 BY THE ASSESSEE CANNOT AMOUNT TO LIQUIDATED DAMAG ES ASCERTAINED BY THE PROCESS OF ARBITRATION OR BY ANY PROCESS KNOWN TO LAW. ACCORDINGLY, THE LATE DELIVERY CHARGE S AMOUNTING TO RS. 36,42,000/- SO DEBITED IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE IS FOUND NOT TO BE ALLOWABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND U/S.37(L) OF THE I NCOME-TAX ACT, 1961. ACCORDINGLY THE AMOUNT OF RS.36,42,000/- IS ADDED BACK TO THE INCOME OF THE ASSESSEE. 3. THE ASSESSING OFFICER RELIED ON THE DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF N.SUNDARESWARAN VS. CIT 2 26 ITR 142. THE ASSESSEE CARRIED THE ISSUE BEFORE THE CIT(A) BU T WITHOUT SUCCESS. AS THE LD. CIT(A) PUT HIS STAMP OF APPROV AL ON THE ACTION OF THE ASSESSING OFFICER ALLOWING THE CLAIM OF THE ASSESSEE, NOW THE ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD . NOWHERE IT IS DISPUTED BY THE ASSESSING OFFICER THAT THE CLAIM OF DEDUCTION IS IN RESPECT OF LATE DELIVERY CHARGES. ASSESSEE PLEADED BEFORE THE ASSESSING OFFICER THAT IT IS IN THE NATURE OF LIQUI DATED DAMAGES. WE FURTHER FIND THAT THE ASSESSING OFFICER HAS ALSO OB SERVED THAT THE CUSTOMERS HAVE DEDUCTED THE SAID AMOUNT FROM THE VA LUE OF THE INVOICES AND AFTER DEDUCTION THE NET AMOUNT IS PAID . THE ASSESSING OFFICER HAS ALSO OBSERVED THAT THE CLAUSE OF LIQUID ATED DAMAGES IS SEEN IN CASE OF EVERY PURCHASE ORDER WHICH WAS FILE D/ENCLOSED BY THE ASSESSEE WITH HIS SUBMISSIONS. HENCE ONE OF TH E TERMS OF CONTRACT BETWEEN THE ASSESSEE AND ITS SUPPLIER WAS THE TIMELY DELIVERY OF THE GOODS AND IN CASE OF FAILURE TO MAI NTAIN THE TIME SCHEDULE, THE CONSEQUENCE WAS CERTAIN AMOUNT OF THE LATE DELIVERY CHARGES/LIQUIDATED DAMAGES TO BE RECOVERED FROM THE ASSESSEE. IN THE CASE OF THE ASSESSEE, NOWHERE IT IS DISPUTED TH AT THE CUSTOMERS DIRECTLY DEDUCTED THE AMOUNT AS PER TERMS OF THE WO RKS ORDER AND PAID THE NET AMOUNT OF THE INVOICE VALUE TO THE ASS ESSEE WHICH WAS CLAIMED AS LATE DELIVERY CHARGES. 5. THE ASSESSING OFFICER HAS PLACED HIS HEAVY RELIA NCE IN THE CASE OF N.SUNDARESWARAN (SUPRA) BUT IN OUR OPINION THE F ACTS OF THAT CASE ARE TOTALLY DIFFERENT. IN THE SAID CASE, THE ASSESSEE ENTERED INTO CONTRACT WITH FOREIGN BUYERS FOR SUPPLY OF CASHEW C ORNELS. HOWEVER, 5 THE SAID ASSESSEE COULD NOT FULFIL THE OBLIGATIONS UNDER THE CONTRACT DUE TO SHORTAGE IN SUPPLY OF CASHEW NUTS AND SUBSEQ UENT RISE IN PRICES. AS PER THE TERMS OF CONTRACT BETWEEN THE A SSESSEE AND THE FOREIGN BUYERS, ASSESSEE HAD TO PAY THE DAMAGES TO THE EXTENT OF RS.12,51,625/-. ACCORDINGLY, ASSESSEE MADE THE CLA IM BY MAKING THE PROVISIONS. BUT AS THERE WAS NO FINAL ADJUDICA TION IN RESPECT OF THE SAID CLAIM AND THERE WAS A CLAUSE OF ARBITRATIO N, THE DEDUCTION WAS DENIED TO THE ASSESSEE. IN THE PRESENT CASE, T HE CUSTOMERS HAVE ALREADY RECOVERED THE AMOUNT TOWARDS LATE DELI VERY CHARGES AND OTHERWISE ALSO, IT HAS REDUCED THE INVOICE VALU E. IN OUR OPINION, CONSIDERING THE FACTS OF THE PRESENT CASE, THE CLAIM OF THE ASSESSEE IS ALLOWABLE AS A REVENUE EXPENDITURE AND IT IS NOT A CASE THAT ASSESSEE HAS MADE ANY PROVISION AS IN THE CASE OF N.SUNDARESWARAN (SUPRA). WE THEREFORE ALLOW THE CL AIM OF THE ASSESSEE. 6. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 29 TH DAY OF APRIL, 2013. SD/- SD/- ( G.S.PANNU ) ( R.S.PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER GSPS PUNE, DATED THE 29 TH APRIL, 2013 COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE ADDL.CIT, RANGE-3, PUNE. 3. THE CIT(A)-II, PUNE. 4. THE CIT-II, PUNE. 5. THE DR B BENCH, PUNE. 6. GUARD FILE. BY ORDER //TRUE COPY// PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE.