Commissioner Of Income Tax-Vi vs Tupperware India Pvt. Ltd.
2014 Latest Caselaw 7045 Del

$~26, 27 & 30
*IN THE HIGH COURT OF DELHI AT NEW DELHI
+                         ITA 787/2014
                           Date of decision: 22nd December, 2014

       COMMISSIONER OF INCOME TAX-VI              ..... Appellant
               Through     Ms. Suruchi Aggarwal, Sr. Standing
               Counsel with Mr. Amir Aziz and Mr. Shashank
               Menon, Advocates.

                    versus
       TUPPERWARE INDIA PVT. LTD.             ..... Respondent
               Through     Mr. Mayank Nagi, Advocate.

                          ITA 788/2014
       COMMISSIONER OF INCOME TAX-VI              ..... Appellant
               Through     Ms. Suruchi Aggarwal, Sr. Standing
               Counsel with Mr. Amir Aziz and Mr. Shashank
               Menon, Advocates.

                    versus
       TUPPERWARE INDIA PVT. LTD.             ..... Respondent
               Through     Mr. Mayank Nagi, Advocate.

                          ITA 791/2014
       COMMISSIONER OF INCOME TAX-VI              ..... Appellant
               Through     Ms. Suruchi Aggarwal, Sr. Standing
               Counsel with Mr. Amir Aziz and Mr. Shashank
               Menon, Advocates.

                    versus
       TUPPERWARE INDIA PVT. LTD.             ..... Respondent
               Through     Mr. Mayank Nagi, Advocate.

       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J. (ORAL)

One common issue arises in these appeals by the Revenue which

pertain to assessment years 2006-07, 2007-08 and 2008-09. The

Assessing Officer in these years made additions by disallowing the

expenditure incurred by the respondent-assessee on plastic moulds on

the ground that the said expenditure should have been claimed by Dart

Manufacturing India Private Limited and Innosoft Technology

Limited, who were the contract manufacturers for the assessee. The

Assessing Officer primarily relied upon the order dated 10th November,

2006 passed by the Settlement Commission under the Central Excise

Act, 1944, holding that the manufacturing cost would include the rent

paid for the moulds and accordingly the excise duty would be

chargeable. It is accepted and admitted that the order passed by the

Settlement Commission related to the cost of excisable goods, which

were manufactured.

2. Excise duty is leviable and collected as per the manner and

method prescribed in the Central Excise Act, 1944. Section 4 of the

said Act states that excise duty is chargeable on the excisable goods

with reference to their value on removal of goods and on each removal

of the goods, the value shall be computed as per the provisions of the

said section.

3. We fail to understand how and in what context, the findings

recorded by the Settlement Commission relating to valuation of good

for levy of excise duty would be relevant for adjudicating and deciding

whether the rent paid for the moulds can be allowed as a deduction

under Section 37(1) of the Income Tax Act, 1961 (Act, for short). The

valuation of the excisable goods for the purpose of Section 4 of the

Central Excise Act, 1944 has no connection or relation with the

expenditure incurred by the respondent-assessee, which is allowable as

expenditure under Section 37(1) of the Act.

4. The respondent-assessee is a subsidiary of Tupperware Asia

Pacific Holding Pvt. Ltd., which holds 99% of the equity capital and

Tupperware Home Parties Inc., USA, which holds remaining 1% of the

share capital. The respondent-assessee had entered into agreements

with Dart Manufacturing India Private Limited and Innosoft

Technology Limited for manufacture of products to be sold under their

brand name. The two manufacturers were paid consideration for the

services rendered including the raw materials used by them.

5. The respondent-assessee had entered into agreements and had

imported moulds on hire basis from overseas group companies. These

moulds were given on „free of cost‟ basis to Dart Manufacturing India

Private Limited and Innosoft Technology Limited. The payment for

the hire charges was made by the respondent-assessee to the overseas

group entities. There is no dispute about the payments made by the

respondent-assessee to the overseas group entities for hire of moulds.

The aforesaid international transactions were not made subject matter

of any transfer pricing adjustments. These are undisputed and

unchallenged facts.

6. Appropriate in this regard would be to reproduce the relevant

portion of written submission filed by assessee before the Assessing

Officer:-

"The Company is engaged, inter-alia, in trading activities in respect of plastic kitchenware products since its set up of business. It purchases the products from the contract manufacturers (Dart Manufacturing India Private Limited and Innosoft Technologies Limited). The products manufactured have to meet the international quality standards and specifications established by Tupperware worldwide which require use of high quality and specific type of molds. Further, as the designs of the products are patented designs, the molds used for manufacture of such products are not available in the open market. Therefore, the Company has to import these molds from overseas group companies on hire basis and provide the same to the contract manufacturers to enable them to manufacture the products. Once the contract manufacturer completes the order placed by the Company the molds are returned back to the Company and there from to the mold owner(s), in case, the particular mold is no longer required for use in manufacture. In view of the above, the Company claims that the mold expenses incurred by it are wholly and exclusively incurred for the purpose of business and are therefore to be allowed as genuine business expenditure."

7. In view of the aforesaid factual position, it is difficult to

understand the logic and reasoning of the Assessing Officer and the

stand of the Department that hire charges paid for the moulds, which

were used to manufacture the products sold by the respondent-assessee

after being manufactured at their behest and cost, should not be treated

as expenditure under Section 37(1) of the Act.

8. For expenditure to be allowed as deduction, following

conditions specified under section 37(1) are required to be met:-

(a) Expenditure should not be covered under section 30 to 36 of the

Act;

(b) Expenditure should not be of capital or personal nature;

(c) Expenditure should laid out wholly and exclusively for the

purposes of business;

(d) Expenditure should be incurred during the previous year;

(e) Expenditure should not be incurred for any purpose which is an

offence or which is prohibited by the law.

"For the purpose of business" is a word of wide import and

includes expenditure which a businessman incurs for business and

commercial expediency. The question of reasonableness is not for the

revenue to decide. Further, expression "wholly and exclusively" as

observed by the Supreme Court in Sasson J. David and Co. (P) Ltd Vs.

C.I.T [( 1979) 118 ITR 261(SC)], does not mean "necessarily‟. Even

expenditure incurred voluntary and without any necessity, but for

promoting business and earning profit is allowable.

9. Dart Manufacturing India Private Limited and Innosoft

Technology Limited were merely contractual manufacturers. They

were to be paid for the services rendered as well as for the inputs/raw

material used by them. They were given moulds free of cost by the

respondent-assessee. For example, an assessee may purchase raw

material and supply the same to the contract manufacturer. The

valuation or cost of manufacture would include cost of raw material

but it does not follow that the assessee cannot treat the price of the raw

material as an expenditure. In case, the aforesaid two contract

manufactures had paid hire charges for the moulds, it would have been

resulted in increase in the purchase price in the hands of the

respondent-assessee as held by the Tribunal. The first addition made

by the Assessing Officer, therefore, cannot be sustained.

10. Reliance placed on Section 194C is also misconceived as the

respondent-assessee had not charged any amount from Dart

Manufacturing India Private Limited and Innosoft Technology

Limited. In fact, Section 40(a)(ia) was not invoked and applied by the

Assessing Officer. On hire charges paid to the overseas group

companies, tax at source would have been deducted under Section 195

of the Act. It is not stated that tax at source had not been deducted.

11. The second issue raised by the Revenue pertains to assessment

year 2007-08. The respondent-assessee had made provision of

obsolete stock amounting to Rs.72,77,736/-. It was explained that

there were obsolete and unsalable furnished goods, which formed part

of the closing stock. Similarly, there were bags and stickers which

could not be used as matching quantities were not available. The

respondent-assessee had accordingly made a provision based upon the

principle that closing stock has to be valued at cost price or market

price, whichever is lower. The respondent-assessee has relied upon

decision of the Supreme Court in Chainrup Sampat Ram versus CIT

(1953) 24 ITR 481 (SC). The aforesaid principle is well recognised

and accepted. However, valuation of the closing stock on the basis of

market price, if lower, should have foundation and basis on how

market price has been computed and not merely on ipsi dixit. The

Assessing Officer has not gone into the said aspect but applied

principle of matching to make the said addition. One cannot appreciate

and understand how the principle of matching can apply, without

examining the question whether the market price of obsolete and

unsalable items was less than or lower than the manufacturing costs. If

the market price of obsolete or unsaleable items is less than or lower

than the cost price, the said position can be the basis for computing

closing stock. It is noticeable that the respondent-assessee has been

following this practise for several years and similar issue had arisen in

the assessment year 2005-06, but the Revenue has not filed any appeal

in respect of the said year. In fact, in the assessment year 2008-09,

some of the obsolete items were sold and sale consideration received

has been duly accounted for. This fact has been noted by the Tribunal

in the impugned order. Thus, on the second issue, we see no reason to

interfere.

The appeals are accordingly dismissed.

SANJIV KHANNA, J.

V. KAMESWAR RAO, J.

DECEMBER 22, 2014 NA