[2023] 154 taxmann.com 190 (Delhi - Trib.

)[25-07-2023]

INTERNATIONAL TAXATION : Commission paid to foreign agents for procurement of

orders do not fall under Technical, Managerial or consultancy services so as to
attract provisions of section 9(1)(vii) read with section 195

INCOME TAX : Where advances made by assessee for purchase of property, were
fully covered by non-interest bearing funds available with assessee and it was also
found that interest-bearing funds had been entirely utilized for stock and sundry
debtors, interest disallowance had rightly been deleted

INCOME TAX : Where decision of assessee to avail additional cold storage facilities
for preservation of meat was a business decision, it did not call for Assessing Officer
to sit in judgment over this and since need for more storage space was also justified
with increase in processing, Commissioner (Appeals) rightly deleted preservation
charges disallowed by Assessing Officer

■■■

[2023] 154 taxmann.com 190 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'A'
ACIT
v.
Alnoor Exports*
CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER
IT APPEAL NO. 4595 (DELHI) OF 2015
[ ASSESSMENT YEAR 2011-12 ]
JULY 25, 2023

I. Section 9, read with sections 40(a)(i) and 195, of the Income-tax Act, 1961, read with
article 7 of the OECD Model Convention - Income - Deemed to accrue or arise in India
(Business Profit - Commission) - Assessment year 2011-12 - Whether commission paid to
foreign agents for procurement of orders do not fall under Technical, Managerial or
consultancy services so as to attract provisions of section 9(1)(vii) read with section 195 -
Held, yes [Para 8] [In favour of assessee]

II. Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not
includible in total income (Purchase of property) - Assessment year 2011-12 - Whether
where advances made by assessee for purchase of property, were fully covered by non-
interest bearing funds available with assessee and it was also found that interest-bearing
funds had been entirely utilized for stock and sundry debtors, interest disallowance had
rightly been deleted - Held, yes [Para 15] [In favour of assessee]

III. Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or
unreasonable payments (Preservation charges) - Assessment year 2011-12 - Assessee was
an exporter of meat which was a perishable product and had to be refrigerated at all times
till final delivery - Assessee availed cold storage facilities of its associate concern which had
its cold storages at Meerut and Mumbai - Assessee had paid preservation charges of Rs. 5
lakh per month consistently - During assessment proceedings, Assessing Officer found that
assessee had taken two additional chambers for which it paid extra charges - Assessing
Officer disallowed extra preservation charges of Rs. 72 lakhs claimed by assessee, stating
that there was no need for additional preservation space based on sales quantity and rates
- However, it was found that storage capacity was to be maintained keeping in view peak
requirement and not on basis of total sales - Further, it was a business decision to take
additional chambers on rent and did not call for Assessing Officer to sit in judgment over
this - Moreover, need for more storage space in Mumbai was also justified with increase in
processing at Mumbai - Whether extra expenditure was for purposes of business and thus,
Commissioner (Appeals) rightly deleted preservation charges disallowed by Assessing
Officer - Held, yes [Paras 18 and 19] [In favour of assessee]

Circulars and Notifications: Circular No. 7/2009, dated 22-10-2009

FACTS-I

■ The assessee debited certain commission expenses in the Profit and Loss (P&L) account.

■ The Assessing Officer required the assessee to furnish copies of agreements, details, and
evidence of services provided by the foreign agents, along with evidence of TDS deducted as
per section 195.

■ The assessee provided all required details, agreements, and evidence of services by foreign
agents. It explained that commission was paid on export sales, with bill details provided.
Overseas agents took orders to delegates, and commission was mentioned on shipping bills
as per RBI guidelines. Commission payments were made after order execution, through
banking channels, and remitted abroad for services outside India.

■ The Assessing Officer, not convinced with the submissions of the assessee, disallowed
commission expenses to foreign agents for non-deduction of TDS under section 195.

■ On appeal the Commissioner (Appeals) deleted the disallowance of commission paid to

foreign agents holding that the assessee was not liable to deduct TDS at source on
commission paid to agents located outside India for procuring orders from buyers located
outside India and not having permanent establishment in India.

■ On appeal by revenue to the Tribunal:

HELD-I
■ It is observed that the issue as to whether commission paid to foreign agents for
procurement of orders is liable for TDS under section 195 read with section 9(1)(vii) is now
settled by the decision of the Delhi High Court in the case of DIT (International Taxation) v.
Panalfa Autoelektrik Ltd. [2014] 49 taxmann.com 412/227 Taxman 351, wherein it has been held
that the commission paid to foreign agents for procurement of orders do not fall under
Technical, Managerial or consultancy services so as to attract the provisions of section 9(1)
(vii) read with section 195. Following the decision of the Delhi High Court in the case of Panalfa
Autoelektrik Ltd. (supra) the co-ordinate bench of Delhi Tribunal had taken a similar view in the
case of ACIT v. Kapoor Industries Ltd. [2021] 125 taxmann.com 271/187 ITD 603. Therefore, on
careful perusal of the order of the Commissioner (Appeals) no good reason is found to
interfere with the findings of the Commissioner (Appeals). The order of the
Commissioner(Appeals) on this issue is sustained. [Para 8]

FACTS-II

■ During the assessment proceedings, it was observed that the assessee claimed interest
expenses on secured and unsecured loans . The Assessing Officer also noticed that the
assessee claimed bank charges and interest expenses in the Profit and Loss (P&L) account.

■ The Assessing Officer raised concerns that the funds were allegedly diverted in the name of
the firm's partners. The assessee was asked to provide details of outstanding expenses as of
1-4-2010 and investments made during the year. Additionally, the assessee was required to
explain why proportionate interest on investments made in properties by partners should
not be disallowed.

■ The assessee responded, stating that the firm had provided funds to three parties for
property purchases. The assessee explained that these amounts should have been debited
to the partners' current accounts, but were mistakenly omitted. The assessee further
clarified that the firm had shown a balance in the current accounts of the partners, and no
interest was paid on this amount. They argued that the interest-free funds available with the
firm adequately covered these advances, and hence, no adverse inference was warranted.

■ However, the Assessing Officer was not satisfied with the explanation provided by the
assessee and disallowed interest, alleging that the funds were diverted for non-business
purposes.

■ On appeal, the Commissioner (Appeals) accepted the assessee's explanation that the
advances were covered by interest-free funds available with the firm and, therefore,
concluded that the interest disallowance was not justified and accordingly deleted the
disallowance of interest.

■ On appeal by revenue to the Tribunal:

HELD-II
■ The Commissioner (Appeals) deleted the disallowance of interest for the reason that the
advances made by the assessee for purchase of property of Rs. 1.40 crores were fully
covered by the non-interest bearing funds of Rs. 16.80 crores available with the assessee. It
was also the finding by the Commissioner (Appeals) that the interest bearing funds of Rs.
21.04 crores have been fully utilized for stock and sundry debtors. Considering the
submissions and evidence furnished before the Commissioner (Appeals) the Commissioner
(Appeals) deleted the disallowance of interest as the advances for purchase of property are
covered by non-interest bearing funds which the assessee is having. The revenue could not
controvert the findings of the Commissioner (Appeals) with evidences. Thus, there is no
infirmity in the order passed by the Commissioner (Appeals) and the same is sustained. [Para
15]

FACTS-III

■ The assessee was an exporter of meat which was a perishable product and had to be
refrigerated at all times till the final delivery. The assessee availed the cold storage facilities of
it associate concern which had its cold storages at Meerut and Mumbai.

■ During the assessment, the Assessing Officer noticed that the assessee claimed preservation
charges in the P&L account for sister concern covered under section 40A(2b). The assessee
had consistently paid preservation charges of Rs. 5 lakh per month throughout the year.
Additionally, on 31-3-2011, two more entries of Rs. 60 lakhs and Rs. 12 lakhs were credited as
expenses to the sister concern. The Assessing Officer sought justification for these expenses.

■ The assessee explained that during the assessment year, they rented one chamber for meat
storage in Meerut at Rs. 5 lakh per month, and due to space shortage, they rented two more
chambers for Rs. 5 lakh each per month, resulting in a total payment of Rs. 12 lakhs.

■ However, the Assessing Officer compared sales quantity and rates between two assessment
years and disallowed Rs. 72 lakhs as he believed the additional preservation space was
unnecessary.

■ On appeal, the Commissioner (Appeals) disagreed and deleted the disallowance, accepting
the assessee's explanation of space shortage, thereby allowing the preservation charges.

■ On appeal by revenue to the Tribunal:

HELD-III

■ It is observed that in the course of proceedings before the Commissioner (Appeals) the
assessee has filed written submissions explaining why the assessee paid preservation
charges and considering the submissions of the assessee the Commissioner (Appeals)
deleted the disallowance observing that the Assessing Officer made the impugned addition
invoking the provisions of section 40A(2)(b) by treating the increase in expenditure as
excessive payments. The submissions by the appellant that the storage capacity is to be
maintained keeping in view the peak requirement and not on the basis of total sales is
 justified. Ultimately it is a business decision and does not call for the Assessing Officer to sit
in judgment over this. The increase in expenditure is apparently due to increase in chambers
taken on rent. The need for more storage space in Mumbai is also justified with the increase
in processing at Mumbai. Thus, genuineness of the extra expenditure is for the purposes of
business hence the addition is deleted.[Para 18]

■ On careful reading of the observations of the Commissioner (Appeals) no valid reason is

found to interfere with the findings of the Commissioner (Appeals) in deleting the
preservation charges disallowed by the Assessing Officer. [Para 19]

CASE REVIEW-I

DIT (International Taxation) v. Panalfa Autoelektrik Ltd. [2014] 49 taxmann.com 412/227 Taxman 351
(Delhi) and ACIT v. Kapoor Industries Ltd. [2021] 125 taxmann.com 271/187 ITD 603 (Delhi - Trib.)
(para 8) followed.
CASES REFERRED TO

Welspring Universal v. Jt. CIT [2015] 56 taxmann.com 174/153 ITD 496 (Delhi - Trib.) (para 6), DIT
(International Taxation) v. Panalfa Autoelektrik Ltd. [2014] 49 taxmann.com 412/227 Taxman 351
(Delhi) (para 6), CIT v. Grup ISM (P.) Ltd. [2015] 57 taxmann.com 450/232 Taxman 846/378 ITR 205
(Delhi) (para 6) and ACIT v. Kapoor Industries Ltd. [2021] 125 taxmann.com 271/187 ITD 603 (Delhi -
Trib.) (para 8).

Kanav Bali for the Appellant. A.T. Panda, Adv. for the Respondent.
ORDER

C.N. Prasad, Judicial Member. - This appeal is filed by the Revenue against the order of the ld.
Commissioner of Income Tax (Appeals)-11, New Delhi [hereinafter referred to CIT (Appeals)]
dated 22-4-2015 for assessment year 2011-12.

2. The Revenue has raised the following grounds:—

"1. On the facts and in the circumstances of the case the Ld. CIT (Appeals) has erred in
deleting the addition of Rs. 80,32,863/- made on account of commission expenses in
view of provisions of Section 195 of the Income-tax Act and CBDT's circular No. 7/2009
withdrawing the immunity available for such foreign remittances without TDS.

2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting
the addition of Rs. 13.94.5474, out of Rs. 14,90,5474, made by AO on account of export
promotion expenses since the assessee was under legal obligation to follow the
provisions of TDS prescribed under Income-tax Act, 1961 before the credit or
remittance of export promotion expenses.

3. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting
the addition of Rs13,91,753/-made by Assessing Officer on account of interest expenses
since the assessee was under legal obligation to follow the provisions of TDS prescribed
 under Income-tax Act 1961 before the credit or remittance of export promotion
expenses

4. On the facts and in the circumstances of the case the Ld. CIT (A) has erred in deleting
the addition of Rs. 72 lacs made by Assessing Officer on account of preservation
charges as it was clear from comparative chart given by the assessee that quantity of
production has gone down from 1.72 lacs kg. in the year relevant to A.Y. 2010-11 to 1.68
lacs kg. in A.Y.2011-12 and the assessee was failed to established that there was any
additional requirement of space for preservation of goods during the year. Further, the
marginal increase in sales/turnover in sales/turnover from Rs. 213.14 crore in A.Y. 2010-
11 to Rs. 217.34 crore in A.Y. 2011-12 was only due to marginal increase in the rate of
realization/selling price."
3. Ground No. 1 of grounds of appeal of the Revenue is in respect of deletion of disallowance of
commission paid to foreign agents for non-deduction of TDS under section 195 of the Income-
tax Act, 1961 (the Act).

4. Briefly stated the facts are that the Assessing Officer while completing the assessment noticed
that the assessee debited commission expenses of Rs. 80,32,863/- in P & L account of export
sales. The assessee was required to furnish copies of agreements, details and evidences of
services provided by the foreign agents and evidence of TDS made u/s 195 of the Act. Assessee
furnished the details. The assessee submitted that it had paid commission on export sales,
provided bill details of commission paid to the parties. The assessee explained that overseas
commission agents took the orders to delegates and the amount of commission is duly
mentioned on the shipping bills itself as per the guide-lines of the Reserve Bank of India (RBI). It
was explained that after the order is executed and the payment is realized the commission was
paid to foreign agents in due course. All the payments are through banking channels. It was
explained that the remittance was made outside India for the services rendered outside India.
Not convinced with the submissions the Assessing Officer disallowed commission expenses to
foreign agents for non-deduction of TDS under section 195 of the Act. On appeal the ld. CIT
(Appeals) deleted the disallowance.

5. The ld. DR strongly placed reliance on the order of the Assessing Officer.

6. The ld. Counsel for the assessee relied on the order of the ld. CIT (Appeals). He also placed
reliance on the decision of the Delhi Bench of the Tribunal in the case of Welspring Universal v. Jt.
CIT [2015] 56 taxmann.com 174/153 ITD 496 (Delhi - Trib.) wherein it has been held that
commission paid by the assessee to non-resident agents for procuring export orders was not
chargeable to tax in the hands of the assessee. Assessee was not liable to deduct tax at source.
The ld. Counsel also placed reliance on the decision of the Hon'ble Delhi High Court in the case
of DIT (International Taxation) v. Panalfa Autoelektrik Ltd. [2014] 49 taxmann.com 412/227 Taxman
351 wherein the Hon'ble Delhi High Court held that commission paid by the assessee to its
foreign agents for arranging of export sales and recovery of payments could not be regarded as
fees for technical services under section 9(1)(vii) of the Act. Reliance was also placed on the
decision of the Hon'ble Delhi High Court in the case of CIT v. Grup ISM (P.) Ltd. [2015] 57
taxmann.com 450/232 Taxman 846/378 ITR 205 wherein the Hon'ble Delhi High Court held that
where overseas enterprise acts as a liaison agent for an assessee and receives remuneration
from each client successfully solicited for assessee such services cannot be said to be included
within the meaning of consultancy services and would not come within the purview of the
technical services under section 9 of the Act.

7. Heard rival submissions perused the orders of the authorities below. The ld. CIT (Appeals)
deleted the disallowance of commission paid to foreign agents holding that the assessee was
not liable to deduct TDS at source on commission paid to agents located outside India for
procuring orders from buyers were all located outside India and not having permanent
establishment in India. The provisions of section 195 of the Act were not applicable on the
commission paid by the assessee as the same was not taxable in India as per the provisions of
section 9(1) of the Act and, therefore, deleted the disallowance which was disallowed applying
the provisions of section 40 of the Act for non-deduction of TDS while deleting the disallowance.
The ld. CIT (Appeals) held as under:-

"4.1.3 I have considered the facts of the case, written submissions of the appellant and the
findings of the Assessing Officer. The Assessing Officer made the impugned addition basis
that the Commission Paid to Overseas Agents was covered u/s 195 and disallowed the
expenditure u/s 40(a)(i) of the IT Act 1961. The appellant during the assessment proceedings
filed a detailed reply that the payment of Commission to Overseas Agents are not covered
u/s 195. The appellant also filed the documentary evidence in the form of Export Bills & Bill of
Lading showing the commission to be paid, applications to bank for the payment
mentioning the details of the party to which the payments were made and bank statements
showing the actual amount paid. The assessing officer did not accept the contention of the
appellant and made the addition.

4.1.4 Considering the above facts, the win minions and documentary evidence filed, I am of
the view that the genuineness of the expenditure is fully substantiated. Also in view of the
finding of the able Madras High Court in the case of "The CIT Chennai v. Faisan Shoes Pvt. Ltd.
(MAD) TC. (A) No. 789 of 2013, the any of the fall judgment has been filed by the appellant
during the proceedings, I am of the view that the payments of Commission to overseas
agents is not covered u/s 9 of the Act and guilty Section 195 of the Act does not come into
play as it is not a Fee the Technical Service. "The decision of the Supreme Court in
Transmission Corporation of AP. Lad me referred by the assessing officer is not applicable
so the facts of the present case. Accordingly, addition of Rs. 80,32,863/- made by the
Assessing Officer is deleted."

8. We observe that the issue as to whether commission paid to foreign agents for procurement
of orders is liable for TDS under section 195 read with section 9(1)(vii) of the Act is now settled by
the decision of the Hon'ble Delhi High Court in the case of Panalfa Autoelektrik Ltd. (supra) wherein
it has been held that the commission paid to foreign agents for procurement of orders do not
fall under Technical, Managerial or consultancy services so as to attract the provisions of section
9(1)(vii) of the Act read with section 195 of the Act. Following the decision of the Hon'ble Delhi
High Court in the case of Panalfa Autoelektrik Ltd. (supra) the co-ordinate bench of Delhi Tribunal
had taken a similar view in the case of ACIT v. Kapoor Industries Ltd. [2021] 125 taxmann.com
271/187 ITD 603. Therefore, on careful perusal of the order of the ld. CIT (Appeals) we do not find
any good reason to interfere with the findings of the ld. CIT (Appeals). The order of the ld. CIT
(Appeals) on this issue is sustained. Ground No. 1 of grounds of appeal is rejected.

9. Ground No. 2 of grounds of appeal of the Revenue is in respect of deleting the disallowance of
Rs. 13,94,547/- out of Rs. 14,90,547/- on account of export promotion expenses. disallowance of
export promotion expenses for non-deduction of TDS. The Assessing Officer while completing
the assessment noticed that the assessee claimed export promotion expenses of Rs. 44,00,261/-
as deduction. Out of Rs. 44,00,261/- an amount of Rs. 14,90,547/- pertained to participation
charges in fair/exhibitions. The assessee was required to furnish details of expenses with
evidence for deduction of tax at source. The assessee furnished all the details and explained that
the expenditure on foreign travel by the partners and staff, also expenditure incurred on export
charges on their visit to India. Expenses also include various trade fairs/exhibitions of which
assessee firm display its products for marketing. It was explained that all the expenses were
incurred for the business of the assessee. However, since the assessee has not deducted TDS on
export promotion expenses of Rs. 14,90,547/- the Assessing Officer disallowed the same. On
appeal the ld. CIT (Appeals) deleted the disallowance to the extent of Rs. 13,94,547/- out of Rs.
14,90,547/-.

10. The ld. DR strongly placed reliance on the order of the Assessing Officer whereas the ld.
Counsel placed reliance on the order of the ld. CIT (Appeals).

11. Heard rival submissions perused the orders of the authorities below. The ld. CIT (Appeals)
deleted the disallowance observing as under:—

"4.2 Ground No. 2 relates to addition of Rs. 14,90,547/- made by the assessing officer u/s
195/40(a)(i) on payments made to organizations located outside India as participation
charges for trade fairs/exhibitions held outside India and not having any permanent
establishment in India. As already discussed in Ground No. 1, payments to organizations
located outside India and not having permanent establishment in India are not covered u/s
9 of the Act and consequently Section 195 of the Act does not come into play as it is not a
"Fee for Technical Service". In respect to payment to one party namely M/s Comnet
Exhibitions Pvt. Ltd. as agents of the organizers in Dubai, 20% of the amount paid may be
treated as Income liable to be taxed in India as per Circular No. 3/2015 dated 12-02-2015
issued by the Central Board of Direct Taxes. The balance payment to persons located
outside India is thus allowed. The appellant thus gets the relief as under:-

Total Payment Made Rs. 14,90,547/-

Payment Made to Comnet Exhibitions Pvt. Ltd. Rs. 4,80,000/-

20% of Amount Paid to Comnet Exhibitions Pvt. Ltd. chargeable to tax in India Rs. 96,000/-

Relief to the appellant (14,90,547 - 96,000) Rs.13,94,547/-"

12. We see no infirmity in the order passed by the ld. CIT (Appeals). This ground is rejected.

13.1 Ground No. 3 of grounds of appeal of the Revenue is in respect of deletion of disallowance
of interest expense. Briefly stated the facts are that in the course of assessment proceedings the
assessee noticed that assessee has claimed interest expenses on secured and un-secured loans
of Rs. 18.47 crores and Rs. 1.57 crores respectively as on 31-3-2011. The Assessing Officer
noticed that the assessee has claimed bank charges and interest expenses of Rs. 1.88 crores in
the P & L account. The Assessing Officer was of the view that assessee had diverted funds in the
name of partners of the firm. Assessee was required to furnish details of expenses outstanding
as on 1-4-2010 and investment made during the year and to show cause as to why proportionate
interest on such investments made in properties by partners should not be disallowed.
Assessee furnished its reply stating that the firm had given funds to three parties for purchase
of properties amounting to Rs. 1.40 crores as on 31-3-2011 as under:—

(i) Advant IT Park P. Ltd. Rs.36,45,800/-

(ii) Sun City Projects (P.) Ltd. Rs.43,57,489/-

(iii) Shree Mukund Associates Rs.60,12,500/-

13.2 It was explained that the amount paid to Advant IT Park Pvt. Ltd. was for booking of space at
Noida for opening of new office and the other two payments were for properties in the name of
partners and should have been debited to partners' current account, but were omitted due to
inadvertent mistake. It was also explained that the assessee firm has shown the balance in
current account of the partners of the firm at Rs. 16.80 crores on which no interest was paid. It
was explained that the interest free funds available with the assessee firm duly covered these
advances. Therefore, no adverse inference is called for. However, not convinced with the reply
furnished by the assessee the Assessing Officer disallowed Rs. 13,91,753/- towards interest.
According to him fund was diverted for non-business purposes. On appeal the ld. CIT (Appeals)
deleted the disallowance.

14. The ld. DR placed reliance on the order of the Assessing Officer and the ld. Counsel placed
reliance on the order of the ld. CIT (Appeals).

15. Heard rival submissions perused the orders of the authorities below. The ld. CIT (Appeals)
deleted the disallowance of interest for the reason that the advances made by the assessee for
purchase of property of Rs. 1.40 crores were fully covered by the non-interest bearing funds of
Rs. 16.80 crores available with the assessee. It was also the finding by the ld. CIT (Appeals) that
the interest bearing funds of Rs. 21.04 crores have been fully utilized for stock and sundry
debtors. Considering the submissions and evidence furnished before the ld. CIT (Appeals) the ld.
CIT (Appeals) deleted the disallowance of interest as the advances for purchase of property are
covered by non-interest bearing funds which the assessee is having. The Revenue could not
controvert the findings of the ld. CIT (Appeals) with evidences. Thus, we see no infirmity in the
order passed by the ld. CIT (Appeals). We sustain the order of the ld. CIT (Appeals). Ground No. 3
of the Revenue's appeal is rejected.

16.1 Ground No. 4 of grounds of appeal of the Revenue is in respect of deletion of disallowance
of Rs. 72,00,000/- made on account of preservation charges.

16.2 In the course of assessment proceedings the Assessing Officer noted that the assessee
claimed preservation charges of Rs. 1.32 lakhs in the P & L account and these expenses have
been claimed in respect of Miki Export International, one of the sister concerns of the assessee
covered under section 40A(2b) of the Act. The Assessing Officer noticed that the assessee paid
preservation charges of Rs. 5,00,000/- per month during the whole year and later on, on 31-3-
2011 two additional entries in respect of expenses of Rs. 60,00,000/- and Rs. 12,00,000/- were
made on 31-3-2011 in respect of credit of these amounts to M/s. Miki Exports International. The
assessee was required to furnish details and explain to justify the claim of these expenses. The
assessee submitted that during the assessment year it had hired one chamber for
storage/preserving meat at Rs. 5,00,000/- per month irrespective of any quantity at Meerut. It
was explained that during the assessment year 2011-12 due to necessity it hired two chambers
for storage/preserving meat at Rs. 5,00,000/- each chamber per month irrespective of any
quantity at Meerut due to shortage of space at Meerut also and paid Rs. 12,00,000/-. However,
the Assessing Officer on comparison of sales quantity and average rate between the assessment
years 2010-11 and 2011-12 was of the view that there was no requirement of space of
preservation of goods as compared to the preceding assessment year. Accordingly, he
disallowed Rs. 72,00,000/- paid towards preservation charges. On appeal the ld. CIT (Appeals)
deleted the disallowance.

17. The ld. DR strongly relied on the order of the Assessing Officer and the ld. Counsel for the
assessee strongly placed reliance on the order of the ld. CIT (Appeals).

18. Heard rival submissions perused the orders of the authorities below. We observe that in the
course of proceedings the ld. CIT (Appeals) the assessee has filed written submissions explaining
why the assessee paid preservation charges and considering the submissions of the assessee
the ld. CIT (Appeals) deleted the disallowance observing as under:—

4.4.2 In the course of the appeal proceedings, the AR of the appellant filed the following
written submissions:—

The assessee firm had paid Rs. 1,32,00,000/- as preservation charges to its associate concern
M/s Miki Exports International on account of hiring of cold storage chambers at Mumbai and
Meerut where it doesn't have its own facilities. In the immediately preceding year and
amount of Rs. 60,00,000/- was paid as preservation charges. During the course of
assessment proceedings the assessee was asked to justify the claim.

In support of the claim, the assessee filed its submissions. However the assessing officer
rejected the contention of the assessee and made an addition of Rs. 72,00,000/- with the
following observations:

8.3 The claim of the assessee for increased expenses under this head has been examined
with reference to the production and sales made during preceding year and the year under
consideration. The comparative data for two years is as under:

Sl. No. Particulars. A. Y. 2011-12 A. Y. 2010-11

1. Amount of sales 217,34,29,652/- 213,14,43,262/-

2. Quantity 1,68,43,496 1,72,35,830

3. Average rate 129.04 123.66

4. Percentage increase 4.35%

8.4 From the above data, it becomes absolutely clear that there has been no increased
requirement of space for preservation of goods as compared to the previous year. In fact,
the quantity of production has gone down from 1.72 lacs kg in the year relevant to A.Y. 2010-
11 to 1.68 lacs Kg. in A.Y. 2011-12. The marginal increase in the sale/turnover from Rs213.14
crore in A.Y. 2010-11 to Rs217.34 crore in AY2011- 12 has been only due to marginal increase
in the rate of realization/selling price. Further, there is no justification of suddenly made
additional credit of Rs72,00,000/- as preservation charges to the sister concern at the end of
the Financial Year 2010-11 i.e. 31-03-2011. The assessee has also not filed any evidence to the
effect that there was any additional requirement of space for preservation of goods during
the year. Further no detail no agreement or any other document has been filed as to what
the additional preservation facilities were availed by the assessee and as to when those
facilities were taken. From the facts it becomes clear that additional credit of Rs. 72 lacs in
P&L account made in the account of sister concern M/s Miki Export International is for non-
business consideration which has been shown by the assessee to reduce the tax liability of
the assessee firm.

8.5 In view of the above facts of the case genuineness of incurring the expenses for the
purpose of business in this year has not been established. Therefore out of the preservation
charges of Rs. 1.32 crores additional expenses of Rs. 72 lacs as discussed above are
disallowed in respect of Miki Export International

The observations of the Assessing Officer are ill founded and not based on correct
appreciation of facts. The fact is that the assessee is an exporter of meat which is a
perishable product and has to be refrigerated at all times till the final delivery. The meat is
processed and packed in the factory at Muzzafarnagar and then sent to the port in
refrigerated containers. The assessee availed the cold storage facilities of it associate
concern M/s Miki International which has its cold storages at Meerut and Mumbai. During
A.Y2010-11 the assessee firm had taken only one chamber @ Rs. 5 lacs per month at
Mumbai. In the current year, the assessee firm had taken two chambers at Mumbai and one
chamber at Meerut @ Rs. 10 lacs per month and Rs. 1 lac per month respectively. For the
sake of convenience, the year wise breakup of preservation charges paid is as under:

A. Y. 2011-12 A. Y. 2010-11

(a) Chamber at 2 Chambers @ Rs.5 lac per chamber 1 Chambers @ Rs.5 lac per chamber
Mumbai Rs.1,20,00,000/- Rs.60,00,000/-
(b) Chamber at 1 Chambers @ Rs.1 lac per chamber Nil
Meerut Rs.12,00,000/-
Total : 1,32,00,000/- 60,00,000/-

The meat is processed as per the availability of animals and is exported as per the
requirements of the customers. There is a time lag between the processing and actual
export, between which the processed meat is preserved in cold storage. The export needs
custom and other clearances and there may be delays on account of non- availability of
space in ships to the required destinations. The turnover cannot form the basis of
requirement of preservation facilities. There may be times, when there are continuous
orders supported by ready availability of animals and space on ships then preservation
facilities may not be required. Similarly when there is disproportionate supply of animals vis
a vis export orders the processed meat may have to be refrigerated for a longer period of
time. The manufacturing activity cannot be closed in case the inventory is piled up. The plant
has to run at the appropriate capacity at all times. The premises required for storage does
not depend on the quantity sold but the level of stock maintained as per the availability of
stocks and requirement of business. Also, the space at the cold storage may not be readily
available on a short notice and has to be booked in advance.

The quantitative details of the opening and closing stock and meat processed are as under:

A. Y. 2011-12 A. Y. 2010-11

Opening Stock 11,66,115 8,86,447

Finished Goods Purchased 2,29,944

Meat processed 175,38,271 172,85,554

Goods returned 1,40,000

Sale 188,44,386 184,01,945

168,43,496 172,35,830
Closing Stock : 20,00,890 11,66,115

Thus it is clear that the closing stock in current year is almost double as compared to the
immediately preceding year, therefore, it needed double space for storage and thus took
additional chambers on rent.

It is not a case where the rates given by the assessee for renting of chambers have increased
in comparison to the immediately preceding year. The amount of preservation charges have
increased because of increase in the storage space taken on rent during the year. The
requirement of preservation facilities is the prerogative of the assessee and the assessing
officer cannot step into the shoes of the assessee to judge the business expediency of
incurring an expenditure i.e. hiring additional chambers. Had additional chambers not been
hire, it would have resulted in loss of production resulting in more loss the additional cost of
chambers.

In view of the above submissions supported by the documentary evidence filed, the addition
of Rs. 72,00,000/- deserves to be deleted.

The appellant during the course of appellate proceedings further filed the following
submissions vide letter dated 16-03-2015:-

In continuation of written submissions filed by the appellant vide its letter dated 16- 2-2015
the following submissions are being offered in support of Ground No. 4 as under:-
The assessee firm has taken on rent 2 chambers @ Rs. 5 lac per Chamber at Mumbai in
comparison to 1 chamber @ Rs. 5 lac per chamber per month in the per month immediately
preceding year. The assessee firm has also taken on rent an additional small chamber at
Meerut @ Rs. 1 lac per month. The reasons and justification of additional chambers required
is as under:

Comparative details of total meat processed and closing stock for two years:-

A. Y. 2011-12 A. Y. 2010-11

Meat Processed 1.13.36,007 1,31,98,066

Muzaffarnagar Rs. 62,02,264/- Rs. 40,87,488/-
Mumbai
Total 1,75,38,271 1,72,85,554

Closing Stock 20,00,890 11,66,115

It can be seen that the processing of meat has from Kg. in the immediately preceding year to
62,02,264 Kg. in the current year at Mumbai. Moreover, the closing stock of meat has also
almost doubled in comparison to the immediately preceding year. The meat which has been
processed at Mumbai had to be preserved and stored in Mumbai only. For preserving the
additional quantity of meat, extra space was required for which additional chamber was
taken on hire.

The processing of meat has slightly decreased at Muzaffarnagar but the firm had to
maintain an adequate level of storage facilities depending on the peak level of stock.
Due to inadequate supply of meat, additional storage facility was taken on rent at Meerut @
Rs. 1 lac per month.

The meat is processed as per the availability of animals and is exported as per the
requirements of the customers. There is a time lag between the processing and actual
export, between which the processed meat is preserved in cold storage. The export needs
custom and other clearances and there may be delays on account of non- availability of
space in ships to the required destinations. The turnover cannot form the basis of
requirement of preservation facilities. There may be times when there are continuous
orders supported by ready availability of animals and space on ships then preservation
facilities may not be required. Similarly when there is disproportionate supply of animals vis
a vis export orders the processed meat may have to be refrigerated for a longer period of
time. The manufacturing activity cannot be closed in case the inventory is piled up. The plant
has to run at the appropriate capacity at all times. The premises required for storage does
not depend on the quantity sold but the level of stock maintained as per the availability of
stocks and requirement of business. Also the space at the cold storage may not be readily
available on a short notice and has to be booked in advance.

The amount of preservation charges have increased because of increase in the storage
space taken on rent during the year. The requirement of preservation facilities is the
prerogative of the assessee and the assessing officer cannot step into the shoes of the
assessee to judge the business expediency of incurring an expenditure i.e. hiring additional
chambers. Had additional chambers not been hire it would have resulted in loss of
production resulting in more loss the additional cost of chambers.
 In view of the above submissions supported by the submissions and documentary evidence
filed on the last date of hearing the addition of Rs. 72,00,000/- deserves to be deleted.

4.4.3 I have considered the facts of the case, written submissions of the appellant and the
findings of the Assessing Officer. The Assessing Officer made the impugned addition
invoking the provisions of Section 40A(2)(b) by treating the increase in expenditure as
excessive payments. The submissions by the appellant that the storage capacity is to be
maintained keeping in view the peak requirement and not on the basis of total sales is
justified. Ultimately it is a business decision and does not call for the Assessing Officer to sit
in judgment over this. The increase in expenditure is apparently due to increase in
chambers taken on rent. The need for more storage space in Mumbai is also justified with
the increase in processing at Mumbai.
4.4.4 Considering the above facts, the written submissions and documentary evidence filed, I
am of the view that the genuineness of the extra expenditure of Rs. 72,00,000/- is for the
purposes of business hence the addition is deleted."

19. On careful reading of the observations of the ld. CIT (Appeals) we do not find any valid reason
to interfere with the findings of the ld. CIT (Appeals) in deleting the preservation charges
disallowed by the Assessing Officer. Ground raised by the Revenue is rejected.

20. In the result, the appeal of the Revenue is dismissed.

JYOTI

*In favour of assessee.