Whether when excise duty liability is that of contract manufacturers, same can be taken over by assessee as matter of commercial expediency and can also be treated as revenue expenditure - NO: ITAT

THE issues before the Bench are - Whether when the Revenue has allowed the expenditure incurred on import of mould utilised by contract manufacturers against payment of rent, any change in the treatment of such expenditure is required in the subsequent year when there is no change either in law or in facts and Whether when the excise duty and interest payments liabilities are that of the contract manufacturers, the same can be taken over by the assessee as a matter of commercial expediency and can also be treated as revenue expenditure. And the verdict partly goes in favour of the Revenue.

Facts of the case

A) The assessee is a wholly owned subsidiary of M/s Tuppeware Asia Pacific Holdings Private Limited, Mauritius which holds 99% equity capital of the assessee. The remaining 1% was held by M/s Tupperware Home Parties Inc., USA. The Group owns the brand name “Tupperware”. The assessee is engaged in trading of plastic kitchenware products It purchases the products from the contract manufacturers (Dart Manufacturing India Private Limited and Innosoft Technologies Limited). During assessment proceedings, AO found that assessee had claimed mould expenses of Rs. 46,632,929/- and the moulds were used by Dart India and ITL against rent payments. On query in this regard, assessee submitted that it had obtained permission from the Ministry of Industry to act as a technology transfer agent and marketing company. since 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. It further furnished that since the designs of the products are patented designs, the molds used for manufacture of such products were not available in the open market. Therefore, the Company had to import them 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 completed the order placed by the Company the molds were returned back to the Company and therefrom to the mold owner(s), in case, the particular mold was no longer required for use in manufacture. During the year under consideration, the company debited a sum of Rs. 4,66,32,929/- in its books of account as mold rental expenses. The said expenses were paid to the overseas entities on account of rental charges for the use of molds in manufacture of the products.

However, the AO was not satisfied with the assessee's submissions and held that the assessee had wrongly been claiming the rental expenses. That it had resulted in less payment of excise duty by Dart India and ITL and at the same time it had reduced the taxable income of the assessee. That therefore, this arrangement appeared to be colorable device to reduce the tax liabilities on part of all these persons and hence, the principles laid down in the famous decision of McDowell were to be applied. AO disallowed the claim of rental expenses in the hands of the assessee on the ground that the moulds were being used in the manufacturing by Dart India and ITL which were right entities to claim these expenses. Accordingly, AO proceeded to disallow the impugned expenses.

On appeal, the CIT(A) held that the expenditure in question was allowable under section 37 of the I.T. Act.

B) Assessee claimed the liabilities of Dart Manufacturing India Pvt. Ltd. (Dart India) and Innosoft Technologies Ltd. (ITL) which was related to excise duty and interest amounting to Rs. 4,94,09,120/- levied by the Customs & Central Excise Commission in view of the Settlement Commission order and discharged by the Company as contractual obligation towards contract manufacturers. AO observed that it was very clear that the liabilities of all the taxes and duties was that of the seller and not that of the assessee. In this regard, AO referred to the decision of the order of the Custom and Excise Settlement Commission dated 10.11.2006 in which these liabilities of excise duty was levied against the Dart India and ITL and not against the assessee.

On appeal, the CIT(A) affirmed the action of the AO. He concluded that seeing from any angle the liability of Rs. 4,94,09,120/- being the liability created against the contract manufactures was not an allowable expenditure in the hands of the assessee in the impugned assessment year.

On appeal, the Tribunal held that,

A) ++ we have perused the records. At the outset, we note that the mould expense in this regard was being incurred by the assessee for the asstt. year 1997-98. The same has been allowed by the AO as business expenditure. No disallowance in this regard was made in the preceding asstt. year i.e. 2005-06 also in 143(3) assessment. In these circumstances, we find that there is no change in the facts and legal position. In this regard, we find that Jurisdictional High Court in the case of CIT vs. Dalmia Promoters Developers (P) Ltd., has held that for rejecting the view taken in earlier assessment years, there must be material change in the fact, situation or in law. We find that in this case there is no change in the facts, situation or in law. Hence, the Revenue cannot be allowed to adopt a different stand. This is also reiterated by the Apex Court decision in Excel Industries. In this regard, it was held that when in earlier asstt. years the Revenue accepted the order of the tribunal in favour of the assessee, then Revenue cannot be allowed to flip flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it;

++ even on merits, we find that the expenditure on mould is allowable in the hands of the assessee. The payment of mould rental was done by the assessee under a contractual obligation with the contract manufacturer;

++ the product being dealt by the assessee had to meet international quality and specification of Tupperware worldwide which requires use of high quality and specific type of moulds, as the design of products are patent design. The moulds used by manufacturer of products are not available in the open market. Therefore, the company had to import these molds from overseas group company on hire basis and provide the same to contract manufacturers to enable them to manufacture the products. Once the contract manufacturer completes the order placed by the assessee, the molds are returned back to the company and therefrom to the molds owners in case the particular molds, is not required for use of manufacturer. We find that the above contract and molds borrowed by the assessee can by no stretch of imagination be considered as a colorable device. In our considered opinion, the same has been rightly allowed by the CIT(A) as Revenue expenses.

++ we also agree with the CIT(A) that even if for the sake of argument, if it was to be presumed that the payment of mould rentals is the liability of the contract manufacturers and so incurred by them in that case the cost of such mould rentals would be part of 'purchases' as it would increase the production cost of the contract manufacturer and accordingly, the purchase price bargained by the assessee would be increased by the same amount of mould rental. Thus, in the above situation the assessee would not incur rental expenses, but will have to pay resultant higher purchase price to the contract manufacturer. Thus the position in the hands of the assessee will be that the net effect on revenue would be the same. Hence, the situation would be revenue neutral;

++ we do not find any infirmity in the order of the CIT(A). Accordingly, we uphold the same.

B) ++ we find that assessee has claimed the liability of Dart India Ltd. and ITL pertaining to excise duty and interest amounting to Rs. 4,94,09,120/- levied by the Custom and Central Excise Commission. This has been borne by the assessee on the plea that it has contractual obligation towards contract of manufacturers in this regard. Further, assessee has claimed that the demand of excise duty related to cost component which was computed wrongly, hence, enhancement thereof was to be borne by the assessee as price adjustment. Further it has been claimed that it was on account of commercial expediency that assessee had to bear this expenditure liability. This was meant to safeguard the interest of the contract manufacturers;

++ however, we note that the plea that assessee has contractual obligation towards the contract manufacturers in this regard is devoid of cogency. The relevant portion of the agreement, it was clearly mentioned that “manufacturer shall pay all taxes relating to its performance of service under this agreement including the manufacture assembly sales and delivery of products”. Thus, it was clear that it was the contract manufacturer who was to bear all the taxes relating to the performance of the service under the agreement. There is no variation in the terms of agreement. The Counsel of the assessee’s submissions that the contract in this regard got amended by means of the letters and the debit notes is not acceptable. There is no proper variation in the terms of agreement. Merely letters exchanged and debit issued after more than 5 years can not be accepted as binding variation / change in the formal terms of agreement relied in this regard. Furthermore, we agree with the AO that even if the assessee has contended that it has taken the liability since, these manufacturers are exclusively selling the goods to it so the liability is in the nature of additional cost, the liability does not relate to this year and the same pertains to earlier years. Hence, assessee’s claim for the current year is unjustified;

++ furthermore, the assessee’s claim is that it was on account of commercial expediency that the liability has been taken over this by the assessee to maintain the relationship with these companies and to safeguard them from additional burden of some duties and taxes, levied against them. We find that this plank of argument also remains un-substantiated. Assessee cannot be allowed to claim such expenditure as revenue expenses which is claimed to have been incurred to safeguard the long term interest of the assessee, which remains unsubstantiated. Hence, we agree with the CIT(A), this expenditure cannot be treated to be a revenue nature and hence, not allowable against the taxable income. The case law relied by the Counsel of the assessee of Sabena Detergents P Ltd. from Madras High Court is not applicable on the facts of the case. That case related to advertisement expenditure incurred on products of sister concern, for which assessee was sole distributor and marketing agent. Hence, we do not find any infirmity in the order of the CIT(A). Accordingly, we affirm the same.