HE issue before the Bench is - Whether payment made towards additional excise duty by the assessee on behalf of the contract manufacturers is allowable as business expenditure. YES is the answer.
Facts of the case
The assessee is a wholly owned subsidiary of M/s Tupperware Asia Pacific Holdings Pvt. Ltd., Mauritius which holds 99% of its equity share capital. The group as a whole owns the brand name 'Tupperware' and carries out business activities through various subsidiaries in various parts of the world. The assessee from time to time had entered into Contract Manufacturing Agreements with Dart and ITL for manufacture of Tupperware plastic tableware and kitchenware products. The designs of the Tupperware products are patented and, therefore, the moulds used to manufacture these products are not available in the open market. Therefore, the Company provides the requisite moulds to Dart and ITL on a 'free of cost basis' which are then used by the said entities in manufacturing process. There was a dispute between the contract manufacturers and the excise authorities with regard to valuation of notional mould value to be used for excise valuation. Accordingly, the Central Excise Department in Hyderabad issued a Show Cause Notice making an additional demand of excise duty (along with interest). In order to arrive at an amicable settlement, Dart and ITL along with assessee (being co-applicant) applied for settlement of proceedings before CESC, for settlement of the disputed excise duty demand. The CESC passed an order raising an additional excise demand, including interest on Dart and ITL as additional excise duty on the goods manufactured by them for the assessee. The said additional excise duty liability was borne by the assessee as it was in respect of liability that arose on contract goods manufactured for the assessee. The assessee filed its return of income, wherein the liability incurred by the assessee herein towards additional excise duty was claimed as revenue expenditure. The AO disallowed the expenditure u/s 37(1) which was confirmed by the CIT(A). This was also confirmed by the Tribunal.
Having heard the parties, the High Court held that,
++ it is not disputed by the revenue that the assessee had in fact made payment of Rs. 4,94,09,120/- towards additional excise duty pursuant to the CESC's order dated 10.11.2006. Once this is accepted, we hold that the expenditure incurred voluntarily and without any necessity is also deductible under Section 37(1) of the Act, so long as it is incurred 'wholly and exclusively' for the purposes of business;
++ further, the facts on record sufficiently establish that the payment was made by the assessee in the interests of commercial expendiency. The moulds for manufacturing the goods marketed by the assessee were provided to the contract manufacturers by the assessee itself, as the said moulds were patented and not available in the market. Excise duty was levied on the notional cost of these moulds. The rent for these moulds was also paid by the assessee to the overseas entities, and not by the contract manufacturers. The contract manufacturers were carrying out the manufacturing activity for the assessee and it was in the assessee's business interests that all tax liabilities of the manufacturers were duly satisfied. The ITAT could not have doubted the business efficacy of the assessee's decision to pay the excise duty in the absence of any reasons on record indicating the contrary;
++ Another ground on which the ITAT disallowed the expenditure towards payment of excise duty was that such expenditure pertained to earlier years (April 2000 to December 2004 in case of Dart and August 2002 to December 2004 in case of ITL). This reason, too, in the opinion of this Court, is erroneous. The liability, payment for which the assessee claims deduction under Section 37, arose on account of the order of the CESC, which was passed on 10.11.2006. This sum of Rs. 4,94,09,120/-, the additional excise duty, was the differential amount which became payable only upon the passing of the said order and thus, became crystallized in the subject assessment year. Therefore, even though the excise duty was for manufacturing activity that occurred earlier, the liability to pay such additional duty did not exist in the previous years and as a result, could not have been claimed by the assessee as expenditure in the concerned previous years.
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