Liability to pay additional duty allowable in the year in which such liability arises

Citation of the Case:-

Tupperware India Pvt. Ltd. vs. CIT, (Delhi High Court), ITA 686/2014, Date of Decision:- 25/03/2015

Brief of the Case

In the present case the Hon’ble High Court while deciding the issue of additional excise duty borne by the assessee is allowable deduction u/s 37(1) held that 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. Therefore, the deduction u/s 37(1) is available in the current assessment year as the duty was paid in the relevant year.

Facts of the case

The assessee from time to time had entered into Contract of Manufacturing of plastic tableware and kitchenware products. To determine the assessable value of the goods so manufactured, the contract manufacturer had applied a certain method to capture the notional value of “free of cost” moulds for excise valuation, i.e., value of moulds would be considered on the basis of their capacity of production during the life time use of the moulds. However, the excise authorities had a different view on valuation of notional mould value to be used for excise valuation and disputed the same. 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, assessee along with its contract manufacturers applied for settlement of proceedings before CESC, for settlement of the disputed excise duty demand. On 10.11.2006, the CESC passed an order raising an additional excise demand, including interest, amounting to Rs. 4,94,09,120/- on the parties who were manufacturing for the assessee as additional excise duty on the goods. 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 for AY 2007-08 on 24.09.2008, wherein the liability incurred by the assessee herein towards additional excise duty was claimed as revenue expenditure. The AO while passing the order held that the claim of the assesee can’t be allow as deduction under section 37(1) of the act. The AO while passing the order observed that liability of taxes and duties was that of contract manufacturers on the behalf of the assessee and not on the Assessee. The liability of additional excise duty related back to the period from April 2000 to December 2004 and August 2002 to December 2004. Therefore, the expenditure cannot be claimed in the year under consideration, i.e., AY 2007-08.

Contention of the Assesee

The ld. Counsel of the assessee submits that there is no dispute that liability of additional excise duty levied upon Assessee’s Contract Manufacturers by the CESC was discharged by the assessee herein in order to enable its business to function smoothly without any disruption as the contract manufacturers were not financially equipped to bear the levy of additional excise duty. The assessee was neither permitted to manufacture its products or trade in India, it had a direct interest in the proper functioning/protection of business of contract manufacturers. Contract manufacturers were “manufacturers of plastic table ware and kitchen ware for M/s Tupperware India Pvt. Ltd. on job work basis”. Learned counsel submits that the ITAT as well as the CIT(A) failed to acknowledge that the term “wholly‟ in Section 37(1) cannot be read as “necessarily‟. He places reliance on the Supreme Court’s decision in Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), wherein the Apex Court observed that as a matter of fact, initially the word “necessarily‟ found place in the Income Tax Bill, 1961, but was expunged by legislature in favour of expression “wholly and exclusively‟. Assessee submits that the term “commercial expediency‟ is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue.

The said additional liability has crystallized only during AY 2007-08 on account of order of the CESC, during the year under consideration. The assessee could not have anticipated the additional demand of excise duty in the past.

Contention of the Revenue

Learned counsel submits that the expenditure related to years prior to the assessment year in question and, therefore, cannot be allowed as deduction in this assessment year. Further, there was no obligation on the assessee to bear the excise duty on the goods manufactured by the contract manufacturers.

Held by CIT(A)

The ld. CIT(A) while dismissing the appeal of the assesee held that the liability created against the contract manufacturers is not an allowable expenditure in the hands of the assessee.

Held by ITAT

The Hon’ble Tribunal held that it was the contract manufacturer who was to bear all the taxes relating to the performance of the service under the agreement. There was no modification of the contract between the manufacturers and the assessee which shifted the burden of payment of excise duty on the assessee. The Hon’ble tribunal while affirming the order of The AO held that the expenditure related back to earlier years due to which the expenditure cannot be claimed in the year under consideration.

Held by the High Court

The Hon’ble High Court held 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, it is irrelevant as to whether, contractually, this liability was that of the contract manufacturers or the assessee itself.

Also, the Hon’ble High Court held that 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. 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 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. 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. Accordingly, the deductions were allowed and decision was in the favour of Assessee.

By Advocate Bharat Agarwal