IN HIGH COURT OF DELHI AT NEW DELHI Decided on : 25.03.2015 + ITA 686/2014 TUPPERWARE INDIA PVT. LTD. Appellant Through: Sh. M.S. Syali, Sr. Advocate with Sh. Mayank Nagi, Sh. Harkunal Singh and Ms. Bhawna Bakshi, Advocates. Versus COMMISSIONER OF INCOME TAX ..Respondent Through: Ms. Suruchii Aggarwal, Sr. Standing Counsel. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % Issue notice. With consent of learned counsel, appeal was heard finally today. 1. present appeal is filed by assessee under Section 260-A of Income Tax Act, 1961 ( Act ), against order dated 14.03.2014 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No. 1977/De1/2011 for Assessment Year (AY) 2007-08. ITAT upheld findings of lower authorities and held that sum of `4,94,09,120/- incurred by assessee in respect of excise duty levied by Custom & Central Excise Settlement Commission ( CESC ) on Dart Manufacturing India Pvt. Ltd. ( Dart ) and Innosoft Technologies Limited ( ITL ) (together referred to as contract manufacturers ) was not allowable business expenditure. question of law that arises for this Court s determination is as follows: Did ITAT fall into error in holding that sum of `4,94,09,120/- incurred by assessee could not be termed as ITA 686/2014 Page 1 business expenditure and was not incurred on account of commercial expediency within meaning of term under Section 37(1) of Income Tax Act? 2. assessee is wholly owned subsidiary of M/s. Tupperware Asia Pacific Holdings Pvt. Ltd., Mauritius which holds 99% of its equity share capital. remaining 1% is held by M/s. Tupperware Home Parties Inc., USA. group as whole owns brand name Tupperware and carries out business activities through various subsidiaries in various parts of world. 3. Accordingly, assessee from time to time had entered into Contract Manufacturing Agreements with Dart and ITL for manufacture of Tupperware plastic tableware and kitchenware products. designs of Tupperware products are patented and, therefore, moulds used to manufacture these products are not available in open market. Therefore, Company provides requisite moulds to Dart and ITL on 'free of cost basis' which are then used by said entities in manufacturing process. 4. To determine assessable value of goods so manufactured, contract manufacturer had applied certain method to capture notional value of free of cost moulds for excise valuation, i.e., value of moulds would be considered on basis of their capacity of production during life time use of moulds. However, excise authorities had different view on valuation of notional mould value to be used for excise valuation and disputed same. Accordingly, Central Excise Department in Hyderabad issued Show Cause Notice making additional demand of excise duty (along with interest). ITA 686/2014 Page 2 5. In order to arrive at amicable settlement, Dart and ITL along with assessee (being co-applicant) applied for settlement of proceedings before CESC, for settlement of disputed excise duty demand. 6. On 10.11.2006, CESC passed order raising additional excise demand, including interest, amounting to `4,94,09,120/- on Dart and ITL as additional excise duty on goods manufactured by them for assessee. said additional excise duty liability was borne by assessee as it was in respect of liability that arose on contract goods manufactured for assessee; and arose only on account of variance in notional value of moulds provided "free of cost" by Tupperware to be used in manufacturing process. 7. assessee filed its return of income for AY 2007-08 on 24.09.2008, wherein liability incurred by assessee herein towards additional excise duty was claimed as revenue expenditure. As per assessee, additional excise duty levied on its contract manufacturers, i.e. Dart and ITL was on goods manufactured for assessee and due to notional re-valuation of moulds, which assessee was contractually bound to provide free of cost. Thus, it formed part of purchase price adjustment. In other words, purchase price for assessee was increased by amount of additional excise duty. Accordingly, assessee had made adjustment of said liability amounting to `4,94,09,120/- in cost of sales as "Price Adjustment". note was inserted by assessee to following effect:- During year Company agreed to compensate certain contract manufacturers towards duty and interest thereon aggregating to `4,94,09,120/- levied by Customs & Excise Settlement Commission as contractual obligation towards contract manufacturers... ITA 686/2014 Page 3 8. Assessment Order under Section 143(3) of Act was passed by Assessing Officer ( AO ) on 18.12.2009 holding that liability of additional excise duty borne by assessee herein was not allowable deduction under Section 37(1) of Act. While disallowing expenditure incurred by assessee, AO arrived at following conclusions:- (a) As per two contracts entered into between assessee on one hand and Dart and ITL on other, liability of taxes and duties was that of Dart/ITL and not of assessee. (b) Assessee has colluded with Dart/ITL to take their liability upon itself and reduce its taxable income. (c) AO noted that assessee was also co-applicant before CESC and no liability was fixed against it. (d) liability of additional excise duty related back to period from April 2000 to December 2004 in case of Dart and August 2002 to December 2004 in case of ITL. Therefore, expenditure cannot be claimed in year under consideration, i.e., AY 2007-08. 9. Aggrieved, assessee preferred Appeal before Commissioner of Income Tax Appeals ( CIT(A) ) which was dismissed by CIT(A) by its order dated 23.12.2010. CIT(A), inter alia, held that liability created against contract manufacturers is not allowable expenditure in hands of assessee. In appeal preferred by assessee against CIT(A) s order before ITAT, ITAT in its impugned order upheld findings of lower authorities on following grounds:- (a) It was contract manufacturer who was to bear all taxes relating to performance of service under agreement. There was no modification of contract between manufacturers and ITA 686/2014 Page 4 assessee which shifted burden of payment of excise duty on assessee. (b) ITAT upheld finding of AO that expenditure related back to earlier years due to which expenditure cannot be claimed in year under consideration. (c) assessee s contention that expenditure incurred was for commercial expediency and to safeguard long term interest of assessee was unsubstantiated. Aggrieved by aforesaid decision, assessee has preferred this appeal. Submissions on behalf of Parties: 10. Mr. Mayank Nagi, learned counsel for assessee submits that ITAT erred in disallowing expenditure incurred by assessee herein in lieu of additional excise duty levied on contract manufacturers, as only element that can be factored in while adjudicating upon allowability of expenditure under Section 37(1) of Act is whether same was incurred wholly and exclusively for purpose of business. It is not pre- condition that expenditure must be incurred out of necessity. He further submits that there is no dispute that liability of additional excise duty levied upon Dart India and ITL by CESC was discharged by assessee herein in order to enable its business to function smoothly without any disruption as contract manufacturers were not financially equipped to bear levy of additional excise duty. Learned counsel submits that since assessee was not permitted to manufacture its products in India, it had direct interest in proper functioning/protection of business of contract manufacturers inasmuch as without them, assessee could not run its ITA 686/2014 Page 5 business of trading in India. He highlights observations of CESC, which noted that contract manufacturers were manufacturers of plastic table ware and kitchen ware for M/s Tupperware India Pvt. Ltd. on job work basis . Reliance is placed on decision of this Court in CIT v. Dalmia Cement (P.) Ltd., 254 ITR 377 (Delhi), approved by Supreme Court in S.A. Builders Ltd. v. CIT, [2008] 288 ITR 1. 11. Learned counsel submits that ITAT as well as CIT(A) failed to acknowledge that term wholly in Section 37(1) cannot be read as necessarily . Wholly refers to quantum of expenditure and exclusively refers to motive, objective or purpose with which particular expense was incurred. He places reliance on Supreme Court s decision in Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), wherein Apex Court observed that as matter of fact, initially word necessarily found place in Income Tax Bill, 1961, but was expunged by legislature in favour of expression wholly and exclusively . 12. Assessee submits that term commercial expediency is not term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying test of commercial expediency, for determining whether expenditure was wholly and exclusively laid out for purpose of business, reasonableness of expenditure has to be judged from point of view of businessman and not of revenue. 13. Learned counsel submits that invoice amount of purchases for disputed period did not include additional excise duty payable by manufacturer and such additional duty had only crystallized after settlement order. Since payment led to outflow in year under ITA 686/2014 Page 6 consideration, i.e. AY 2007-08, it was charged as price adjustment in P&L A/c and claimed as expenditure in AY 2007-08. Further, for subsequent years, contract manufacturers duly charged and invoiced such additional excise duty in invoices raised for period subsequent to passing of order of CESC. 14. Finally, learned counsel submits that ITAT erred in holding that expenditure incurred by assessee cannot be allowed in AY under consideration since same pertains to payment of excise duty pertaining to earlier years. It failed to consider that said additional liability has crystallized only during AY 2007-08 on account of order of CESC, during year under consideration. assessee could not have anticipated additional demand of excise duty in past, as this is first time wherein such quantification was made by excise authorities pursuant to order of CESC. Learned counsel submits that liability is to be claimed only in year when it crystallizes and not before. Reliance is placed on ACIT v. Rattan Chand Kapoor, 149 ITR 1 (Del), which was subsequently followed in CIT v. National Cereal Products Ltd., 165 Taxman 180 (Del) and in CIT v. Shri Ram Pistons & Rings Ltd., (2008) 220 CTR 404 (Del). 15. On other hand, learned counsel for revenue defends order of ITAT and submits that payment of excise duty cannot be claimed as expenditure within meaning of Section 37(1) of Act. Learned counsel submits that expenditure related to years prior to assessment year in question and, therefore, cannot be allowed as deduction in this assessment year. Further, there was no obligation on assessee to bear excise duty on goods manufactured by contract manufacturers and ITA 686/2014 Page 7 therefore, ITAT s order disallowing expenditure claimed by assessee cannot be faulted with. Analysis and Conclusions 16. At outset, this Court notes that pre-requisites for allowability of deduction of expenditure as business expenditure under Section 37(1) of Act are as follows: (a) Expenditure should not be covered under section 30 to 36 of Act; (b) Expenditure should not be of capital or personal nature; (c) Expenditure should be made wholly and exclusively for purposes of business; (d) Expenditure should be incurred during previous year; (e) Expenditure should not be incurred for any purpose which is offence or which is prohibited by law. 17. This Court in its recent decision in CIT v. Tupperware India Pvt. Ltd., [2015] 229 Taxman 318, was called upon to decide, inter alia, allowability of expenditure towards rent paid for moulds provided by assessee herein to contract manufacturers. Court noted aforesaid requirements for claiming deduction under Section 37(1) of Act and observed as follows: For purpose of business is word of wide import and includes expenditure which businessman incurs for business and commercial expediency. question of reasonableness is not for revenue to decide. Further, expression wholly and ITA 686/2014 Page 8 exclusively as observed by Supreme Court in Sasson J. David and Co. (P) Ltd. v. CIT [(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. This proposition has also been applied by Bombay High Court in CIT v. N.G.C. Network India (P) Ltd., 368 ITR 738. 18. It is not disputed by revenue that assessee had in fact made payment of `4,94,09,120/- towards additional excise duty pursuant to CESC s order dated 10.11.2006. Once this is accepted, it is irrelevant as to whether, contractually, this liability was that of contract manufacturers or assessee itself. We hold this in light of settled proposition discussed above, i.e. expenditure incurred voluntarily and without any necessity is also deductible under Section 37(1) of Act, so long as it is incurred wholly and exclusively for purposes of business. 19. Further, facts on record sufficiently establish that payment was made by assessee in interests of commercial expendiency. moulds for manufacturing goods marketed by assessee were provided to contract manufacturers by assessee itself, as said moulds were patented and not available in market. Excise duty was levied on notional cost of these moulds. rent for these moulds was also paid by assessee to overseas entities, and not by contract manufacturers. contract manufacturers were carrying out manufacturing activity for assessee and it was in assessee s business interests that all tax liabilities of manufacturers were duly satisfied. ITAT could not have doubted business efficacy of assessee s ITA 686/2014 Page 9 decision to pay excise duty in absence of any reasons on record indicating contrary. 20. This Court notes that ITAT in its impugned order had allowed expenditure claimed by assessee towards payment of mould rentals paid to overseas entities. ITAT rejected revenue s contention that appropriate entities which would claim rental amount as expenditures were contract manufacturers, and reasoned as follows: 15. We also agree with ld. CIT(A) that even if for sake of argument. if it was to be presumed that payment of mould rentals is liability of contract manufacturers and so incurred by them in that case cost of such mould rentals would be part of 'purchases' as it would increase production cost of contract manufacturer and accordingly, purchase price bargained by appellant would be increased by same amount of mould rental. Thus, in above situation assessee would not incur rental expenses, but will have to pay resultant higher purchase price to contract manufacturer. Thus position in hands of assessee will be that net effect on revenue would be same. Hence, situation would be revenue neutral. 21. This Court fails to understand as to how above rationale applied by ITAT to allow deductibility of rental expenditure cannot be extended to expenditure on additional excise duty incurred by assessee. If, instead of assessee, additional excise duty were to be borne by contract manufacturers, contract manufacturers would have accounted for that amount in purchase price of goods, resulting in higher price to be paid by assessee. Therefore, this situation is, as per ITAT s own explanation, revenue neutral as well. AO s determination ITA 686/2014 Page 10 that payment was made by assessee on behalf of contract manufacturers as part of collusive attempt to evade tax, is thus, baseless. 22. Another ground on which ITAT disallowed 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 opinion of this Court, is erroneous. liability, payment for which assessee claims deduction under Section 37, arose on account of order of CESC, which was passed on 10.11.2006. This sum of `4,94,09,120/-, additional excise duty, was differential amount which became payable only upon passing of said order and thus, became crystallized in subject assessment year. Therefore, even though excise duty was for manufacturing activity that occurred earlier, liability to pay such additional duty did not exist in previous years and as result, could not have been claimed by assessee as expenditure in concerned previous years. In arriving at this conclusion, this Court relies upon its ruling in Rattan Chand Kapoor (supra). In Rattan Chand Kapoor (supra), issue was whether sales tax liability for periods 1953-54 to 1958-59 could be claimed as deductible expenses in assessment year 1964-65, when demand was made in 1964. Court answered question in affirmative and noted as follows: But, what happens if liability is not determined till much later? In present case, demand was raised in February, 1964, but related to period 1953-54 to 1958-59. Obviously, assessed could not claim deduction on basis that it arose at much earlier date. Perforce, claim could only be raised after it had been determined as assessment for all those years would be over long ago. ITA 686/2014 Page 11 decision in Rattan Chand Kapoor (supra) was affirmed by this Court in Shri Ram Pistons & Rings Ltd.(supra). 23. In light of reasons stated above, this Court holds that sum of `4,94,09,120/- paid by assessee towards additional excise duty on behalf of contract manufacturers constitutes deductible expenditure under Section 37(1) of Act. 24. question of law framed, therefore, is answered in favour of assessee and appeal is allowed. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) MARCH 25, 2015 ITA 686/2014 Page 12 Tupperware India Pvt. Ltd. v. Commissioner of Income-tax