TIOL Update, Wednesday, Aug 09, 2017

Keywords - Actual write off vs provision for bad debt - book profit - Bad & doubtful debt - Clause (i) to Explanation 1 of Sec 115JB - Dichotomy - retrospective effect.

Whether after retrospective insertion of Clause (i) to Explanation 1 of Sec 115JB any amount set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under section 115JB - YES: HC

Whether if the assessee provisioning certain amounts for bad and doubtful debts, also reduces the corresponding amount from the loans and advances on the asset side in the books, it would amount to write off and such write-off is not hit by the Clause (i) to Explanation to Sec 115JB - YES: HC

The assessee is a registered company. For the AY 2003-2004, the assessee had filed NIL return. The Assessing Officer issued Sec 148 notice to reopen the assessment. The AO did not agree with the assessee provisioning a sum of Rs 6.3 Cr for bad and doubtful debts. The Assessing Officer added such sum for computing the book profit of the assessee for the purpose of Minimum Alternative Tax ['MAT'] liability under section 115JB of the Act. The CIT(A) allowed the assessee's appeal and the Tribunal held that the the provision for bad and doubtful debts cannot be termed as a provision for liability but was in the nature of diminution in the value of asset.

On appeal, the HC held that,

++ the Supreme Court in case of HCL Comnet Systems and Services Ltd. held that clause (c) of the explanation would apply to the debt payable by the assessee. In such a case, if the amount is set aside as a provision and provision is made for meeting a liability other than ascertained liability, clause (c) would come into force and such provision would be added in computation of book profit for the purpose of 115JA of the Act. This clause, however, would not cover a provision made for a debt which is receivable by the assessee. It was observed that the provision for bad and doubtful debts which is made to cover up probable diminution in the value of the asset, cannot be said to be a provision for liability because even if the debt is not recoverable, no liability could be fastened on the assessee;

++ to overcome such view of the Supreme Court, the Revenue added clauses (g) and (i) to the explanations in section 115JA and 115JB of the Act respectively with retrospective effect. With such addition now the book profit for the purpose of section 115JB of the Act would be increased by the amount or amounts set aside as provisions for diminution in the value of any asset. The explanatory note for introduction of such amendment clarified that the new clause (i) was inserted "so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit." This legislative change thus was clearly necessitated on account of the judgment of the Supreme Court in case of HCL Comnet Systems and Services Ltd. holding that under clause(c) to the explanation any provision for bad or doubtful debts for diminution in the value of any asset cannot be added to the book profit of the assessee;

++ this Court in Deepak Nitrite Limited, held that in view of such statutory change, the decision of Supreme Court in case of HCL Comnet Systems and Services Ltd, would allow the Revenue to make such addition. Delhi High Court in case of Commissioner of Income-tax v. ILPEA Paramount (P) Ltd 2010-TIOL-155-HC-DEL-IT had come to similar conclusion. Seen from this light and in this context, the decision in case of Deepak Nitrite Limited, lays down the correct proposition;

++ decisions of Supreme Court in cases of Southern Technologies Ltd and Vijaya Bank bring out a clear distinction between a case where the assessee may make a provision for doubtful debt and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of write-off and not a mere provision;

++ Karnataka High Court in case of Yokogawa India Ltd. applying such principle found that case on hand was one of a debt which was an amount receivable by the assessee and not any liability payable by the assessee and observed that clause(c) of the explanation to section 115JA/115JB, would not apply. In context of applicability of clause(i) to the explanation, relying on the decision of Supreme Court in case of Vijaya Bank, the Court observed that there is a dichotomy between actual write off and provision for bad and doubtful debt. A mere debit to the Profit and Loss account would constitute a bad and doubtful debt but it would not constitute actual write off. However, if simultaneously such amount is obliterated from the accounts by reducing corresponding loans and advances on the asset side, the same would amount to a write off;

++ by way of culmination of above judicial pronouncements and statutory provisions, the situation that arises is that prior to the introduction of clause(i) to the explanation to section 115JB, as held by the Supreme Court in case of HCL Comnet Systems and Services Ltd, the then existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. With insertion of clause (i) to the explanation with retrospective effect, any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under section 115JB of the Act. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset aside of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to section 115JB. The judgment in case of Deepak Nitrite Limited fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corporation Ltd, fell in the later category;

++ in our view, there is no conflict between the two judgments and both operate in different fields. Reference is answered accordingly.

Case disposed of

2017-TIOL-1526-HC-MUM-CT

TATA JOHNSON CONTROLS AUTOMOTIVE LTD Vs STATE OF MAHARASHTRA : BOMBAY HIGH COURT (Dated: August 3, 2017)

Bombay Sales tax Act - Section 2(29)

Keywords - seperate sale price - designing charges - reimbursement by customers

The Applicant dealer is a manufacturer and trader in automotive seating systems and components thereof. While assessing the Applicant for a period from April 01, 1998 to Mar 31, 1999, the AO had taxed the cost of designing and tooling received by the applicant from his purchasers, which was stated to be on account of designing and for the purpose of getting the moulds manufactured from his suppliers. This amount was held by the AO as an amount of sale price and tax was levied on it.

On appeal, the HC held that,

Whether cost paid towards designing and tooling is a part of the same series of transaction of sale of seating system, and hence cannot be segregated as seperate sale - YES: HC

++ the aggregation of consideration for the transfer of the product would in normal parlance constitutes sale price. All the payments should be made pursuant to the contract of sale. The total amount of consideration for purchase of goods would include the price strictly so called and also other amounts which are payable by the purchaser or which represent the expenses required for completing the sale as the supplier would ordinarily include all of them in the price at which he would sale his goods. It is clear that in the present case, the sale price is not statutorily fixed but it is a part of contract between the parties. The prima dona consideration would be the total price paid by the purchaser for acquisition of the product under sale. The contract will have to be examined. The payment of designing and tool cost is necessary concomitant of the final sale price of the seating system. The amount of money which goes from the pocket of the vendee to the pocket of the vendor as a consideration for passing of the property in the goods is the “sale price”. It is the amount but for the payment of which the vendor would not transmit his title of the goods in favour of the vendee. The applicant / seller would not deliver/sale the seating system without recovering the cost of designing and moulds required for manufacture of seating system. The cost paid towards designing and tooling is a part of the same series of transaction of sale of seating system. The sale cannot be segregated. It is also not the case that the said tools are provided by the customer / buyer. The design and tools are prepared by the applicant to enable the applicant / vendor to manufacture seating systems. The development charges for design and tooling and price of seating system is artificially being segregated to avoid payment of sales tax. Without payment of designing and tooling cost, the applicant would not part with the seating system. The definition of “purchase price” will have to be read in conjunction with the “sale price”;

Whether the designing charges and tooling cost reimbursed to the dealer by its customers, would form part of the 'sale price' as defined u/s 2(29) of Bombay Sales Tax Act - YES: HC

++ the production / manufacture of the seating system is only on the basis of the said mould which is designed. Without the said mould, the seating system could not be manufactured. The said mould is retained by the vendor. The said mould cannot be used for any other purpose. The development charges for the mould is agreed to be charged and paid as a part of the contract of supply of seating system. The development charges for designing and tool have inescapable bearing on the delivery of the seating system and, therefore, they will have to be held as part of the sale price of the seating system. The purchase price as defined means the amount of valuable consideration paid or payable by a person for any purchase made, including any sum charged for anything done by the seller in respect of goods at the time of or before delivery thereof. The sale price as defined under the Sales Tax Act is also in a similar manner. The sale price means, the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof. The sale price as such would mean the amount paid to a dealer for any sale made including any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof. Considering the definition of the “sale price” and “purchase price” in conjunction, there can be no room of doubt that the designing and tooling cost incurred by the vendee for the manufacture of seating system in the present facts and circumstances of the case, would be a part of the “sale price” of the seating system. Considering the above, the said designing charges and tooling cost reimbursed to the applicant by its customers, would form part of the “sale price” as defined under Section 2(29) of the Bombay Sales Tax Act.

Reference in favour of Revenue

2017-TIOL-2856-CESTAT-DEL

CST Vs MACHINE TOOLS INDIA PVT LTD : DELHI CESTAT (Dated: July 6, 2017)

ST – ST demand was confirmed on various grounds - however, the adjudicating authority dropped the demand proposed in the SCN for reversal of cenvat credit attributable to trading activity on proportionate basis, as alleged in the SCN, amounting to Rs. 1.33 crore - the revenue has filed the present appeal by taking the view that the respondent has engaged in the activities of manufacturing, trading and services -since the activity of trading is not liable to payment of ST, it falls within the category of exempted services, as per rule 2 (e) of the Cenvat Credit Rules, 2004 [CCR] -hence, this attracts the mischief of rule 6 (3) of CCR -consequently, the respondent is liable to reverse cenvat credit attributable to trading activity on proportionate basis -in the present appeal, the revenue has sought to modify the findings of the adjudicating authority only to the above extent.

HELD –Prior to 2011, trading is not even considered as "exempted service" – going by this fact, it is clear that no credit is available on any ‘input service' attributable to ‘trading' during the material time – having availed the credit on common input services, without maintaining separate accounts, it is not open to the respondent to claim that there is no need for reversal of proportionate credit attributable to their activity of trading - if there are common input services, without separate accounts, it is necessary for the respondent to avail so much of credit only, which are attributable to the taxable output service - this can be enforced by way of reversal of credit attributable to trading activities – the legal position has been examined and decided by the Tribunal in Mercedes Benz India Pvt. Ltd. [2014-TIOL-476-CESTAT-MUM] which has been affirmed by the Bombay High Court [2016-TIOL-1322-HC-MUM-CX] – the findings of the original authority that the demand for reversal is made in vacuum without support of provisions of law, is legally unsustainable - the respondent is liable to reverse the credit attributable to the trading activities - considering that the issue is of legal interpretation and there are different decisions on the matter, the demand is to be restricted to normal period and no penalty is imposable on the respondent - the revenue's appeal will succeed to an extent of reversal of cenvat credit for normal period along with applicable interest - the appeal is allowed partly to that extent : CESTAT [para 6, 7, 8]

Appeal of Revenue partly allowed

2017-TIOL-1523-HC-KOL-CUS

JAJU PETRO CHEMICAL PVT LTD Vs CC: CALCUTTA HIGH COURT (Dated: July 6, 2017)

Cus – Petitioner assails the show cause notice-cum-demand dated 19.7.2013 as also the impugned order on the ground of breach of principles of natural justice

HELD - The adjudication proceedings under section 28 read with section 124 of the Act was taken up for consideration on different dates by the adjudicating authority - upon consideration of the materials made available to it, it had initially found it prudent to adjourn such proceedings sine die on 17.4.2014 –the adjudicating authority had proceeded to dispose of the proceedings by the impugned order dated 27.2.2015 subsequent to adjourning the proceedings sine die on 17.4.2014 without further notice to the petitioner - on this score alone, the impugned order stands vitiated due to breach of principles of natural justice, not having given adequate notice to the petitioner for a hearing subsequent to 17.4.2014 for the impugned order dated 27.2.2015 to come into being: High Court[para 13, 14]

Brief facts & conclusion : The petitioner had imported slack wax – DRI had initiated an investigation on the suspicion of undervaluation -such investigation conducted by DRI was commodity specific rather than importer specific - the petitioner had applied under section 18(1) of the Act for the purpose of assessment – under section 18(2) of the Act, it is the duty of the officer concerned to inform the duty leviable on the goods imported as finally assessed -in the present case, a final assessment of the duty has not happened – the Customs Authorities have invoked section 28 of the Act without a final order of assessment – in the present case, none of the situations contemplated under section 28 has arisen -the duty is yet to be finally assessed for the petitioner to be said to be guilty of not paying the duty or paying short levy of the duty payable – therefore, a failure contemplated under section 28 of the Act of 1962 not happening, the authorities should not have invoked section 124 of the Act of 1962 – in A.S.Syndicate Warehousing Pvt. Ltd. [ 2011(267) ELT 469 Calcutta ], Mahesh India [ 2009(243) ELT 339 ], ITC [2006-TIOL-141-SC-CX]and Rerolling Mills [ 1997 (94) ELT 8 (SC) ], it was held that a writ petition challenging a SCN is maintainable, in the event it is established that, the SCN was issued without jurisdiction or in the abuse of the due process of law - the authorities could not have invoked section 28 read with section 124 of the Act in the facts of the present case - the overwhelming inference, therefore, is that the impugned SCN was issued without jurisdiction - the final order emanating out of the SCN consequently suffers from the same defect - in Wright Minerals Pvt. Ltd. [order dated 12.4.2017 in WP 8120 (W) of 2017], in a similar situation, a SCN was set aside and the authorities were permitted to proceed in accordance with law - the impugned order is set aside - the Customs Authorities are requested to complete assessment proceedings in accordance with law as expeditiously as possible - both the DRI and the Customs Authorities are thereafter at liberty to take steps, in accordance with law, in the event, they find the petitioner to be guilty of infraction of any law after the final assessment – writ petition disposed of : HIGH COURT [para 15, 16, 18, 19, 20, 21]

Writ Petition disposed of

2017-TIOL-1522-HC-MAD-ST

R S SENTHIL KUMAR Vs Addl.CST: MADRAS HIGH COURT (Dated: July 14, 2017)

ST - The petitioner owns two immovable properties which were leased out to two different firms - Revenue admitted in the SCN that the dispute arose w.r.t. property leased out to one of the two firms - In his statements w.r.t. the second firm, the petitioner admitted paying service tax upto the period the lessee had paid service tax along with monthly rent - Petitioner later paid the balance service tax & submitted a letter reporting compliance - Nonetheless, duty demand under heading 'Renting of immovable property' service, with interest & penalty w.r.t. the second lessee firm, was confirmed, despite payment of balance service tax with interest.

Held - the revenue did not consider the payment of the balance tax by the assessee or give any finding on that aspect - The impugned order was passed without appropriate application of mind - A representation by the petitioner, supported with challans as evidence of payment, seeking rectification of the impugned order was brushed aside - Moreover, where the revenue contended that they failed to reconcile the amount paid by the petitioner with the demand raised, the same shows the revenue in bad light - This issue was not acknowledged at any earlier stage and was only raised in their counter affidavit - The revenue could easily have procured bank details from the petitioner to reconcile the payments made - Moreover, the amount paid by the petitioner is higher than demand amount raised - The arbitrary & cryptic nature of the impugned order shows the revenue's intent to harass the petitioner - Hence such order merits being quashed: High Court (Para 3-12)

Writ petition allowed

2017-TIOL-1521-HC-ALL-CX

CCE Vs ORIENT BELL LTD : ALLAHABAD HIGH COURT (Dated: July 6, 2017)

CX - the respondent/assessee is engaged in manufacture and trading of ceramic tiles & availed Cenvat credit of common input services - Since trading activity was exempted from service tax w.e.f. 01.04.11, any composite activity of manufacturing & trading required the maintenance of seperate books of account for common input services used - An assessee failing to do so was required to pay 6% on the value of the goods, which had to be calculated on the difference between the sale and purchase price of the goods traded or 5% of the cost of the goods sold, whichever was more - Assessee was served an SCN disallowance and recovery of Cenvat credit availed - Although assessee agreed to reverse part of the credit for the period beginning from 01.04.2011, the entire duty demand was confirmed by the Commr.(A) - Later, the Tribunal allowed the assessee to reverse part of the credit, which was 10% of credit availed on trading turnover.

Held - the respondent was liable for payment of the amount in accordance with Rule 6 of the CCR, for not maintaining separate accounts - Rule 6 prescribed payment of 6% of the value of the goods being the difference between sale and purchase price of the goods traded or 10% of the cost of the goods sold, whichever is more - The provision was enforced vide Notfn. No.13/2011 w.e.f. 01.04.11 - The subsequent Notfn. dated 20.06.12 enforced w.e.f. 01.07.12 is only a repetition of the above amended Rule 6, but in a different form - Therefore such provision for payment 6% of the value of the goods remained in existence w.e.f. 1st April, 2011 - Hence the Commr.(A) erroneously disallowed such benefit, on the grounds that the said provision had come into effect from 01.07.12 - The Tribunal later held that the said provision came into effect from 01.04.11, and allowed such benefit to the assessee - Hence, Tribunal order warrants no interference: High Court

Appeal dismissed

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