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General Mills India Private Limited 902, Ventura Hiranandani Business Park Hiranandani Gardens, Powai Mumbai- 400 076 Vs. AddL, CIT-10(2) 4th Floor Aayakar Bhavan, M.K. Marg Mumbai- 400 020
November, 04th 2014
           IN THE INCOME TAX APPELLATE TRIBUNAL,
                 MUMBAI BENCH "G", MUMBAI
  BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND
          SHRI AMIT SHUKLA, JUDICIAL MEMBER
                      ITA No. 2582/Mum/2011
                      Assessment Year: 2003-04

        General Mills India               AddL, CIT-10(2)
        Private Limited                   4th Floor Aayakar
        902, Ventura                      Bhavan, M.K. Marg
        Hiranandani Business              Mumbai- 400 020
                                    Vs.
        Park Hiranandani
        Gardens, Powai
        Mumbai- 400 076
        PAN:AAACG 1773 B
               (Appellant)                         (Respondent)

                     Assessee by : Shri J.D Mistri
                      Revenue by : Shri Pavan Kumar Beerla

                  Date of hearing : 14.10.2014
           Date of Pronouncement : 31.10.2014

                                ORDER

PER AMIT SHUKLA, JM:

     This appeal has been preferred by the Assessee against the order
dated 03.01.2011 passed by the Ld.CIT(A)-21, Mumbai for the quantum
of assessment passed u/s 143(3) for the A.Y. 2003-04 mainly on
following grounds of appeal.

     "Ground No. 1:- The learned CIT(A) has erred in upholding the
     disallowance    of    management        consultancy     fees   of
     Rs.3,31,77,130/- paid to General Mills Marketing Inc.
                                                                ITA No. 2582/Mum/2011
                                      2                     General Mills India Private Limited
                                                               Assessment Year: 2003-04


     Ground No.:2 The learned CIT(A) has erred in upholding the
     disallowance of loss on sale of assets of Rs.36,37,746/-.

     Ground No.-3 The learned CIT(A) has erred in upholding the
     disallowance of depreciation of Rs.49,27,407/- being depreciation
     claimed on plant and machinery lying at the premises on the
     Appellant's co-packers M/s. Sitashree Food Products Private
     Limited and M/s. Ahaar International Limited.

     Ground No.-4 The learned CIT(A) has erred in upholding the
     disallowance of conversion charges of Rs.11,46,827/- paid by the
     Appellant to its co-packer M/s. Sitashree Food Products Pvt. Ltd.

     Ground No. 5- The learned CIT(A) has erred in upholding the
     disallowance of provision for leave encashment of Rs.7,84,269/-."

2.   The assessee company is engaged in the business of production,
marketing, sales and distribution of food products. In first ground the
assessee has challenged the disallowance of management consultancy
fees of Rs.3,31,77,130/- paid to General Mills Marketing Inc. During the
course of the assessment proceedings the assessing officer noted that
under the head operating expenses, the assessee has debited a sum of
Rs.3,31,77,130/- as management service fees. In response to the show
cause notice, the assessee filed details of invoices and amount of money
paid. On further notice, the assessee submitted that the payment was
made in pursuance of agreement with M/s. General Mills Marketing Inc.
USA (GMM) which was entered on 24.04.2003 as "management service
agreement." The copy of the agreement was also filed under the terms
of the said agreement, GMM would provide certain financial, human
resources, information, legal services to the assessee company and in
lieu of that assessee was required to make the payment to GMM for the
                                                              ITA No. 2582/Mum/2011
                                     3                    General Mills India Private Limited
                                                             Assessment Year: 2003-04


services rendered. It has submitted that in pursuance of the said
agreement the assessee had paid Rs.3,31,77,130/- and TDS of
Rs.23,56,283/-   was      deducted   in   respect   of   the       amount               of
Rs.1,57,08,556/-. Assessing Officer again requested        the assessee to
clarify and explain the allowability of the amount paid, when the TDS
was deducted only on sum of Rs.1,57,08,556/- the further noted that
agreement was entered on 24.04.2003 and was shown effective from
01.11.2001. In response as per the AO, the assessee justified its claim
and also non deduction of TDS on the entire proceeds, however
assessee could not justify the business expediency. The assessing officer
after detailed reasoning held that the amount of Rs.3,31,77,130/-
claimed by the assessee as management consultancy fees is an
inadmissible expenditure for which commercial expediency could not be
proved by the assessee. Accordingly he added the said same the total
income of the assessee.

3.    Even the Ld.CIT(A) confirmed the said addition on the ground
that mere existence of the agreement was not sufficient to justify the
claim of the payment, that it was made wholly and exclusively for the
purpose of business. Further the agreement was made effective
retrospectively for which the assessee could not be given proper
explanation.
4.   Before us the learned senior counsel, Shri J.D. Mistri submitted
that the agreement with the GMM clearly provided that it would be
providing various kinds of services to the assessee for which the
payment was to be made by the assessee. It was in pursuance of the
said agreement payment was made. The payment is also supported by
invoices raised that the GMM. Once the payment has been made for
                                                                   ITA No. 2582/Mum/2011
                                     4                         General Mills India Private Limited
                                                                  Assessment Year: 2003-04





getting the services for the business purpose then the same cannot be
disallowed, on the ground that agreement have been made effective
from retrospective date. In any case he submitted that the assessee has
filed additional evidences in support of the payment and also for the
rendering of the actual services by GMM to the assessee. He further
pointed out that in the transfer pricing study report of GMM, the nature
of services rendered have been fully highlighted. These evidences go to
the root of the issue, therefore, the same should be admitted and
matter can be examined by the AO.

5.   On the other hand Ld. DR submitted that during the course of the
assessment    proceedings    as   well     as   before   the      first        appellate
proceedings, no evidences of services and business expediency                            was
proved by the assessee. How the assessee has deducted the TDS on
part of the payment has also not been made clear, therefore, order of
the Ld.CIT(A) should be confirmed. In any case if the additional
evidences are to be admitted then the matter should be restored to the
file of the AO for de novo adjudication.
6.   After considering the rival submissions and also on the perusal of
the record, it is seen that assessee has made the payment to GMM, in
pursuance of management service agreement dated 24.04.2003, in
terms of which the GMM would be providing services like financial,
human resources, information, legal services etc. to the assessee
company. The invoices have also been raised which has been placed in
the paper book. The payment is not in dispute. Only case of the
department is that the assessee could not prove the rendering of
services and the business expediency. Now at this stage the assessee
has filed additional evidences in support the services rendered raised by
                                                           ITA No. 2582/Mum/2011
                                   5                   General Mills India Private Limited
                                                          Assessment Year: 2003-04


the GMM to the assessee. These evidences go to the root of the issue,
therefore we are admitting the same and the entire matter is remanded
back to the file of the assessing officer to examine these evidences and
decide the issue afresh and in accordance with the provision of law.
Thus Ground no. 1 raised by the assessee is treated as allowed
for statistical purpose.
7.    In Ground No. 2 the assessee has challenged disallowance of loss
on sale of assets of Rs.36,37,746/-. The assessing officer noted that,
assessee has included an amount of Rs.36,37,746/- as loss on sale of R
& D assets, which stands disallowed in the earlier years up to the stage
of the Ld.CIT(A). On this ground alone, the Ld.CIT(A) too has confirmed
the said addition.

8.    Before us learned senior counsel, Shri J.D. Mistri submitted that
from the perusal of computation of taxable income filed along with
return of income, it can be seen that the assessee has not claimed any
such amount. He drew our attention to computation of taxable income
given at page 274 of the paper book, from where he pointed that the
loss on sale of R&D assets was added twice and then it was deducted
once. Thus in effect the assessee has not claimed the loss and
therefore, no disallowance is called for. The Ld. DR admitted that this
matter can be verified by the AO and if no claim has been made then no
double disallowance should be made.

9.    After considering the material placed on record, we find that in
the statement showing computation of taxable income for A.Y. 2003-04
filed along with return of income, the assessee had started the
computation from net loss as per P&L account and thereafter has added
the loss on sale of R&D assets of Rs.36,30,476/- twice. Thus the
                                                           ITA No. 2582/Mum/2011
                                   6                   General Mills India Private Limited
                                                          Assessment Year: 2003-04


assessee has added back the loss amount at Rs.72,60,952/-. Out of the
said amount, the assessee has deducted only Rs.36,30,476/-, which
inter alia means that finally no deduction on account of loss on R&D
assets have been made. Accordingly the contention of the learned
counsel appears to be prima facie correct that the assessee has not
claimed any loss on sale of R&D assets in the computation of income.
Hence there is no question of disallowance. However, assessing officer
will verify the computation of income and give appropriate relief. In
result Ground No. 2 is treated as allowed as indicated above.

10.   In Ground No. 3&4 the assessee has challenged the disallowance
of depreciation of Rs.49,27,407/-, being depreciation claim on plant and
machinery given to the co-packers and disallowance of conversion
charges of Rs.11,46,827/- paid by the assessee to one of the co-packer.
The brief facts qua the issues involved are that, the assessee had
appointed co-packers for the work of processing/packing of its product.
As per the agreement with them the assessee has been providing co-
packers either finances or plant and machineries equipment etc to be
used by them for the doing the task given by the assessee company.
The assessing officer noted that the assessee company had terminated
its agreement with the two co-packers namely, M/s. Sitashree Food
Products Private Limited and M/s. Ahaar International Limited prior to
A.Y. 2003-04. Still the assessee was claiming depreciation and
processing charges paid to these two parties in previous year under
consideration. In response to the show cause notice, the assessee
submitted that machinery lying with the co-packers were owned by the
assessee and ready for use, hence assessee was eligible for claim of
depreciation. Such a claim on plant and machinery lying with the co-
                                                                  ITA No. 2582/Mum/2011
                                       7                      General Mills India Private Limited
                                                                 Assessment Year: 2003-04


packers aggregated to Rs.49,27,407/-. Further the assessee had paid
conversion/ process charges of Rs.11,46,827/- to M/s. Sitashree Food
Prouduct for the work done earlier. The assessing officer rejected the
assessee's claim on the ground that the agreement was terminated way
back in the year 2002 and in the year 1999, hence the plant and
machinery was not used for the business purposes in this year and there
is no business relation with the said two parties. Accordingly he
disallowed of Rs.49,27,407/- and also the conversion charges paid to
M/s. Sitashree food of Rs.11,46,897/-.

11.   Before the Ld.CIT(A), the assessee submitted that, there arose a
dispute   between   the     assessee       and   co-packers    and         arbitration
proceedings had been initiated. Once the asset has been put to use for
purpose of business in the earlier years and is ready for use, then
assessee was entitled for depreciation. Similarly the conversion charges
were paid in terms of earlier agreement and work done that is before
the termination of the agreement therefore the payment made is an
allowable expense. The Ld.CIT(A) rejected the assessee's explanation
and confirmed the said disallowance on the similar ground that the
termination of the agreement was done in the earlier years and no
business was carried out in this year with the said parties, therefore,
depreciation cannot be allowed. Similarly the assessee has failed to
explain that the processing charges paid in this year were for the
business carried on prior to the termination of agreement. Thus the
additions were confirmed.


12.   Before us the learned senior counsel, Shri J.D. Mistri submitted
that, plant and machineries were owned by the assessee and were
                                                            ITA No. 2582/Mum/2011
                                    8                   General Mills India Private Limited
                                                           Assessment Year: 2003-04


entered into block of assets. The said plant and machinery were given to
the co-packers for the purpose of assesse's business only. Later on
when the dispute arose between the assessee and the packers, the
plant and machinery were still lying with the packers, pending arbitration
proceedings. Thus, once the plant and machinery were used for the
business purpose of the assessee and were also ready for use, then
depreciation has to be allowed. In support of his contention, he relied
upon the decisions of Bombay High Court in the cases of hittle Anderson
Ltd. Vs. CIT reported in (1971) 79 ITR 613, CIT Vs. G.N. Agarwal
reported in (1996) 217 ITR 250, and CIT Vs. G.R. Shipping Ltd. In these
judgments the Hon'ble High Court have held that the word "use" in the
section 32 should be understood in      a wide sense so as to include
passive as well as active user. If the assets has been used earlier and
continued to be the asset of the assessee which is ready for use, then
depreciation has to be allowed. Regarding processing/conversion
charges, he submitted that the assessee had business dealing with these
parties and the said payment made to one of the co-packers was in
relation to the work done prior to the termination of the agreement.
There is no dispute that the payment has been made to the co-packers
for the processing /conversion charges. The only dispute is that during
the year the agreement stood terminated, which cannot be the reason
for disallowance when amount was payable in the terms of the
agreement prior to the date of termination.


13.   On the other hand the Ld. DR strongly relied upon the order of the
Ld.CIT(A) and submitted that, once the agreement already stands
terminated then there is no business dealing with the said parties and
                                                             ITA No. 2582/Mum/2011
                                    9                    General Mills India Private Limited
                                                            Assessment Year: 2003-04


therefore it cannot be held that it was for use of business or for business
purpose.

14.   We have heard the rival submissions and also perused the relevant
findings given in the impugned order. The assessee had provided plant
and machinery, equipment etc to co-packers for the work of
process/packing of flour and other food products. These plant and
machineries belong to the assessee and were part of the block of assets
of the assessee. Later on due to some dispute between assessee and
co-packers, the business dealing was stopped and the agreement
between the two parties stood terminated in the earlier year/s. The only
reason for disallowance of depreciation by the department is that, the
use of assets for the purpose of assessee's business was not proved
even though ownership of the asset lying with those parties were not in
dispute. In the present case there is no dispute that the assessee had
already used the asset for the purpose of its business and such asset
were forming part of the block of assets. Once the plant and machinery
has been used for the business purpose and is ready for use any time,
then even if it has not been used for a particular period, it cannot lead
to any inference that, there has been no user of plant and machinery.
This proposition is well supported by the decisions of Hon'ble
Jurisdictional High Court as referred the learned senior counsel. Thus
the assessee's claim for depreciation on such plant and machinery lying
with the packers is eligible for depreciation and the disallowance
confirmed by the Ld. CIT(A) is deleted.

15.   So   far   as   claim   for   conversion/processing         charges              of
Rs.11,46,827/- paid to co-packers M/s. Sitashree Food Products Pvt. Ltd.
we find that the agreement was terminated in the month of May 2002.
                                                              ITA No. 2582/Mum/2011
                                     10                   General Mills India Private Limited
                                                             Assessment Year: 2003-04


Before that the assessee had regular business dealing, with the said
party. If the amount has been paid in pursuance of the earlier business
dealing prior to the date of termination then even though payment has
been made in this year, it cannot be held that same is not for the
business purpose. We do not agree with the reasoning of the AO as well
as the Ld.CIT(A) that that any payment after the termination of
agreement is not for the purpose of business. When the payment has
been made in accordance with the agreement between the parties
existing earlier the same has to be allowed as business expenditure.
Thus we hold that no disallowance is called for and accordingly the
addition stands deleted. In the result Ground No. 3 & 4 is treated
as allowed.

16.   In Ground No. 5 the assessee has challenged the disallowance of
provision for leave encashment of Rs.7,84,269/-. The assessing officer
noted that assessee has claimed an amount of Rs.7,84,269/- on account
of provision for leave encashment and such a claim has been rejected by
him on the ground that actuarial valuation report has not been filed in
support of the claim for provision. This has been confirmed by the
Ld.CIT(A) on sane ground.

17.   Before us learned senior counsel submitted that the assessee had
duly pointed out before the authorities below that leave encashment
benefits have been provided on the basis of 15 days salary for each
employee at current encashable basic salary. This has been given in the
notes to the financial accounts for the year ending 31st March 2003. On
the other hand Ld. DR submitted that there is no actual payment and it
was un- ascertain liability and therefore it has rightly been disallowed.
                                                                                 ITA No. 2582/Mum/2011
                                               11                            General Mills India Private Limited
                                                                                Assessment Year: 2003-04





18.      After considering the rival submissions and on perusal of the
record, we find that the only reason for disallowance is that, assessee
has not given any actuarial valuation. As pointed out by the learned
senior counsel, the assessee has provided the basis for the provision in
the notes to the financial accounts in the following manner, "leave
encashment benefits are provided for at 15 days salary for each
employee, at current encashable basic salary". This aspect has not been
examined or verified either by the AO or by the Ld.CIT(A). Therefore we
feel that this matter should be restored back to the file of the AO to
consider the basis for the provision made for the leave encashment as in
such a situation it may not be necessary that actuarial valuation report
for leave encashment has to be submitted, when the basis for leave
encashment has been clearly given and there is no ambiguity about it.
While examing this matter, the AO may also examine about applicability
of Sec. 43B in respect of this claim. Thus ground no. 5 is treated as
partly allowed for statistical purpose.

19.      In the result, the appeal filed by the Assessee is treated as
partly allowed for statistical purpose.
Order pronounced in the open court on this 31st day of October,
2014.
                  Sd/-                                                                  Sd/-

       (B.R. BASKARAN)                                                     (AMIT SHUKLA)
      ACCOUNTANT MEMBER                                                  JUDICIAL MEMBER
Mumbai, Dated: 31.10.2014
*Srivastava
Copy to: The Appellant
         The Respondent
         The CIT, Concerned, Mumbai
         The CIT(A) Concerned, Mumbai
         The DR "G" Bench
                                        //True Copy//
                                                            By Order

                                              Dy/Asstt. Registrar, ITAT, Mumbai.
         ITA No. 2582/Mum/2011
12   General Mills India Private Limited
        Assessment Year: 2003-04

 
 
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