Whether a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement, can be construed as ‘interest’ u/s 2(28)

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Whether a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement, can be construed as 'interest' u/s 2(28)

Whether a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement, can be construed as ‘interest’ u/s 2(28)

Sharp Menthol India Ltd Vs DCIT
Whether a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement, can be construed as ‘interest’ u/s 2(28) – NO: ITAT
Whether depreciation on plant & machinery can be denied on ground that it was not possible to ascertain their value, when the surrendered amount on their installation during relevant year was accepted by the Department – NO: ITAT
– Assessee’s appeal partly allowed: DELHI ITAT
A) During the course of assessment proceedings, the AO found that the assessee company had received pre-shipment advance against export order from M/s Cargill International Trading Pte Ltd [Singapore], whereby a sum of Rs. 2,25,93,901/- had been credited by way of journal entry, being the amount of discount on funds received from M/s Cargill International Trading (I)(P) Ltd. The assessee was accordingly asked to explain how the discount had been accounted for in the profit and loss account. The assessee filed detailed reply explaining that it had entered into a trade agreement with M/s Cargill International Trading Pte Ltd, whereby it had exercised the first option to receive the prepayment amount as reduced by the Trade Discount/prepayment Discount. It was explained that a sum of Rs. 43.61 crores was received from the foreign party and was shown as trade advance. The assessee further explained that it allowed trade discount of Rs. 2.25 crores on the prepayment of trade advance and since it was following the Accrual System of Accounting, and credited the same into the account of M/s Cargill International Trading [Singapore]. It was further pointed out that since the trade agreement was for one year, the trade discount of Rs. 2.25 crores was broken into two periods. Accordingly, a sum of Rs. 77,44,651/- was shown as expense under the head ‘financial charges’ and balance amount was carried over to the next year under the head ‘prepaid expenses’.
The explamnation offered by assessee did not find any favour with the AO who was of the opinion that the trade discount/cash discount mentioned in the agreement was related to trade transaction mentioned in the agreement and gets crystallised only when trade transaction was completed and since the transaction was to be completed in the previous year relevant to A.Y 2007-08, the liability on account of trade account got crystallised in A.Y 2007-08 only. Having stated all that, the AO found that no actual sale had taken place and the contract of sale had not finally materialised and has been cancelled and, accordingly, proceeded to treat the trade discount in the nature of finance charges/interest payment and invoking the provisions of section 40(a)(ia), the AO treated the said claim devoid of any tax deducted at source and added the same to the income of assessee. On appeal, the CIT(A) upheld the order of AO.
B) Consequent to the assessee filing his return along with a claim for depreciation on plant & machinery, the AO observed that in the list of inventory prepared by the Income tax department and again by the Excise department, there was a difference in the inventory of plant & machinery and various new assets appeared in the list prepared by the Excise department. The AO dismissed the theory which suggested that plant & machinery worth Rs. 4.25 crores had been installed within short period. The AO further observed that the assessee had not submitted any fixed assets register which it was required to maintain and failed to submit proof of purchase, installation and use of the plant and machineries. He was of the firm belief that the claim of assessee was not in accordance with law and hence liable to be rejected.
On appeal, the CIT(A) observed that in so far as the claim of deprecation on amount disclosed as additional income amounting to Rs. 75 lakhs, which was claimed as revenue expenditure in earlier A.Ys but were disallowed, now the same was treated as capital expenditure. The assessee was entitled for depreciation because the genuineness of the expenditure claimed as repair and maintenance were never doubted. Accordingly, he directed the AO to allow depreciation on the addition of plant & machinery.
On appeal, the ITAT held that,
Whether a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement, can be construed as ‘interest’ u/s 2(28) – NO: ITAT
++ as far as trade discount is concerned, it is not in dispute that the trade discount was agreed to by the parties mutually as a percentage of principal amount to be deducted by foreign party at the time of prepayment. It is also true that there is no direct or indirect indication in the trade agreement, which could suggest that the assessee wanted to borrow money from the foreign party. There is no dispute that this was purely a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement. This means that the discount allowed by the assessee to the foreign party is an integral part of sales/purchases. However, it is found that the sale transaction did not materialise and was cancelled. However, at the same time, there is no merit in treating the said discount as interest u/s 2(28) thereby invoking the provisions of section 40(a)(ia);
Whether depreciation on plant & machinery can be denied on ground that it was not possible to ascertain their value, when the surrendered amount on their installation during relevant year was accepted by the Department – NO: ITAT
++ as far as depreciation on surrendered income is concerned, the undisputed fact is that the plant and machinery were found installed at the premises of the assessee. This fact is apparent from the list of inventories prepared by the Income tax department as well as by the Central Excise Department. It is found that the lower authorities have dismissed the claim of depreciation on the ground that there is no evidence and it is not possible to ascertain the value of plant and machinery claimed to be installed during the year under consideration. The surrendered amount of Rs. 3.50 crores on this account has been accepted by the Department. Considering the facts in totality, this Tribunal is of the considered opinion that the assessee has satisfactorily established its claim of depreciation on Rs. 3.50 crores.

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