Friday, June 10, 2016

Custom duty borne by purchaser would be deductible even if liability disputed by importer seller

a) Assessee-firm purchased certain imported products under two agreements. The price as agreed in both the cases was the gross costs to the sellers with certain amount of net profit. The gross cost included all expenditure incurred by the sellers for supplying the goods to the assessee.

b) However, as there was uncertainty about the incidence of customs duties, the parties inserted a clause in the agreements, to make it clear that any liability with respect to duty of customs payable by the seller, would be a part of the costs and the buyer (assessee) would pay for the same. In terms of the contract the assessee was required to pay custom duty of Rs 1.78 crores to its seller as a part of the cost of the goods.

c) While completing assessment, the Assessing Officer accepted expenditure incurred on account of customs duty. There after, the CIT, in exercise of powers under section 263, reversed assessment order holding that the amount of custom duty was a contingent liability as the sellers of goods had challenged the same in the Supreme Court.

d) On appeal, the Tribunal held that liability on account of customs duty was to be allowed as the deduction on accrual basis. Aggrieved-revenue filed the instant appeal. The High Court held in favour of assessee as under:

1) It couldn’t be disputed that the Customs Department had raised a demand upon the seller of the goods. This amount was a part of the consideration payable by the assessee to the seller of goods. The mere fact that the seller of the goods had obtained a stay, would not, by itself, result in the same being considered as an unascertained and unqualified liability.

2) The entire consideration of customs duty demanded by the Customs Department from the seller was a part of the price so far as the seller and the assessee was concerned. Moreover, as the assessee was following the mercantile systems of accounting, mere challenge to thedemand by the seller would not, by itself, lead to the liability ceasing, although, the seller of the goods could not be able to claim/obtain a deduction on the above account as the same had not been paid in terms of section 43B. However, this does not in any way deprive the assessee of the deduction of the amounts paid for purchase of goods.

3) Thus, the assessee would be entitled to deduct the aforesaid amount as consideration paid for the goods. In any case, if the Apex Court holds that no custom duty is payable and quashes the demand of the Customs Department, then the consideration payable for the goods would stand reduced by virtue of section 41. Therefore, assessee would be liable to pay tax under section 41 on remission as its liability to pay for the goods purchased from the seller would stand reduced. – CIT v. Monica India [2016] 70 47 (Bombay)

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