By TIOL News Service

AHMEDABAD, APR 20, 2016: THE issue is - Whether subsidiary is entitled to claim expenses incurred on reimbursement to its Principal which had paid on its behalf for breach of contract. YES is the answer.

Facts of the case

The assessee during the impugned year, entered into a contract with Deramic Group in relation to purchase of specified battery separators. In terms of the agreement, all the group companies of Exide group including assessee would purchase specified battery separators from Deramic Group. The assessee, accordingly purchased batteries from another entity because of which, Deramic Group imposed a penalty on Exide Technologies Inc. which was paid by Exide Technologies and thereafter recovered from the assessee. As such amount had been paid in normal course of its business; the assessee claimed deduction of such amount as expenditure in its return of income. During assessment, the AO noticed that the payment of penalty amounting to Rs.65,52,000/- for breach of contract with Deramic Group could not be treated as within the norms of assessee's business and that the assessee had not submitted any evidence to show that the agreement between Exide Technologies and Deramic Group had a binding effect upon the assessee. The AO also noticed that the acceptance of this payment by the TPO at an ALP was irrelevant for determining the correct total income of the assessee and therefore, added such amount to the total income of assessee. On appeal, the CIT(A) as well as the Tribunal reversed the order of AO.

Having heard the parties, the High Court held that,

++ the facts as emerging from the record are that the assessee is in the business of manufacturing and marketing of storage batteries for multifarious applications, viz., cars, LCV, HCV, tractors, earth moving equipments, inverters, gensets, etc. and is a subsidiary of CMP Batteries Limited, UK and the ultimate holding company is Exide Technologies Inc., USA. The assessee debited penalty for breach of commercial contract to the profit and loss account amounting to Rs.65,52,000/- claiming it as commercial penalty resulting from breach of contract to compensate Exide Technologies. It was the case of the assessee that the payment was in the nature of commercial penalty resulting from breach of contract to compensate other parties. The facts of the transaction are that the assessee is a group company of the Exide group which operates worldwide. The Group, while selling its separator business to Deramic Group, in order to assure business and in order to maintain quality of the product, had agreed with Deramic Group that all the entities of Exide Group shall purchase specified battery separators only from Deramic Group. However, the assessee had purchased separators from another company and hence, under the agreement, Exide Technologies had to pay damages for breach of the contract. Since, these damages were occasioned on account of breach of contract of the assessee, the same were reimbursed by the assessee. In the facts of the present case, the assessee claimed deduction u/s 37 in respect of Rs.65,52,000/- which it had paid to Exide Technologies by way of reimbursement as Exide Technologies was required to pay such amount to Deramic Group on account of the default on the part of the assessee. Thus, the amount paid by the assessee is directly related to the amount paid by the Exide Technologies to Deramic Group on account of default on the part of the assessee and would squarely fall within the ambit of the term "expended wholly and exclusively for the purposes of the business or profession" as contemplated u/s 37(1). In the light of the above discussion, it is not possible to state that the impugned order passed by the Tribunal suffers from any legal infirmity so as to give rise to a question of law, much less, a substantial question of law, warranting interference.

(See 2016-TIOL-806-HC-AHM-IT)