Business expenditure- Section 37(1)- A. Ys. 2006-07 to 2008-09- Hire charges paid on plastic moulds could not be disallowed even if they were given to contract manufactures free of cost-

Assessee had entered into agreements with Dart Manufacturing India Private Ltd (‘DMI’) and Innosoft Technology Ltd (‘ITL’) to manufacture products to be sold under its brand name. It had imported moulds on hire basis from overseas group companies. These moulds were given on ‘free of cost basis’ to DMI and ITL. The Assessing Officer relied upon the order of SetCom passed under the Central Excise Act, 1944, holding that manufacturing cost would include rent paid for the moulds. Accordingly, he disallowed expenditure on plastic moulds on the ground that it should have been claimed by DMI and ITL, who were contract manufacturers of the assessee. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) How and in what context the finding recorded by the SetCom relating to valuation of good for levy of excise duty would be relevant for deciding whether rent paid for the moulds could be allowed as deduction u/s. 37(1)?

ii) The valuation or cost of manufacture would include cost of raw material as an expenditure but it would not mean that the assessee could not treat the price of raw material as an expenditure.

iii) In case the aforesaid two contract manufacturers had paid hire charges for the moulds, it would have resulted in increase in the purchase price in hands of assessee.

iv) Thus, assessee was entitled to deduction of hire charges paid for moulds. Disallowance made by Assessing Officer could not be sustained.”