The order of the Bench was delivered by
N.R.S. GANESAN, JUDICIAL MEMBER:-All the appeals of the assessee and the Revenue are directed against the respective orders of the Commissioner of Income Tax (Appeals). Since common issues arise for consideration in all these appeals, we heard these appeals together and disposing of the same by this common order.
Let’s first take assessee’s appeal in I.T.A. No.86/Mds/2008 for assessment year 2004-05.
2. The first ground of appeal is relating to reduction of deduction under Section 80-IB of the Income-tax Act, 1961 (in short 'the Act') for the purpose of computing eligible profit for deduction under Section 80HHC of the Act.
3. Shri G. Baskar, the Ld.counsel for the assessee, submitted that the Assessing Officer reduced the deduction allowed under Section 80-IB of the Act while computing eligible profit under Section 80HHC of the Act. According to the Ld. counsel, Section 80HHC of the Act is an independent provision, therefore, the deduction allowed under Section 80-IB of the Act cannot be reduced from the eligible profit computed under Section 80HHC of the Act.
4. On the contrary, Shri M. Swaminathan, Ld. Sr.Standing Counsel for the Revenue, submitted that the CIT(Appeals), by following the Special Bench decision of this Tribunal in ACIT v. Rohini Garments (2007) 294 ITR (AT) 15, found that the assessee cannot claim more than the profit computed under the provisions of the Act. If the deduction allowed under Section 80-IB of the Act was not reduced from the eligible profit computed under Section 80HHC of the Act, then the deduction claimed by the assessee would exceed the total profit. It cannot be the intention of the Parliament to allow deduction under Section 80HHC and 80-IB of the Act more than the profit earned by the assessee. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) has rightly directed the Assessing Officer to reduce the deduction allowed under Section 80-IB of the Act while computing deduction under Section 80HHC of the Act.
5. We have considered the rival submissions on either side and perused the relevant material available on record. The judgment of Madras High Court in SCM Creations v. ACIT (2008) 304 ITR 319 would cover the issue. Accordingly, the orders of lower authorities are set aside and the Assessing Officer is directed to decide the issue in the light of the judgment of Madras High Court in SCM Creations (supra) after giving a reasonable opportunity to the assessee.
6. The next ground of appeal arises for consideration is with regard to initiation of penalty proceeding under Section 271AA and 271G of the Act.
7. We have heard the Ld.counsel for the assessee and the Ld. Sr. Standing Counsel for the Revenue. From the order of the Assessing Officer it appears that the Assessing Officer has initiated the penalty proceedings and no order appears to have been passed. The assessee has sought remedy by way of appeal before the CIT(Appeals) and further appeal before this Tribunal against the order passed by the Assessing Officer under Section 271AA and 271G of the Act. Therefore, mere initiation of proceedings by issuing show cause notice cannot be a subject matter of appeal before this Tribunal. Hence, the CIT(Appeals) has rightly considered this as premature. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
8. In the result, the assessee’s appeal in I.T.A. No.86/Mds/2008 stands dismissed.
9. Now coming to the Revenue’s appeal in I.T.A. No. 319/Mds/2008 for the assessment year 2004-05, the first ground of appeal is with regard to addition of Rs. 5.50 Crores in respect of donation made by the assessee to M/s Public & Political Awareness Trust.
10. Shri M. Swaminathan, Ld. Sr.Standing Counsel for the Revenue, submitted that the assessee made donation to M/s Public & Political Awareness Trust and claimed deduction under Section 80GGB of the Act. Referring to the provisions of Section 29A of the Representation of the People Act, 1951, the Ld. Sr. Standing Counsel submitted that the assessee being a multinational corporation, is not entitled to contribute to any political party. Such a donation was also prohibited under Section 2(e) of Foreign Contribution (Regulation) Act, 1976. Referring to the word “contribution” in Section 293A of the Companies Act, 1956, the Ld. Sr. Standing Counsel submitted that it refers only direct contribution and indirect contribution such as giving advertisement in any of the publication by or on behalf of any political party. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not justified in allowing the claim of the assessee.
11. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that Section 80GGB of the Act clearly says that in computing the total income, there shall be deducted any sum contributed to any political party or electoral trust. Explanation to Section 80GGB of the Act clarifies that the word “contribute” has the same meaning as it is assigned to it under Section 293A of the Companies Act, 1956. Referring to Section 293A of the Companies Act, the Ld.counsel submitted that a company, which is not being a Government company, may contribute not exceeding 5% of its average net profit to any political party or to any political purpose, to any person. The Ld.counsel further submitted that the assessee being an Indian company has taken the Trust as medium to donate funds for political purpose and the actual beneficiary are the political parties and not the Trust. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly allowed the claim of the assessee under Section 80GGB of the Act.
12. We have considered the rival submissions on either side and perused the relevant material available on record. We have also carefully gone through the provisions of Section 80GGB of the Act which reads as follows:-
“DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY COMPANIES TO POLITICAL PARTIES
In computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it, in the previous year to any political party or an electoral trust.
[Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.]
Explanation For the removal of doubts, it is hereby declared that for the purposes of this section, the word “contribute”, with its grammatical variation, has the meaning assigned to it under section 293A of the Companies Act, 1956 (1 of 1956).”
13. Before 01.04.2010, the amount contributed by any Indian company to any political party has to be reduced from total income for the purpose of computing taxable income. The Parliament by Finance (No.2) Act, 2009 with effect from 01.04.2010 amended Section 80GGB by incorporating the word “or an electoral trust”. Therefore, with effect from 01.04.2010, if a contribution was made to an electoral trust, that amount is eligible for deduction while computing the taxable income. In the case before us, admittedly, the contribution was made to trust and not to any political party directly. Even though Companies Act, more particularly Section 293A(2)(b), allows the companies to donate for political purpose to any person, the Income-tax Act allows the payment made to a political party. Therefore, the question arises for consideration is when the assessee contributed to a trust, whether such payment may be construed as payment made to a political party? It is to be kept in mind that the assessment year under consideration is 2004- 05. The amendment carried out by Parliament by Finance (No.2) Act, 2009 with effect from 01.04.2010 incorporating the word “or an electoral trust” may not be applicable at all. Explanation to Section 80GGB of the Act says that the word “contribute” has the meaning which was assigned to it under Section 293A of the Companies Act. However, the contribution shall be made to political party directly before 01.04.2010. In the case before us, admittedly, the contribution was made to Public and Political Awareness Trust and not to any political party. Hence, this Tribunal is of the considered opinion that the contribution made by the assessee to the extent of Rs. 5.50 Crores to Public & Political Awareness Trust for the assessment year 2004-05 cannot be claimed as deduction under Section 80GGB of the Act. In other words, the Income-tax Act, being a special enactment for computing the taxable income, it will override other enactments including the Companies Act. Therefore, the CIT(Appeals) is not justified in allowing the claim of the assessee.
14. We have carefully gone through the judgment of Madras High Court in Cheran Engineering Corporation Ltd. v. CIT (1999) 238 ITR 892. In that case, the contribution was made by the employer to the welfare of the employees. Therefore, the Madras High Court held that it has to be allowed under Section 37 of the Act. In the case before us, it is not the contribution made by the assessee to the welfare of the employees. It was made to a trust for creating political awareness, therefore, the judgment of Madras High Court in Cheran Engineering Corporation Ltd. (supra) may not be applicable at all. Hence, we are unable to uphold the order of the lower authority. Accordingly, the same is set aside and the disallowance made by the Assessing Officer to the extent of Rs. 5.50 Crores is restored.
15. The next ground of appeal is with regard to addition of Rs. 38.83 Crores.
16. Shri M. Swaminathan, Ld. Sr.Standing Counsel for the Revenue, submitted that the assessee changed its method of accounting in respect of copper concentrate purchases from mark to market to take into effect the increase in the liability of the assessee which was ascertained. According to the Ld. Sr. Standing Counsel, change of accounting method is not compulsory. The assessee should have accounted for increase in purchase price at the time of finalization of accounts on 31.03.2004. By increasing the purchase price, according to the Ld. Sr. Standing Counsel, the assessee is making an attempt to reduce the profit, therefore, the CIT(Appeals) is not correct in allowing the claim of the assessee.
17. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that in fact, the assessee changed the method of accounting from mark to market. It is for the assessee to change the method of accounting with regard to policy of the company. The Assessing Officer cannot comment on the policy of the company unless and until the method of accounting adopted by the assessee does not disclose the correct profit of the assessee. Even though the purchase price was increased by changing the method of accounting from mark to market, the assessee was uniformly following the method to subsequent years. Therefore, according to the Ld. counsel, it cannot be said that the assessee was making an attempt to reduce the profit by shifting the accounting policy. As rightly observed by the CIT(Appeals), the method of accounting have been followed consistently, hence, the CIT(Appeals) has rightly deleted the addition.
18. We have considered the rival submissions on either side and perused the relevant material available on record. As rightly submitted by the Ld.counsel for the assessee, a company can adopt any one of the methods permissible for computing the profit. Once the assessee changed its method of accounting and consistently followed the same in subsequent years, the Department cannot doubt the method of accounting followed by the assessee. In the initial years, there may be fluctuation in the profit of the assessee due to increase in purchase price by changing the method of accounting. However, when the assessee was consistently following the same, there will be revenue neutral, hence there cannot be loss to the Revenue. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly allowed the claim of the assessee under the provisions of Section 145A of the Act. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
19. The next ground of appeal is with regard to addition of Rs. 14,58,83,105/- consequent to the block assessment in the assessee’s case.
20. Shri M. Swaminathan, Ld. Sr.Standing Counsel for the Revenue, submitted that consequent to the block assessment, the Assessing Officer made an addition of Rs. 14,58,83,105/-. However, the CIT(Appeals) found that in the block assessment, the addition made by the Assessing Officer to the extent of Rs. 14,00,86,150/- was deleted. Due to exchange fluctuation, the addition made in pursuance of block assessment, was also deleted by the CIT(Appeals) to the extent of Rs. 57,96,955/-. According to the Ld. D.R., the addition made by the Assessing Officer in the block assessment is with regard to undisclosed income. The present assessment is under Section 143(3) of the Act. Therefore, according to Ld. Sr. Standing Counsel, the order of the CIT(Appeals) for the block assessment cannot be a reason for deleting the addition made in the regular assessment.
21. We have heard the Ld.counsel for the assessee also. According to the Ld. counsel, the addition made in the block assessment was deleted, therefore, consequently, there cannot be any addition in the regular assessment.
22. We have considered the rival submissions on either side and perused the relevant material available on record. The addition made in the block assessment is in respect of the undisclosed income. The addition made in the present case is in the assessment made under Section 143(3) of the Act. Under the scheme of Income-tax Act, there can be simultaneous assessment one for regular assessment and another for block period. Therefore, as rightly submitted by the Ld. Sr. Standing Counsel for the Revenue, the block assessment made by the Assessing Officer was separate and distinct. However, it needs to be verified whether the same income which formed part of undisclosed income for the block period has been added once again in the regular assessment. For the purpose of verification, this Tribunal is of the considered opinion that the matter needs to be re-examined. Accordingly, the orders of the lower authorities are set aside and the entire issue with regard to addition of Rs. 14,58,83,105/- is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the issue and bring on record whether any income which formed part of undisclosed income in the block assessment was included in this assessment. The Assessing Officer shall delete the income which formed part of undisclosed income for the block period. With the above observation the matter is remitted back to the file of the Assessing Officer.
23. The next issue arises for consideration is with regard to addition of Rs. 4.44 Crores under Section 37 of the Act.
24. Shri M. Swaminathan, Ld. Sr.Standing Counsel for the Revenue, submitted that FCC Bond holders had the option to convert the bonds into shares. Therefore, the decision of Delhi Bench of this Tribunal in DCIT v. Ranbaxy Laboratories Ltd. (88 ITD 283) applicable to the facts of the case. Ld. Sr. Standing Counsel further submitted that the assessee has also changed its method of accounting in relation to expenses incurred for issue of FCC Bonds. The expenses spread over for seven years. Therefore, the claim of the assessee to the extent of Rs. 4.44 Crores cannot be allowed.
25. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the assessee claimed expenses for issue of FCC Bonds under Section 37 of the Act. The expenses for issue of FCC Bonds may not fall under Section 35D of the Act. According to the Ld. counsel, Section 37 and Section 35D of the Act are enabling provisions and not mutually exclusive. Referring to the judgment of Apex Court in India Cements Ltd. v. CIT (1966) 60 ITR 52, the Ld.counsel submitted that where a company was in the business, incurred expenditure on issue of debentures, such an expenditure has to be allowed while computing the total income of the assessee. As held by Apex Court in India Cements Ltd. (supra), such an expenditure need not be amortized against the profit over the period. Therefore, the CIT(Appeals) by following the judgment of Apex Court and Accounting Standard AS 26, allowed the claim of the assessee.
26. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee-company is already in business, therefore, the expenses for issue of debentures need not be amortised under Section 35D of the Act and it has to be allowed under Section 37 of the Act. The CIT(Appeals), in fact, has placed his reliance in India Cements Ltd. (supra). Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
27. The next ground of appeal is with regard to disallowance of Rs. 2.13 Crores towards notional interest on interest free loan advanced to wholly owned subsidiary company.
28. Shri M. Swaminathan, Ld. Sr.Standing Counsel for the Revenue, submitted that the assessee advanced money to subsidiary company outside the country. In fact, the loan was borrowed in India and advanced it to its wholly owned subsidiary companies outside India. According to the Ld. Sr. Standing Counsel, by diverting the borrowed funds outside India, the assessee is diverting the taxable profit outside the jurisdiction. Referring to the assessment order, the Ld. Sr. Standing Counsel submitted that the Transfer Pricing Officer originally suggested to make adjustment to the extent of Rs. 13,64,01,948/-. However, on the representation made by the assessee, an adjustment was made to the extent of Rs. 2,13,80,690/-. According to Ld. Sr. Standing Counsel, the advance was made to Monte Cello BV. Since the loan was advanced to foreign company, according to Ld. Sr. Standing Counsel, the interest claimed by the cannot be allowed.
29. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the assessee borrowed loan for business purpose and the same was advanced to two companies from whom the assessee was purchasing copper ore, which is raw material for the assessee. Therefore, there was a business expediency as held by Apex Court in S.A. Builders Ltd. v. CIT (288 ITR 1). Referring to the advance made to Monte Cello BV, the Ld.counsel submitted that the advance was made for earlier assessment year and not in the current year. Therefore, the observation made by the TPO is not correct. Since no advance was made during the year under consideration, according to the Ld. counsel, the disallowance made by the Assessing Officer cannot be justified, accordingly, the CIT(Appeals) has rightly deleted the addition.
30. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee, in fact, advanced money to two companies which are outside India. The assessee claimed that two companies are engaged in excavation of copper ore and the assessee was purchasing copper concentrate from those companies. The question arises for consideration is when the assessee advanced money to the companies outside India, whether the interest on the borrowed funds can be allowed while computing the taxable income? The assessee claims that due to business expediency, the advance was made. The Revenue contends that since money was borrowed in India and paid interest, the profit in India was considerably reduced, since the profit of the assessee was shifted to outside the jurisdiction. The CIT(Appeals) by placing reliance on the judgment of Apex Court in S.A.Builders Ltd. (supra), allowed the claim of the assessee. The fact that the advance was made to foreign countries and shifting of profit to other nation was not examined by the CIT(Appeals). Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the transfer pricing adjustment made by the Assessing Officer is remitted back to his file. The Assessing Officer shall re-examine the matter and refer the same to TPO for reconsideration. The Transfer Pricing Officer shall examine the matter afresh and find out whether any advance was made to foreign company during the current year and whether such advance would amount to shifting of profit to other nation. Thereafter the Assessing Officer shall decide the issue afresh in accordance with law after giving a reasonable opportunity to the assessee.
31. The next issue arises for consideration is with regard to addition of Rs. 4.35 Crores.
32. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee has claimed Rs. 4.35 Crores towards management consultancy fees. The Transfer Pricing Officer found that the details of specific services provided by the assessee are not available. The assessee assumed margin of 15% on the cost and computed the arm's length price. The Transfer Pricing Officer found that the method of computation of arm's length price by the assessee was not correct. According to the Ld. Sr. Standing Counsel, in terms of property, plant and equipment used, the value of the asset is almost eight times that of the comparable company. The inventory of four times that of the comparable company was not taken into consideration by the TPO and the Assessing Officer. According to Ld. Sr. Standing Counsel, considering the proportion of the comparable companies, business size, the value of the asset, it was reasonable to conclude that the assessee has not availed any service from the so-called Associate Enterprise. However, the CIT(Appeals) found that the Transfer Pricing Officer arbitrarily estimated the management services fee at Rs. 8.70 Crores as against Rs. 4.35 Crores received by the assessee. Accordingly, the CIT(Appeals) directed the Assessing Officer to delete the addition of Rs. 4.35 Crores.
33. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the Transfer Pricing Officer found that the details of the services said to be provided by the assessee were not provided. However, this is not correct. The assessee has produced a copy of the agreement before the Transfer Pricing Officer as well as the Assessing Officer. It is also not correct to claim that the details of experts made available to the assessee were not provided to the Transfer Pricing Officer. The Transfer Pricing Officer himself referred the names of the persons who had been engaged by the assessee for providing expert service. Referring to the evidences for expenses, the Ld.counsel submitted that the assessee-company is a very big company having factory at multiple locations in the globe, the evidences were made available before the TPO and the Assessing Officer. The details of the evidences, which were made available before the TPO and the Assessing Officer were produced before the CIT(Appeals) and this Tribunal as well. Hence, the CIT(Appeals) found that the Transfer Pricing Officer arbitrarily estimated the management service fees at Rs. 8.70 Crores as against Rs. 4.35 Crores actually received by the assessee. Therefore, the CIT(Appeals) has rightly deleted the addition made by the Assessing Officer.
34. We have considered the rival submissions on either side and perused the relevant material available on record. The assesseecompany claims to have received management service fee of Rs. 4.35 Crores each from CMT and TCM. However, it appears the assessee could not provide the details of specific services provided to those entities. The assessee claims that the details were made available before the TPO and they are available before the CIT(Appeals) and before this Tribunal. It is not in dispute that the assessee-company assumed a profit of 15% on the revenue in the form of management service fee. The assessee further claimed before the CIT(Appeals) that the TPO arbitrarily estimated the fee at Rs. 8.70 Crores instead of Rs. 4.35 Crores. The assessee appears to have adopted cost plus method for computing arm's length price in respect of management consultancy charges. From the tabular column available at page 69 of the order of the CIT(Appeals), it appears the business size of CMT is almost twice that of TCM. Moreover, in terms of property, plant, equipment, value of the asset, CMT is almost eight times bigger than that of TCM. Therefore, the Transfer Pricing Officer assumed that the assessee-company should have received double the amount towards management consultancy fee from TCM and CMT.
35. We have carefully gone through the provisions of Rule 10C of Income-tax Rules, 1962. For the purpose of determining the most appropriate method, the Transfer Pricing Officer has to identify the nature and class of international transaction. Apart from that, the degree of comparability between international transaction and uncontrolled transaction between the enterprises entered into such transaction has to be identified. In the casebefore us, the Transfer Pricing Officer has not compared the third party comparable cases. Moreover, it is not known the actual services rendered by the assessee to CMT and TCM. Unless and until the services rendered by the assessee are brought on record, the business size of CMT and TCM cannot determine the comparability of services rendered and consideration received by the assessee. Therefore, this Tribunal is of the considered opinion that it is obligatory on the part of the Transfer Pricing Officer to bring on record the exact nature of services rendered by the assessee and thereafter has to compare the transaction with other companies in the international transaction with uncontrolled transaction. Since such an exercise was not done, this Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer after referring the matter to the Transfer Pricing Officer once again. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to TPO once again and determine the arm's length price in respect of services rendered by the assessee in the light of finding and conclusion that may be reached by the Transfer Pricing Officer.
36. The next issue arises for consideration is with regard to addition of Rs. 30.50 lakhs towards management consultancy fees paid to M/s Twin Star Holdings Ltd., Mauritius.
37. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee claims to have paid Rs. 30.50 lakhs towards economic cost of funds paid to M/s Twin Star Holdings Ltd., Mauritius. Referring to the order of the Transfer Pricing Officer, the Ld. Sr. Standing Counsel submitted that the payment made to M/s Twin Star Holdings Ltd. is not exclusively for business of the assessee. Referring to the order of the CIT(Appeals), the Ld. Sr. Standing Counsel submitted that it is not known how the payment of Rs. 30.50 lakhs made to M/s Twin Star Holdings Ltd., Mauritius benefited the assessee-company. Referring to the observation made by the CIT(Appeals), the Ld. Sr. Standing Counsel submitted that the CIT(Appeals) made generalized remarks that the assessee’s market capitalization has gone up substantially after listing of holding company in the UK Stock Exchange, therefore, the CIT(Appeals) is not justified in allowing the claim of the assessee.
38. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the assessee has produced details of consultancy services provided by M/s Twin Star Holdings Ltd., Mauritius along with copy of agreement before the Assessing Officer as well as the Transfer Pricing Officer. The assessee has also explained the nature of consultancy charges paid. However, the Transfer Pricing Officer ignoring the explanation offered by the assessee, arbitrarily decided and observed that M/s Twin Star Holdings Ltd. lacked resource for providing management consultancy to the assessee-company, thereafter determined economic cost of funds paid to M/s Twin Star Holdings Ltd. According to the Ld. counsel, the payment of Rs. 30.50 lakhs to M/s Twin Star Holdings Ltd. was made out of commercial expediency and the assessee-company greatly benefited out of the payment since the holding company was listed in UK Stock Exchanges.
39. We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee has paid management consultancy fees to M/s Twin Star Holdings Ltd., Mauritius. From the material available on record, it appears that M/s Twin Star Holdings Ltd. principally holds investments. It is not known what kind of services / consultancy was provided to the assessee-company by M/s Twin Star Holdings Ltd., Mauritius. The assessee claims that it obtained a great advantage in the payment of Rs. 30.50 lakhs. It also claimed by the assessee before the CIT(Appeals) that the market capitalization of the assessee substantially raised after listing of holding company in UK Stock Exchanges. The main contention of the Revenue appears to be that M/s Twin Star Holdings Ltd. has no resource to provide management consultancy services. This claim of Revenue was not considered by the CIT(Appeals). So, what kind of management consultancy or services were provided by M/s Twin Star Holdings Ltd. has to be brought on record. Since the actual service rendered by M/s Twin Star Holdings Ltd. was not brought on record by the CIT(Appeals), this Tribunal is of the considered opinion that the matter needs to be re-examined. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to the TPO once again and TPO shall examined the actual service rendered by M/s Twin Star Holdings Ltd. to the assessee and thereafter determine the arm's length price after giving a reasonable opportunity to the assessee.
40. The next ground of appeal is with regard to disallowance of Rs. 1.68 Crores under Section 14A of the Act.
41. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the CIT(Appeals) deleted Rs. 1.68 Crores under Section 14A of the Act on the ground that the investment made by the assessee in Balco cannot be equated with ordinary investment of the ordinary shareholder. According to the Ld. Sr. Standing Counsel, the assessee is engaged in the business of manufacturing non-ferrous metals, namely, copper, zinc and aluminium. The assessee made investment in Balco in the year 2001 to the extent of Rs. 553.17 Crores out of which Rs. 551.92 Crores was out of borrowed funds. Since Rs. 69.92 Crores was outstanding in the assessment year 2004-05, the Assessing Officer disallowed the proportionate interest of Rs. 1.68 Crores. Therefore, according to Ld. Sr. Standing Counsel, the CIT(Appeals) is not justified in deleting the addition made by the Assessing Officer.
42. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that admittedly the assessee is engaged in the business of manufacturing of copper, zinc and aluminium. The investment made by the assessee in Balco was part of its business expansion all over the world. The investment made by the assessee in Balco cannot be equated with ordinary investment made by ordinary shareholder to earn capital gain or exempted income. The investment was made by the assessee in order to diversification in the non-ferrous metal sector. Therefore, the interest, if any, paid by the assessee has to be allowed under Section 36(1)(iii) of the Act. Since the investment was made in the course of business, there cannot be any disallowance towards interest on borrowed funds. The Ld.counsel further submitted that the income earned from the investment in Balco is business income. The investment made in Balco was for running business of the assessee in a profitable manner. Therefore, according to the Ld. counsel, the disallowance made by the Assessing Officer was rightly deleted by the CIT(Appeals).
43. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that that the assessee is engaged in the business of manufacturing copper, zinc and aluminium. The assessee claims that the investment in Balco was for business purpose. Admittedly, out of total investment of Rs. 553.17 Crores, Rs. 551.92 Crores was out of borrowed funds. The question arises for consideration is whether the investment made in Balco is for business purpose or not? The relationship between the assessee and Balco is not known. How the investment made in Balco benefits the assessee is also not known. The relationship between the assessee and Balco was not brought on record by the Transfer Pricing Officer as well as the CIT(Appeals). Therefore, this Tribunal is unable to uphold the order of the lower authority. However, since the nature of transaction and the relationship was not brought on record, the matter needs to be re-examined by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the entire issue with regard to disallowance made under Section 14A of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall reexamine the matter afresh and bring on record the purpose for which the investment was made in Balco and the relationship between the assessee and Balco and thereafter decide the issue afresh, in accordance with law, after giving a reasonable opportunity to the assessee.
44. The next issue arises for consideration is with regard to deduction made by the assessee under Section 80-IA of the Act. 44. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee claimed deduction under Sections 80-IA, 80-IB and 80HHC of the Act. Referring to Section 80-IA(9) of the Act, the Ld. Sr. Standing Counsel submitted that the CIT(Appeals) directed the Assessing Officer to reduce deduction allowed under Section 80-IA of the Act while computing deduction under Section 80HHC of the Act.
45. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the deduction allowed under Section 80-IA of the Act shall be reduced while computing relief under Section 80HHC of the Act. The Ld.counsel placed his reliance on the judgment of Madras High Court in SCM Creations v. ACIT.
46. We have considered the rival submissions on either side and perused the relevant material available on record. As rightly submitted by the Ld. Counsel for the assessee, the issue was considered by the Madras High Court in SCM Creations (supra). The Madras High Court by following the judgment of Madhya Pradesh High Court in J.P. Tobacco Products Pvt. Ltd. v. CIT (1998) 229 ITR 123 and the judgments of various High Courts, found that the deduction allowed under Section 80-IA of the Act need not be reduced while computing relief under Section 80HHC of the Act. In view of this judgment of Madras High Court, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
47. Now coming to Revenue’s appeal in I.T.A. No.318/Mds/2008 for assessment year 2004-05, the only issue arises for consideration is with regard to levy of penalty under Section 271G of the Act.
48. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee has failed to furnish the information in respect of international transaction under Section 92D(3) of the Act. Referring to Section 92D(3) of the Act, the Ld. Sr. Standing Counsel submitted that every person who enters into international transaction shall keep and maintain such information and document as prescribed. Referring to Rule 10D of Income-tax Rules, 1962, the Ld. Sr. Standing Counsel submitted that Rule 10D provides for details of information and documents to be kept and maintained under Section 92D of the Act. Admittedly, the assessee has not produced the bills and vouchers and the required information as provided in Rule 10D(3)(g) of Income-tax Rules, 1962. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not justified in deleting the penalty under Section 271G of the Act.
49. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the Assessing Officer levied penalty of Rs. 1,43,58,919/- under Section 271G of the Act. The penalty was, in fact, levied for non-production of information regarding the expenses incurred for providing management consultancy service to CMT and TCM. Referring to the order of the CIT(Appeals), the Ld.counsel submitted that the allegation of the Revenue is that the assessee furnished only extracts of information instead of documentary evidence required by the Transfer Pricing Officer under Rule 8D(d) of Income-tax Rules, 1962. The addition made by the Assessing Officer was deleted by the CIT(Appeals). Therefore, it cannot be said that the assessee has not produced necessary details of information and documents as required for international transaction. The Ld.counsel further submitted that it is not the case of the Transfer Pricing Officer that the required information and document were not produced before him. According to the Ld. counsel, the detailed information supported by documentary evidence regarding the ownership, international transaction, copies of balance sheet, copies of comparable transactions, etc were submitted before the Transfer Pricing Officer. The Assessing Officer has simply initiated the penalty proceeding under Section 271G of the Act without indicating the document which was not produced by the assessee. According to the Ld. counsel, the assessee’s accounts were duly audited by the statutory auditor as well as internal auditors. The audited accounts were also published in the annual report. The apportionment of expenditure was on the basis as done in the last year. Therefore, the CIT(Appeals) has rightly deleted the penalty levied by the Assessing Officer.
50. We have considered the rival submissions on either side and perused the relevant material available on record. The main reason on which the penalty was deleted was that the CIT(Appeals) deleted the adjustment made by the Transfer Pricing Officer in respect of management consultancy service said to be provided by the assessee to TCM and CMT. While considering the appeal of the Revenue in respect of the quantum addition, this Tribunal remitted back the matter to the file of the Assessing Officer for reconsideration with a direction to bring on record the actual services said to be rendered by the assessee to CMT and TCM.
51. We have carefully gone through the order of the CIT(Appeals). The Assessing Officer referring to the observation made by the Transfer Pricing Officer, more particularly page 27 of his order, found that the assessee has failed to furnish information and documents regarding the expenses said to be incurred by providing management consultancy services to CMT and TCM. To ascertain the nature of service rendered by the assessee to CMT and TCM, the matter was remitted back to the file of the Assessing Officer, this Tribunal is of the considered opinion that the penalty levied by the Assessing Officer under Section 271G of the Act also needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the issue of penalty levied under Section 271G of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and bring on record the actual service rendered by the assessee to CMT and TCM and, thereafter decide the issue afresh after bringing on record the failure of the assessee to provide the exact information and documents which are required to be produced for international transaction and, thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee.
52. Now coming to Revenue’s appeal in I.T.A. No. 1020/Mds/2010 for assessment year 2005-06, the first issue arises for consideration is deduction claimed by the assessee under Section 80-IA of the Act.
53. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the CIT(Appeals) ought to have followed the decision of Chennai Bench in Chettinadu Cement Corporation Ltd. v. ACIT in I.T.A. No.1029/Mds/2005 dated 05.01.2007. According to the Ld. Sr. Standing Counsel, when the assessee used the power generator for captive consumption, deduction under Section 80-IA of the Act cannot be allowed. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not justified in allowing the claim of the assessee.
54. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that in fact, this Tribunal in Mohan Breweries & Distilleries Ltd. v. ACIT (2009) 311 ITR (AT) 346, found that the captive power plant set up for distillery unit is eligible for deduction under Section 80-IA of the Act. Moreover, in the assessee's own case, this Tribunal for the earlier assessment year found that the assessee is eligible for deduction when the power generated used for captive consumption. The Mumbai Bench of this Tribunal has also taken a similar view allowing the identical claim of the assessee. It is not the case of the Revenue that any of the condition prescribed for allowing deduction under Section 80-IA of the Act was not complied with. Merely because the power was utilised for captive consumption that cannot be a reason for disallowing the claim of the assessee. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly allowed the claim of the assessee.
55. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee has used the power for captive consumption and claimed deduction under Section 80-IA of the Act. This Tribunal in Mohan Breweries & Distilleries Ltd. (supra) examined this issue elaborately and found that even though the power was generated for captive consumption, the assessee was eligible for deduction under Section 80-IA of the Act. A similar view was taken by Mumbai Bench of this Tribunal as well. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly allowed the claim of the assessee. Hence, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
56. Now coming to disallowance of Rs. 1 Crore donated to Tsunami Relief Fund of Rajiv Gandhi Relief and National Welfare Trust.
57. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the payment made by the assessee to Tsunami Relief Fund is not for business purpose. Under Section 37 of the Act, the expenditure incurred by the assessee for running the business alone is eligible for deduction. Donation to Tsunami Relief Fund and a trust cannot be construed as an expenditure for earning the income of the assessee. Therefore, the CIT(Appeals) is not justified in allowing the claim of the assessee.
58. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that in fact, the assessee claimed deduction to the extent of Rs. 1,75,58,500/- under Section 80G of the Act. The Assessing Officer restricted the claim to the extent of Rs. 1,73,250/- since the donation made to Rajiv Gandhi Relief and National Welfare Trust was eligible for deduction only for 50% as against 100% claimed by the assessee. However, the CIT(Appeals) allowed the claim of the assessee under Section 37 of the Act. since it is not a business expenditure, according to the Ld. counsel, the CIT(Appeals) has rightly allowed the claim of the assessee.
59. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee donated Rs. 1 Crore to Rajiv Gandhi Relief and National Welfare Trust. The amount was donated towards corporate social responsibility. Therefore, the expenditure incurred by the assessee has to be allowed under Section 37 of the Act. The Madras High Court in CIT v. Velumanickam Lodge (2009) 317 ITR 338 has considered a similar issue. The assessee before the Madras High Court, a civil contractor, constructed a hockey stadium in the Collectorate complex at Ramanathapuram. The assessee claimed the expenditure for constructing the hockey stadium as revenue expenditure. The Madras High Court after considering its earlier judgment in Cholan Roadways Corporation Ltd. v. CIT (1999) 235 ITR 473, found that the contribution made towards Flag Day Fund and Chief Minister’s Rehabilitation Fund are deductible as they are not in contravention of any law. The Madras High Court further found that the expenditure incurred by the assessee towards construction of hockey stadium was for promotion of its business, hence it was allowed as revenue expenditure.
60. In this case before us also the donation of Rs. 1 Crore was made to Rajiv Gandhi Relief and National Welfare Trust with an intention to give relief to the people who are affected by Tsunami. The payment made by the assessee is not in contravention of any law. It is for the welfare of the people. It is common knowledge that the State of Tamil Nadu was very badly affected due to Tsunami and several lakhs of people were made homeless. The assessee is doing business in the State of Tamil Nadu, more particularly in the district of Tuticorin, therefore, there is an obligation on the part of the assessee to give donation to the rehabilitation work so that the assessee can carry on its business activity in a peaceful atmosphere. Therefore, even though technically speaking, the donation is not for earning any business income, it would definitely mitigate the difficulties suffered by the local people who are affected by Tsunami. Therefore, as found by the Madras High Court in Cholan Roadways Corporation Ltd. (supra) and Velumanickam Lodge (supra), the CIT(Appeals) has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
61. The next ground of appeal is with regard to disallowance under Section 14A of the Act.
62. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the Assessing Officer disallowed Rs. 27.48 lakhs which was 2% of the exempt income of Rs. 13.74 Crores. In fact, the disallowance was made by the Assessing Officer by following the order of this Tribunal in Sundaram Finance Ltd. The CIT(Appeals), however, deleted the addition. No such addition was made in the assessee's own case for the earlier assessment year. Accordingly, he restricted the same to Rs. 5 lakhs on estimate basis. The Ld. Sr. Standing Counsel submitted that this Tribunal uniformly estimated the disallowance under Section 14A of the Act before introduction of Rule 8D of Income-tax Rules, 1962 at 2%. Therefore, the CIT(Appeals) is not justified in allowing the claim of the assessee.
63. We have heard Shri G. Baskar, the Ld.counsel for the assessee, also. It is not in dispute that Rule 8D is not applicable for the year under consideration. As rightly submitted by the Ld. Sr. Standing Counsel, this Tribunal is uniformly estimating the expenditure at 2% before introduction of Rule 8D of Income-tax Rules, 1962. The CIT(Appeals) without any basis has restricted the same to Rs. 5 lakhs instead of disallowing Rs. 27.48 lakhs which comes to 2% of exempt income earned by the assessee. Therefore, this Tribunal is unable to uphold the order of the lower authority. Accordingly we set aside the order of the CIT(Appeals) and restore the order of the Assessing Officer.
64. The next ground of appeal is with regard to addition of Rs. 10.99 Crores as loss on account of change in method of accounting.
65. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that due to change in the method of accounting, there was a loss to the extent of Rs. 10.99 Crores. According to the Ld. Sr. Standing Counsel, there was no reason for change in the method of accounting which was regularly followed by the assessee for several years. Change in the method of accounting resulted decrease in profit. The Ld. Sr. Standing Counsel further submitted that each transaction is different and independent from other transactions, therefore, just because the assessee changed the method of accounting for all the transactions that cannot be a reason for setting up of loss suffered in one unit against the other. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) ought to have upheld the addition of Rs. 10.99 Crores.
66. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the income of the assessee has to be computed in accordance with method of accounting regularly followed by the assessee. The assessee can also change the method of accounting, in case adoption of different accounting policy was required to determine the correct taxable income. The assessee adopted prudent accounting policy on mark to market basis. In fact, the liability of the assessee to pay on account of MTM copper concentrate goes up substantially in view of increase in the prices of copper concentrate and fluctuation in foreign currency. The increase in price was not accounted. Therefore, the accounts of the assessee would not reflect the true and fair view as per Accounting Standard - 1 prescribed by the Institute of Chartered Accountants of India. In order to determine the correct taxable income, the assessee has changed the accounting policy. In fact, the assessee knowing fairly well that the liability to pay towards purchase of copper concentrate has gone up substantially, bonafidely changed the method of accounting. Therefore, the CIT(Appeals) found that the method of accounting was changed by the assessee in order to comply with the mandatory Accounting Standard which requires an auditor to state the effect of change of method of accounting, which has material impact in the determination of taxable profit. The assessee has to change the method of accounting policy in order to guard himself from the fluctuation in the line of business which is carried on by the assessee. The business carried on by the assessee always suffered fluctuation at various levels, therefore, the method of accounting adopted by the assessee is bonafide which was subsequently followed regularly. Hence, according to the Ld.counsel, the CIT(Appeals) has rightly allowed the claim of the assessee.
67. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee has changed its method of accounting policy. Now the assessee claims before this Tribunal that the method of accounting was changed as per the Accounting Standard-I prescribed by Institute of Chartered Accountants of India. The Accounting Standard – 1 prescribed by Institute of Chartered Accountants of India was adopted by Central Board of Direct Taxes under Section 145 of the Act. The assessee claims before this Tribunal that the method of accounting, which was followed in the earlier assessment year, was changed in order to guard itself from the fluctuation in the market. It is nobody’s case that the change of method of accounting was due to malafide intention of the assessee. When the assessee bonafidely changed the method of accounting as per the Accounting Standard adopted under Section 145 of the Act and continues to follow the same, even though there was loss at initial year, the same would not stand in the way of changing the accounting policy. In other words, the loss suffered in the first year would be set off in the subsequent year and there would be revenue neutral. Hence, there can be no loss to the Revenue. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that the addition of Rs. 10.10 Crores on account of fall in net profit due to change in the method of accounting cannot be sustained. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
68. The next ground of appeal is with regard to addition of Rs. 11.08 Crores on account of depreciation on bogus steel purchases and capitalization of foreign exchange fluctuation.
69. We have heard Ld. Sr. Standing Counsel for the Revenue and the Ld.counsel for the assessee. The only contention of the Ld.counsel for the assessee is that in the block assessment, the order of the Assessing Officer was set aside on the ground that it was barred by limitation. This issue was examined by this Tribunal in in the caseof assessee in I.T.A. No.718/Mds/2011 & I.T.A. No.1008/Mds/2011 and by order dated 23.09.2016, the very same issue was remitted back to the file of the Assessing Officer for reconsideration. For the reason stated in the order dated 23.09.2016 in the assessee's own case, on identical circumstances, this issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the issue afresh and thereafter decide as indicated in the order of this Tribunal dated 23.09.2016.
70. The next ground of appeal is with regard to addition of Rs. 4,00,099/- towards prior period expenses.
71. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the addition of Rs. 4,00,099/- was net of a debit of an expenditure to the extent of Rs. 4,14,832/- being the compensation paid to a transporter on account of loss suffered by them due to Tsunami and flood in the State of Tamil Nadu. The only contention of the assessee was that the payment was made during the year under consideration. The Tax Audit Report of the assessee clearly shows that the compensation was paid in respect of goods transporter for earlier assessment year. Since the liability to pay the transport charges arose for the earlier assessment year, the compensation also has to be paid in the earlier assessment year, therefore, this cannot be allowed during the year under consideration.
72. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that even though the goods were transported in the earlier assessment year, due to Tsunami and heavy flood in the State, the transporter suffered a heavy loss, therefore, they claimed compensation during the year under consideration. The liability to pay compensation arose in the assessment year under consideration, therefore, the CIT(Appeals) allowed the claim of the assessee.
73. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the transporters transported goods in the earlier assessment year. The assessee now claims that there was liability to pay compensation during the year under consideration which was unforeseen due to Tsunami and heavy flood in the State. It is not in dispute that the Tax Audit Report clearly says that the goods were transported in the earlier years, therefore, the payment to be made relates to the earlier assessment year. It is nobody’s case that the compensation was paid in respect of loss suffered during the year under consideration. It is also not known how the loss was quantified to pay compensation by the assessee. In the absence of any material available on record regarding the quantification of compensation and liability to pay the same, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the issue of compensation is remitted back to the file of the Assessing Officer. The Assessing Officer shall bring on record the liability to pay compensation by the assessee and the year in which the liability was crystallized and thereafter decide in accordance with law after giving a reasonable opportunity to the assessee.
74. In the result, this appeal of the Revenue is partly allowed.
75. Now coming to assessment year 2006-07 in I.T.A. No. 1386/Mds/2010 filed by the assessee, the first ground of the appeal is with regard to deduction claimed by the assessee under Section 80-IB of the Act.
76. Shri G. Baskar, the Ld.counsel for the assessee, submitted that the assessee claimed deduction under Section 80-IB of the Act in respect of Chinchpada and Rakholi units for 8th and 7th year respectively. The Ld.counsel submitted that the CIT(Appeals) confirmed the order of the Assessing Officer on the ground that the claim is for 7th or 8th year, the deduction claimed by the assessee is only at 30%, therefore, the CIT(Appeals) found that the issue becomes infructuous. According to the Ld. counsel, the claim made by the assessee in respect of Chinchpada and Rakholi units was for 8th and 9th year respectively, therefore, the Assessing Officer is not justified.
77. We have heard Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, also. According to the Ld. Sr. Standing Counsel, the assessee claims that the claim was 7th and 8th year. Admittedly, the deduction under Section 80-IB of the Act is only 30% from the eligible undertaking from 6th year to 10th year. Therefore, irrespective of the year in which it was claimed whether it be 7th year or 8th year or 6th to 10th year, the assessee is eligible for deduction only at 30%. As long as the assessee falls within the period of 6th to 10th year, the assessee is eligible for deduction under Section 80-IB of the Act at the rate of 30%. Therefore, according to the Ld. Sr. Standing Counsel, the issue raised by the assessee becomes infructuous.
78. We have considered the submissions on either side and perused the relevant material available on record. We have also considered the provisions of Section 80-IB of the Act. The only contention of the assessee before this Tribunal is that the Assessing Officer changed the year of claim to 9th and 10th year arbitrarily. The fact remains that the assessee is eligible for deduction from 6th year to 10th year. Therefore, whether the claim is for 7th year or 8th year, so long it falls within the period of 6th to 10th year, the assessee is eligible for deduction under Section 80-IB of the Act at 30%. Therefore, as rightly submitted by the CIT(Appeals), the issue becomes infructuous. Accordingly, the same is confirmed.
79. The next ground of appeal is with regard to management consultancy fee disallowed to the extent of Rs. 13,38,30,000/- under Section 40(a)(i) of the Act for non-deduction of tax at source.
80. Shri G. Baskar, the Ld.counsel for the assessee submitted that in respect of management consultancy fee of USD 3 million which is equivalent to Rs. 13,38,30,000/- paid to the holding company, namely, Vedanta Resource Plc, the assessee is not required to deduct tax at all. The management consultancy fee is not taxable in India, therefore, the CIT(Appeals) is not justified in disallowing the claim of the assessee.
81. On the contrary, Shri M. Swaminathan, Ld. Sr. Standing Counsel submitted that the assessee has paid USD 3 million towards management consultancy service and also paid USD 2 million as Representative Office fees. Both the payments were admittedly made to Vedanta Resources Plc, a body corporate incorporated in England and Wales. In respect of Representative Office fees, the CIT(Appeals) himself found that the said fees is not chargeable to tax in India. Accordingly, it was found that no TDS is required to be made. However, in respect of management consultancy fees, the CIT(Appeals) found that Vedanta Resources Plc, UK company agreed to provide services. Referring to Article 13 of Double Taxation Avoidance Agreement between India and UK, it was found that the foreign company has deputed the skilled employees to India and the assessee-company availed their services. Therefore, the CIT(Appeals) found that the assesseeITA Nos.318,319 & 86/08 company utilised the services in Indian soil. Therefore, the transaction between the assessee and the UK company has to be treated as technical services in terms of Section 9(1)(vii) of the Act as well as Article 13 of Double Taxation Avoidance Agreement between India and UK. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) found that the assessee is liable to deduct tax.
82. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee has paid management consultancy fees and Representative Office fees to its holding company in UK. In respect of Representative Office fees, the CIT(Appeals) himself found that the payment was made for the service rendered outside India, therefore, it was not liable for taxation in India. Accordingly, the CIT(Appeals) found that there is no need to deduct tax.
83. Coming to management consultancy fees, the CIT(Appeals) found that the UK company rendered service in India, after deputing their employees in India. Therefore, the CIT(Appeals) found that the utilization of service was in India, hence the transaction has to be construed as technical services both in terms of Article 13 of Double Taxation Avoidance Agreement between India and UK and in terms of Section 9(1)(vii) of the Act. Accordingly, the CIT(Appeals) confirmed the order of the Assessing Officer. It is not in dispute that UK company deputed their skilled employees to India to render services to the assessee. In fact, the assessee-company availed services of UK company in India. Therefore, the payment made to the assessee towards management consultancy fees is liable to tax in India. Hence the assessee has to necessarily deduct tax as mandated under Section 9(1)(vii) of the in respect of the payment of management consultancy fees. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
89. Now coming to Revenue’s appeal in I.T.A. No.1665/Mds/2010 for assessment year 2006-07, the ground of appeal is regarding deduction claimed by the assessee under Section 80-IA of the Act for the power plant set up by the assessee.
90. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue submitted that the assessee used the power generated for captive consumption. Therefore, the assessee is not eligible for deduction under Section 80-IA of the Act.
91. We have heard Shri G. Baskar, the Ld.counsel for the assessee, also. This issue was examined by this Tribunal for assessment year 2005-06 in the Revenue’s appeal at paras 52 to 55 of this order. This Tribunal found that even though the power generated was used for captive consumption, the assessee is eligible for deduction under Section 80-IA of the Act. In fact, this Tribunal placed its reliance in Mohan Breweries & Distilleries Ltd. (supra). In view of the above, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
92. The next ground of appeal relates to deduction claim of the assessee under Section 80GGB of the Act.
93. We have heard Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue and Shri G. Baskar, the Ld. counsel for the assessee. The deduction claimed by the assessee under Section 80GGB of the Act was examined by this Tribunal in the earlier part of this order for assessment year 2004-05. After referring to the amendment carried out by the Parliament by Finance (No.2) Act, 2009 with effect from 01.04.2010, this Tribunal found that the contribution made by the assessee was to M/s Public & Political Awareness Trust and not to any political party. Accordingly, this Tribunal found that the CIT(Appeals) is not justified in allowing the claim of the assessee. This Tribunal has also found that the judgment of Madras High Court in Cheran Engineering Corporation (supra) was in respect of the claim made by the assessee under Section 37 of the Act, therefore, the said judgment is not applicable to the facts of the case. In view of the above, the order of the CIT(Appeals) is set aside and that of the Assessing Officer is restored.
94. The next issue arises for consideration is with regard to claim of the assessee under Rule 8D of the Income-tax Rules, 1962.
95. We have heard Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue and Shri G. Baskar, the Ld. counsel for the assessee. Admittedly, Rule 8D is not applicable for the year under consideration. However, the expenditure incurred by the assessee for earning exempt income cannot be allowed as expenditure for earning taxable income. Therefore, certain disallowance has to be made. This Tribunal consistently disallowing the claim at the rate of 2% of the exempt income earned by the assessee before the introduction of Rule 8D of Income-tax Rules, 1962. Therefore, the Assessing Officer is directed to disallow 2% of exempt income earned by the assessee for the year under consideration.
96. The next issue arises for consideration is with regard to addition on account of bogus steel purchase.
97. The issue of bogus steel purchase was examined by this Tribunal in the earlier part of this order. Referring to the order passed by the Assessing Officer for the block period, this Tribunal found that the order passed by the Assessing Officer is barred by limitation. This Tribunal had no occasion to go into the merit of the disallowance made by the Assessing Officer. Accordingly, this issue was remitted back to the file of the Assessing Officer. For the sake of consistency, the order of the CIT(Appeals) is set aside and the issue of claim of bogus steel purchase is also remitted back to the file of the Assessing Officer. The Assessing Officer shall reexamine the matter afresh in the light of the material available on record and thereafter decide the issue afresh, in accordance with law, after giving a reasonable opportunity to the assessee.
98. The next issue arises for consideration is with regard to deduction claimed by the assessee under Section 80-IB of the Act.
99. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee claims deduction under Section 80-IB of the Act in respect of other income of the assessee. Referring to Section 80-IB of the Act, the Ld. Sr. Standing Counsel submitted that Section 80-IB of the Act is applicable only in respect of income derived from industrial undertaking. Referring to judgment of Apex Court in Pandian Chemicals Ltd. v. CIT (262 ITR 278), the Ld. Sr. Standing Counsel submitted that the profit or gain of the assessee must be derived from actual conduct of the business. A mere commercial connection between income and industrial undertaking would not be sufficient for the purpose of allowing deduction under Section 80-IB of the Act. If the income of the assessee is part and parcel of manufacturing activity, there is no need for the assessee to disclose income from other sources. Since the income was admittedly derived from other sources other than the manufacturing process, the assessee cannot say that it was derived from eligible industrial undertaking. Therefore, according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not justified in allowing the claim of the assessee.
100. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that the income which was shown as other income, was from sale of raw material, unclaimed liabilities written back, interest received from customers, interest on employee loans, etc. These incomes are inextricably connected with business of the assessee, therefore, it has to be construed that the same was derived from industrial undertaking. Referring to the judgment of Karnataka High Court in Motor Industries Company Ltd. (37 DTR 94), the Ld.counsel submitted that what was observed by Karnataka High Court in Motor Industries Company Ltd. (supra) is equally applicable to the claim made by the assessee under Section 80-IB of the Act. According to the Ld. counsel, sale of scrap would form part of total turnover of eligible business, therefore, according to the Ld. counsel, the assessee is eligible for deduction in respect of sale of scrap. Referring to the unclaimed liabilities written back, the Ld.counsel submitted that at the time of creation of liabilities, the same was not allowed as deduction and hence, written back of such unclaimed liabilities in the books of account would form art of profits derived from eligible business. Similarly, the exchange rate fluctuation on sale of finished goods would also form part of the total turnover of the assessee. Moreover, the interest received on sale of finished goods from customers would form part of sale price as held by Madras High Court in CIT v. Madras Motors Ltd. (2002) 257 ITR 60. The loan given to the employees was for business activity, therefore, the interest received on the loan from employees would go to reduce the cost of manufacturing activity, therefore, such interest is also eligible for deduction under Section 80-IB of the Act. Therefore, to the extent interest received on the loan given to the employees, the profit could be increased.
101. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee appears to have claimed deduction under Section 80-IB of the Act in respect of foreign exchange fluctuation on sale of finished goods, unclaimed liabilities written back, interest received from customers, scrap sales and interest on employees loan. Though the assessee claimed before the lower authorities that foreign exchange fluctuation on sale of finished goods, this Tribunal is of the considered opinion that profit on sale of finished goods, due to fluctuation in foreign exchange, the same has to be construed as derived from industrial undertaking. In case the profit was on the sale of raw material, the same cannot be taken as income derived from industrial undertaking at all. Since no details/materials are available before this Tribunal, it has to be first ascertained whether profit on foreign exchange fluctuation was due to sale of finished goods or raw material. No material is available on record to suggest that the foreign exchange fluctuation was due to sale of finished goods on export. Therefore, this Tribunal is of the considered opinion that the matter needs to be verified by the Assessing Officer.
102. Now coming to unclaimed liabilities written back, the unclaimed liabilities relate to earlier assessment year, due to unclaimed liabilities of the earlier year, the same were written back in the books of account and treated as income of the assessee. This Tribunal is of the considered opinion that deduction under Section 80-IB of the Act is only in respect of current profit. The profit written back in the books of account as unclaimed of the earlier year cannot be construed as profit of current year, therefore, by including the unclaimed liabilities written back in the books of account, the assessee cannot inflate the eligible profit for the purpose of deduction under Section 80-IB of the Act.
103. Now coming to the interest received from customers, it is not known whether the interest was received on sale of finished goods or interest was received on any other situation. If the interest was received on sale price for delayed payment of sale price, then as found by Madras High Court in Madras Motors Ltd. (supra), assessee is eligible for deduction under Section 80-IB of the Act. If the interest was received for any other reason and not for delayed payment of sale price, this Tribunal is of the considered opinion that the same cannot be construed as derived from industrial undertaking. In the absence of any material, this Tribunal is of the considered opinion that the books of account need to be verified and find out whether the interest was received for delayed payment of sale price or for any other reason. Moreover, the scrape sale is concerned, whether the assessee generated the scrape sales during its own manufacturing activity or the scrape sale was a separate business needs to be verified.
104. Now coming to interest on employees loan, it has to be ascertained whether the loan given to employees was to reduce the cost of manufacturing activity or not. In the absence of any details, this Tribunal is of the considered opinion that the matter needs to be verified. Accordingly, the orders of the lower authorities are set aside and the claim of deduction under Section 80-IB of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and thereafter decide the issue after considering the judgments of Apex Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (113 ITR 84), CIT v. Sterling Foods (237 ITR 579) and Pandian Chemicals Ltd. v. CIT (262 ITR 278) and thereafter, decide the issue in accordance with law, after giving a reasonable opportunity to the assessee.
105. The next issue arises for consideration is with regard to disallowance under Section 40(a)(ia) of the Act.
106. Shri M. Swaminathan, Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee has paid representative office fees of USD 20 lakhs. Considering the need of business of the assessee, the assessee required presence of M/s Vedanta Resources Plc, a UK company, to represent it in London. According to Ld. Sr. Standing Counsel, the assessee-company availed the services of Representative Office of M/s Vedanta Resources Plc to expand its business operation and interact with consultant. Therefore, the payment made by the assessee is liable to tax under Section 195 of the Act at the time of making payment.
107. On the contrary, Shri G. Baskar, the Ld.counsel for the assessee, submitted that admittedly the assessee has paid USD 20 lakhs towards representative office fees. Referring to Article 13 of Double Taxation Avoidance Agreement between UK and India, the Ld.counsel submitted that representative office fees is not liable to tax in India. Since no tax is to be levied in respect of payment made to UK company in India, according to the Ld. counsel, the assessee need not deduct tax, therefore, there cannot be any disallowance under Section 40(a)(ia) of the Act.
108. We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee-company nominated M/s Vedanta Resources Plc, a UK company to represent it in London. The assessee-company availed the services of M/s Vedanta Resources Plc to expand its business operation and interact with its consultant in London. The UK company appears to have not made available any technical knowledge to the assessee-company. The UK company rendered its services only in London Metal Exchange for the purpose of expanding its business operation in London. Since no activity was carried out in India by the foreign company, and entire advice was made by UK company to expand the assessee’s business in UK, namely, London Metal Exchange. Therefore, this Tribunal is of the considered opinion that the payment made to M/s Vedanta Resources Plc, UK is not liable to tax in India. Accordingly, the assessee is not liable to deduct tax under Section 195 of the Act. Therefore, there cannot be any disallowance under Section 40(a)(ia) of the Act.
109. Now coming to disallowance of notional interest, a similar issue was considered for the assessment year 2004-05. In the earlier part of this order, this Tribunal found that the advance was made to companies outside India and the lower authorities have not examined whether the advance made to the companies outside India would amount to shifting of profit to other jurisdiction. Accordingly, the matter was remitted back to the file of the Assessing Officer. For the very same reason, the orders of the lower authorities are set aside and the disallowance of notional interest is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and find out whether the payment of interest on the advance made to the companies outside the country would amount to shifting of profit to other jurisdiction. Thereafter he shall decide the issue afresh in accordance with law, after giving a reasonable opportunity to the assessee.
110. To sum up the result,
Revenue’s appeals in ITA No.319/Mds/2008 is partly allowed
for statistical purposes.
ITA No.318/Mds/2008 is allowed for statistical purposes.
ITA No.1020/Mds/2010 is partly allowed for statistical purposes.
ITA No.1665/Mds/2010 is partly allowed for statistical purposes.
Assessee’s appeals in ITA No.86/Mds/2008 is dismissed.
ITA No.1386/Mds/2010 is dismissed.