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TMI Blog2012 (10) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the assessee is regarding confirmation of part disallowance on this account to the extent of Rs. 42,81,600/-. 2.1 Brief facts of this issue till the assessment stage are noted by Ld. CIT(A) in para 2.1 of his order and for the sake of ready reference, the same is reproduced below: "The first ground is with regard to the disallowance of sales commission expenditure of Rs. 9,77,76,800/-. The appellant company is engaged in the business of manufacturing wind turbine generators (WTGs) at Daman & Pondicherry. During the year, under consideration, the appellant claimed sales commission expense in the sum of Rs. 9,77,76,800/- on total sales of Rs. 1917.50 crores. The appellant has paid commission to 27 parties on 137 transactions of sales out of total 451 wind mills sales. The A.O. called six customer for personal verification by issuing summons u/s 131 of the act, who were examined and their statements were recoded. The A.O. has discussed these facts in details in the assessment order and concluded that there is no evidence that the assessee company received inbound services and its claim of payment of commission is not justified, as no services were rendered by the agents. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has approached the customers and, therefore, it did not come out from the record that the customers were introduced to the assessee by some other person. He also submitted that no evidence has been produced regarding rendering of any services by these persons and hence, commission was rightly disallowed by the A.O. Reliance was placed on the judgement of Hon'ble Apex Court rendered in the case of Laxmi Sugar Mills & Oil Mills Vs CIT as reported in 84 ITR 439 (S.C.). 2.5 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this issue was decided by Ld. CIT(A) as per para 3.2 of his order which is reproduced below: "3.2 I have considered the facts of the case and the submissions as advanced by the appellant along with the case laws as relied upon. The facts emerged that agreements have been entered into for payment of commission in respect of Work done by the agents and for providing information which resulted in maturity of sales. The payments were made as per the agreement. As per the agreement, the scope of services depending on type of customer required to be done by the agents were as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific finding brought on record by the AO after enquiry in certain cases, wherein he examined the six customers and brought on record that in respect of these customers, the agents played no role in achieving the sales and these customers directly approached the assessee for the transaction:- Name of person called u/s. 131 Name of party to whom sales made. Commission Agent Commission paid Shri Somchand Laljibhai Savia. Savia Twisters Pvt. Ltd. India Wind power Ltd. 8,00,000 Shri Dhanjibhai Anandbhai Makvana Makson Pharmaceuticals Ltd. Vishal Corporation 8,00,000 Shri Amrutlal Jethalal Kalaria Intricast Pvt.. Ltd. t rikaya Metalic Ltd. 2,00,000 Shri Nirbhaya Krishna Agrawal Harsha Engineers Ltd. Shree Radhika Steel-chem -Ltd. 8,81,600 Shri Pareshkumar Labsankar Vyas Arnbuja Intermediates Ltd. PKM Industries 8,00,000 ShriNareshbhai Manchand Shah M/s. Sahastra Properties Pvt. Sonica Granite Pvt. Ltd. 8,00,000 42,81,600 In respect of the above six transactions, the company has not initiated any dialogue and not approached the customers on the basis of any information received from the agents. Therefore, it is held that the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, it was the submission of the Ld. A.R. that the agents had furnished other information such as report about reputation, status, financial standings etc. Regarding these 6 parties, he also submitted that they have also helped in realization. The Ld. A.R. was asked to file letters of these agents but the same are not filed by the Ld. A.R. and hence, in the facts of the present case, we feel that the order of Ld. CIT(A) on this issue does not call for any interference from our side because part disallowance confirmed by him is on this basis of these 6 customers were not introduced by these agents whereas for the balance amount for which disallowance of commission is deleted by Ld. CIT(A), he has given a clear finding that these parties were introduced by the commission agents and evidence were filed regarding rendering of the services by them and these findings of Ld. CIT(A) could not be controverted by the Ld. D.R. Regarding the judgment of Hon'ble Apex Court on which reliance has been placed by the Ld. D.R., we find that this judgment is not applicable in the present case because the facts are different. In that case, this finding was recorded by the tribunal that selling agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, and hence, he apportioned on the ratio of .turnover of the assessee company and allocated @ 5.2% of these amounts and calculated an amount of Rs. 50,19,716/-as incurred relating to earning dividend income and disallowed the same. Thus, total disallowance made u/s. 14A was Rs. 3,06,48,988/-. Sr.No. Particulars Amount Rs. in lakhs 1. Director's remuneration 163.1 2. Director's fees and traveling 67.45 3. Staff salary of Corporate office 73.9. 4. Audit fees 122.0 5. Building 50.12 6. Rent 278.76 7. Communication 210.00 Total 965.33 3.2 Out of this disallowance of Rs. 3,06,48,988/- made by the A.O. u/s 14A, Ld. CIT(A) has confirmed the part disallowance for which the assessee is in appeal and deleted the balance disallowance for which the revenue is in appeal before us. 3.3 It was submitted by the Ld. A.R. before us that while working out the disallowance u/s14A, the A.O. included the amount of investment in foreign subsidiaries also but income of dividend from investment in foreign subsidiaries is taxable and, therefore, this investment in foreign subsidiaries of Rs. 59,07,18,092/- out of total investment of Rs. 97,74,38,092/- cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own funds of the assessee is many times more than this investment because interest free funds available with the assessee as on 31.03.2005 as per the balance sheet as on that date is of Rs. 929.57 crores. There is no finding given by the A.O. regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance u/s 14A can be made out of interest expenditure in the facts of the present case. Accordingly, ground No.2 & 3 of the revenue's appeal are rejected. 3.6 Regarding ground No.2 of the assessee's appeal as per which, Ld. CIT(A) has directed the A.O. to allocate directors' remuneration fee and traveling allowance toward earning dividend and to make proportionate disallowance u/s 14A of the Income tax Act, 1961, we are of the considered opinion that the A.O. should make proportionate disallowance only in respect of dividend income from Indian subsidiaries. We do not find any merit in the submissions of the assessee that no disallowance is called for out of administrative expenditure because dividend income is exempt and hence, proportionate disallowance out of administrative expenses is justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ACIT as reported in 343 ITR 89 (S.C.) in support of this contention that netting of interest should be allowed. 4.4 Ld. D.R. supported the order of authorities below. 4.5 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgement cited by Ld. A.R. We find that interest income cannot be said to be an income derived from an industrial undertaking and, therefore, Section 80-IB deduction is not allowable in respect of interest income. Regarding netting of interest income, we find that his issue is now covered by the judgment of Hon'ble Apex Court rendered in the case of ACG Associated Capsules Pvt. Ltd. (supra). In that case, it was held by the Hon'ble Court that only 90% of net interest included in the profits of business of the assessee has to be excluded under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of business. Although this judgment is in respect of deduction u/s 80HHC but we find no reason as to why the same logic should not be applied in respect of deduction u/s 80-IB of the Income tax Act, 1961. We, therefore, hold that net interest only should be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the order of his predecessor in assessee's own case for the assessment year 2003-04 and 2004-05 in which the judgment of Hon'ble Gujarat High Court rendered in the case of India Gelatine & Chemicals Ltd. as reported in 275 ITR 285 was followed. Now, revenue is in appeal before us. 5.3 It was submitted by the Ld. D.R. that this issue is now covered against the assessee by the judgement of Hon'ble Apex Court rendered in the case of Liberty India Ltd. as reported in 317 ITR 218 (S.C.) 5.4 As against this, Ld. A.R. submitted brief note on eligibility of duty drawback while computing deduction u/s 80-IB of the Income tax Act, 1961. The same is reproduced below: "A brief note on eligibility of income on account of Duty Drawback while computing deduction u/s 80IB of the Act. Scheme of Duty Drawback. The grant of duty drawback is governed by the Customs and Central Excise Duty Drawback Rules, 1995 (Drawback Rules) (copy at Exhibit 1). The duty drawback is of two kinds: (1) All Industry Rates (AIR) (2) Brand rate The AIR is a general rate notified by the Government through Duty Drawback scheme every year after assessment of average incidences of Customs and Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of product exported and has also suffered custom duty or central excise duty. It may be noted that we have not opted for AIR Duty Draw Back but have claimed refund of actually paid duty on input used in manufacture of product exported by us by making detailed application for each export submitting evidence/proof of input consumed in product exported and amount of custom duty and central excise duty paid by us on the same. A copy of one such sample application giving details of the duty paid is attached herewith as Exhibit 2. Scheme of DEPB is different from scheme of Duty Drawback: Even the scheme of DEPB i.e. Duty Entitlement Pass Book Scheme wherein the exporter is given pass book containing a credit on the FOB value at rates prescribed under Export Import Policy and Handbook is also different and as a matter of fact has no nexus with the actual amount of duty paid. The credit can be used for payment of import duties while importing the goods. The DEPB itself is transferable and can be sold in open market and purchaser of DEPB can also use such credit for import of material. In almost all States Sale of DEPB is considered as sale of goods liable for Value Added Tax (VAT). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of duty drawback as it found that duty drawback was claimed under AIR and was not arithmetically equal to the actual amount of duty paid. The relevant Para 17 of the judgment Hon'ble Supreme Court is reproduced herein below for immediate reference: "The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent i n a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported..." Thus in subject case Hon'ble Supreme Court gave a finding to above effect as the duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s receipts has been accepted and explained by Hon'ble the Supreme Court in later decisions in the following cases: Topmann Exports V CIT (2012) 342 ITR 49(SC). the relevant extract is reproduced hereinbelow for ready reference: xxx... 15. We may now point out the errors in the impugned judgment of the High Court. The first reason given by the High Court is that clause (iiia) of Section 28 treats profits on the sale of an import license as income chargeable to tax and when the license is sold, the entire amount is treated as profits of business under clause (iiia) of Section 28 and thus there is no justification to treat the amount which is received by an exporter on the transfer of the DEPB any differently than the profits which are made on the sale of an import license under clause (iiia) of Section 28 of the Act. In taking the view that when the import license is sold the entire amount is treated as profits of business, the High Court has visualized a situation where the cost of acquiring the import license is nil. The cost of acquiring DEPB, on the other hand, is not nil because the person acquires it by paying customs duty on the import content of the export product a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... briefly to the facts of the case. For the assessment year 2003-04, the assessee filed a return of income claiming a deduction of Rs. 34,44,24,827/- under Section 80HHC of the Act. The Assessing Officer passed the assessment order deducting ninety per cent of the gross interest and gross rent received from the profits of business while computing the deduction under Section 80HHC and accordingly restricted the deduction under Section 80HHC to Rs. 2,36,25,053/-. The assessee filed an appeal against the assessment order before the Commissioner of Income-Tax (Appeals), who confirmed the order of the Assessing Officer excluding ninety per cent of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of Section 80HHC. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal (for short 'the Tribunal'). The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475, that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature included in any such profits are to be deducted from the profits of the business as computed under the head "Profits and Gains of Business or Profession". The expression "included any such profits" in clause (1) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and Gains of Business or Profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. xxx... 5. Lastly, if at all it emerges that the decision of Liberty India (supra) and decisions in the case of Topman (supra) and ACG Associated (supra) have conflicting views, the assessee submits that: (i) The decisions of Topman and ACG were rendered by a bench having headed by 3 judges whereas the decision of Liberty was rendered by a division bench, therefore a larger bench would prevail upon a division bench; (ii) The decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of customs duty payment on the import content of export product. This neutralization is provided of by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as a percentage of the FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by the DGFT for import of raw materials, components, etc., DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product s per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty drawback are incentives which flow from the schemes framed by Central Government or form section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived form the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings. 17. The next question is- what is duty drawback? Section 75 of the Customs Act, 1962, and section 37 of the Central Excise Act, 1944, empowers the Government of India to provide for repayment of customs duty and excise duty paid by an assessee. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 75 of the Finance Act 1944 these rules are made by the Central government. Rule 6 is relevant and the same is reproduced below: ""Rule 6. Cases where amount or rate of drawback has not been determined.- (a) Where no amount or rate of drawback has been determined in respect of any goods, any manufacturers or exporter of such goods may, within sixty days form the date relevant for the applicability of the amount or rate of drawback in terms of sub-rule (3) of rule (5) apply in writing to the commissioner of Central Excise or the Commissioner of Customs and Central Excise, having jurisdiction over the manufacturing unit, of the manufacturer exporter or, of the supporting manufacturers, as the case may be, for determination of the amount or rate of drawback thereof stating all the relevant facts including the proportion in which the materials or components or inputs services are used in the production or manufacture of good and the duties paid on such materials or components or the tax paid on input services," 5.10 We have gone through the clause (a) of sub section (2) of section 75 of the Customs Act, 1962 and we find that there are two types of duty drawback which can be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (supra). In the case of Liberty India (supra), the issue was decided by the Hon'ble Apex Court against the assessee on this basis that since the rule does not envisage refund of an amount arithmetically equal to customs duty paid by the individual exporter/manufacturer, the duty drawback and DEPB receipt of the assessee is on account of statutory policy and provisions in the Customs Act by the Government of India and hence, this profit derived by way of some incentive does not fall within the expression 'profits derived form industrial undertaking' in section 80-IB. In the present case, duty drawback received by the assessee has a direct and arithmetic correlation with the custom duty paid by the assessee and, therefore, there is no income as such on account of duty drawback received by the assessee because whatever custom duty paid by the assessee has been received back by the assessee and it leaves no income with the assessee. 5.11 The assessee has also placed reliance on the tribunal decision rendered in the case of JK Aluminium Co. Vs ITO in I.T.A.No.3303/Del/2010 dated 29.04.2011. In that case also, the issue involved was with regard to allowability of deduction u/s 80- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and, therefore, respectfully following the Tribunal decision rendered in the case of J K Aluminium Co. (supra), we decide this issue in favour of the assessee and hold that in the facts of the present case, duty drawback received by the assessee is eligible for deduction u/s 80-IB. This ground of the assessee is allowed. 6. The next issue is regarding allowability of deduction in respect of employees contribution to PF & ESI. This issue is raised by the revenue as per ground No.6 and also by the assessee as per ground No.7. It was submitted by the Ld. A.R. that this issue is now covered in favour of the assessee by the tribunal decision rendered in the case of Shri Om Singh Vs ITO in I.T.A.No. 1908/A/Ahd/2009 dated 18.09.2009. Respectfully following this tribunal decision, we decide this issue in favour of the assessee and accordingly ground No.6 of the revenue's appeal is rejected and ground No.7 of the assessee is allowed because the entire amount was paid prior to the due date of filing of return of income. 7. The next issue is raised by the assessee as per ground No.5 & 6 regarding set off of loss of Rs. 468.34 lacs of Dhuneta Unit against profits of other eligible units. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in computation of income to cover any error, omission etc. The same is as per ground No.2 and 3 of the assessee's appeal whereas revenue has raised this issue as per ground No.4 because Ld. CIT(A) has directed the A.O. to allow deduction u/s 80-IB of the Income tax Act, 1961 of Rs. 19,16,20,416/- out of additional undisclosed income of Rs. 20 crores during the survey u/s 133A of the Income tax Act, 1961. 15. Regarding assessee's ground No.2 & 3, it was submitted by the Ld. A.R. that this issue is directly and squarely covered in favour of the assessee by the tribunal decision in group case in I.T.A.No. 3761-3762/Ahd/2008, I.T.A.No. 1368 and 1629/Ahd/2008 and he submitted copies of both these tribunal decisions. The relevant para 15 of this tribunal decision rendered in the case of Suzlon Infra Structure vs ACIT in it 3761-3762/Ahd/2008 is reproduced below: "15. In view of the above facts and case laws referred by both the sides and discussed above, we find that the assessee- company was subjected to survey action u/s 133A of the Act on 05.04.2006 and during the course of survey action, the department found many documents, books of account, records on electronic media and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the concerned authority in a case when refund is under and payable and the authority concerned on being satisfied, shall grant appropriate relief. In the present case also, the assessee has specifically required the A.O. and the CIT(A), during the course of proceedings before the respective authorities, that there is no unaccounted or undisclosed income found during the course of survey or from the impounded material and the surrender was subject to the condition that the disclosure is made to cover any errors, omissions, discrepancy that may be found in any manner based on any entries, notes, scribbling, notings etc. in the books of account, other documents, loose papers, transactions etc., forming part of impounded materials or identified from any other source, records etc., in the hands of the company or any other associated concern/person etc. The assessee has very categorically made these disclosures vide letter dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, we allow the claim of the assessee." 16. From the decision in the case of Suzlon infrastructure (supra), we find that in that case also, the issue was regarding the reducing of conditional additional amount of R.700 lacs added in the computation of income to cover any error, omission, discrepancy etc. made in reference to the All India Survey Action. Hence, it is seen that the facts in the present case are identical and, therefore, by respectfully following this tribunal decision, we hold that in the present case also, the additional declaration made by the assessee cannot be added to the total income because in the present case also, there is no iota of evidence which suggests that there is unaccounted or undisclosed income emerging out of incriminating documents impounded during the course of survey and the addition was made by the A.O. solely on the basis of the statement in the course of survey as in that case. Accordingly, grounds No.2 & 3 of the assessee's appeal are allowed. 17. Regarding the next ground No.4 of the revenue's appeal, we feel that this has become infructuous because since no addition is made in respect of additional amount of Rs. 20 crores, on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no question of any further set off in the present year. 22. Ld. D.R. supported the orders of authorities below. 23. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that the amount of loss for which set off is in dispute is the same in assessment year 2005-06 and assessment year 2006-07. In assessment year 2005-06, this ground was not pressed by the Ld. A.R. and accordingly rejected as not pressed. Hence, the loss of Dhuneta unit stands set off against profit of other eligible units in that year and therefore, there is no question of further set off in the present year if the entire amount of loss is set off in that year. This is not coming out form the record as to what was the actual amount of loss of Dhuneta unit and how much out of this was set off in assessment year 2005-06. Hence, we set aside the order of Ld. CIT(A) on this issue and restore the matter back to the file of the A.O. for a fresh decision. The A.O. should find out what was the actual amount of brought forward loss of Dhuneta unit in assessment year 2005-06 and how much loss out of this was set off in that year and if th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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