9911796707
TMI Blog2015 (9) TMI 1115X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance ought to have been estimated at some reasonable token figure. 3. The learned CIT(A) has erred in law and on facts in confirming the action of ld. AO in not granting deduction u/s.80IB of the Act on Interest on FDR and ICD amounting to Rs. 18,15,43,011/-. 4. Both the lower authorities have erred in law and on facts in not properly appreciating and considering various submissions, evidences and supporting placed on record during the course of the proceedings and not properly appreciating various facts and law in its proper respective. 5. Levy of interest u/s 234A/B/C/D of the Act is not justified. 6. Learned CIT(A) has erred in law and on facts in confirming the action of ld. AO in initiating penalty under section 271(1)(c) of the Act without recording mandatory satisfaction as contemplated under the Act." 3. At the outset of hearing learned Authorized Representative did not press ground nos. 4, 5 & 6. So, they are dismissed as not pressed. 3.1 Assessee is engaged in the business of manufacturing Wind Turbine Generators (WTGs) at various units, Daman and Pondicherry Dhule. 4. First issue is assessee's appeal for A.Y. 2007-08 is with regards to disallowing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f subscription of shares or debentures. Sample copy of sanction letter issued by IDBI is placed at page nos. 134 to 145 of paper book. Rule 8D prescribed for working out disallowance u/s 14A is not applicable for assessment years prior to A.Y. 2008-09. Hence, for A.Ys. prior to A.Y. 2008-09 (as in the present case), Assessing Officer has to prove the nexus that borrowed funds have been used for making investments which generate tax free income prior to making disallowance u/s.14A. Assessing Officer has not recorded any finding regarding any direct nexus between interest bearing borrowed funds and investment in subsidiaries. Further, stand of assessee has been that assessee was having substantial interest free funds for making such investments. Assessee's total investments in Indian subsidiaries were only Rs. 176.25 crores whereas its share capital and reserves and surplus aggregated to Rs. 3,713.31 crores which is sufficient for investment in Indian subsidiaries. Further, according to learned Authorized Representative, assessee's own funds have increased by Rs. 891.06 crores (i.e. Rs. 3713.31 crores - Rs. 2,822.25 crores) during year under consideration which is more than i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed funds have been used for making investments which generate tax free income prior to making disallowance u/s.14A. Assessing Officer has not recorded any finding regarding any direct nexus between interest bearing borrowed funds and investment in subsidiaries. Apart from this, learned Authorized Representative submitted that assessee was having substantial interest free funds. So disallowance u/s.14A is not required as discussed above. We find that ITAT, Ahmedabad 'C' Bench in assessee's own case for A.Y. 2005-06 & 2006-07 reported in [2013] 32 taxmann.com 349 (Ahmedabad - Trib.) has dealt with similar issue and decided as under: "14. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Regarding the grounds raised by the revenue in respect of disallowance of interest expenditure made by the Assessing Officer under section 14A and deletion made by learned Commissioner of Income-tax (Appeals), we find that no interference is called for in the order of the learned Commissioner of Income-tax (Appeals). We hold so because we find that with regard to the investment of Rs. 5907.18 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut on interest expenditure. Assessing Officer is directed accordingly. (b) Regarding direction to Assessing Officer to allocate directors' remuneration fee and traveling allowance towards earning dividend and to make proportionate disallowance under section 14A of the Income-tax Act, 1961, we are of the view that Assessing Officer should make proportionate disallowance only in respect of dividend income from Indian subsidiaries. We do not find any merit in the contention of 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 justified. Accordingly, we do not find any reason to interfere in the order of CIT(A) to that extent. Same is upheld. 5. Next issue in assessee's appeal for A.Y. 2007-08 is with regards to allowability of deduction u/s.80IB of the Act on interest on FDR and ICD amounting to Rs. 18,15,43,011/-. Assessing Officer observed that assessee has claimed deduction u/s.80IB for its Daman unit-II and Daman RBU unit-III @ 30%, while @ 100% for Pondicherry and Dhunetha unit at Daman. Assessing Officer has not granted the benefit of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est 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 under section 80HHC but we find no reason as to why the same logic should not be applied in respect of deduction under section 80-IB of the Income-tax Act, 1961. We, therefore, hold that net interest only should be considered for reducing from profits of business for computing deduction under section 80-IB and for the purpose of computing net interest, only these expenditure, which are incurred for earning interest income should be considered and reduced from interest income. Ground No. 3 of the assessee is rejected whereas ground No. 4 of the assessee is allowed for statistical purposes." Facts being similar, so following same reasoning, we hold that net interest only should be considered for reducing from profits of business for computing deduction u/s.80-IB and for the purpose of computing net interest, only these expenditure, which are incurred for earning interest income should be considered and reduced from interest income. As a result, main ground is reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r payment of commission in respect of work done by agents and for providing information which resulted in maturity of sales. Payments were made as per terms of agreement. This issue was discussed in detail by concerned CIT(A) in A.Y. 2006-07, wherein he has discussed the scope of services required to be done by the agents as per the agreements. So, his predecessor CIT(A) deleted the disallowance by holding that the payment of commission was genuine. But the year under consideration, assessee has given evidence that recipients have provided information about potential buyers and provided services, which helped the sales to be matured and realized and as the facts are similar in the instant year. So, CIT(A) held that payment of commission by assessee was justified. 8.2 Before us, learned Departmental Representative supported the order of Assessing Officer and CIT(A) was not justified in deleting the addition made on account of disallowance of sales commission expenses. Accordingly, the order of CIT(A) be set aside and that of Assessing Officer be restored. On other hand, learned Authorized Representative supported the order of CIT(A) and requested in light of ITAT, Ahmedabad decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w to control his cost and hence it is in the interest of both the party that the remissior would not come on front line. In the case of the appellant, it is seen that: (i) all the payments were made by cheques and parties were genuine. The parties have confirmed the receipt of payments and rendering of services in the form of giving information about its customers ; (ii) all the agents are tax payers and the commission received by the assesseecompany is shown in their income-tax returns and the tax has been paid thereon : (iii) for the appellant, there is no motive to save taxes as units of appellant are eligible for deduction under section 80-IB : and (iv) all the recipients of the commission are independent persons and they are not related to the appellant-company ; (v) there is increase in the sales this year, which justifies the payment of commission ; (v) as per the hon'ble Supreme Court's decision relied on by the appellant, the Assessing Officer cannot sit in the judgment over commercial wisdom of the appellant and determine the reasonableness ofthe expenditure, unless the person is a related person to the assessee under section 40A(2)(b). As the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified in disallowing the payment of commission in respect of these transactions and the disallowance of Rs. 42,81.600 is confirmed. However, the entire expenditure cannot be disallowed merely based on the statements of six customers, who form, a very negligible percentage of sales and the commission expenditure. Therefore, the appellant is allowed relief in respect of the balance amount of commission paid." 8. From the above paragraph of the order of the learned Commissioner of Income-tax (Appeals), we find that a clear finding is given by the learned Commissioner of Income-tax (Appeals) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realise and, therefore, payment of commission is justified except for 6 parties. In respect of these 6 parties, it is noted by the learned Commissioner of Income-tax (Appeals) that the Assessing Officer after inquiry has brought on record in respect of these 6 customers, the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions. The income of all the units of the assessee is eligible for deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partmental representative. Hence, this judgment of the hon'ble apex court does not render any help to the Revenue in the present case. In view of our above discussion, we do not find any reason to interfere in the order of the learned Commissioner of Income-tax (Appeals) on this issue. Accordingly, ground No. 1 of the Revenue as well as ground No. of the assessee's appeals is rejected." In this background, we find that CIT(A) has given clear finding on the issue that assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realise and, therefore, payment of commission was justified and income of all units of assessee is eligible for deduction u/s. 80IB. Therefore, there is no motive to save taxes by paying commission. Thus, we are not inclined to interfere in the finding of CIT(A) who has deleted the addition of Rs. 18,04,87,694/- on account of disallowance of sales commissions paid u/s. 37. Same is upheld. 9. Next issue in Revenue's appeal for A.Y. 2007-08 is with regards to deduction u/s.80IB in respect of Rs. 18,15,43,011/-. This issue has been discussed in ground no.3 vide para 5 of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 18 of this judgment of the hon'ble apex court should be reproduced below for ready reference (page 233) : "16. DEPB is an incentive. It is given under the Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralise the incidence of customs duty payment on the import content of export product. This neutralisation is provided for 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 products as 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 the Central Government or from section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of the Customs and Central Excise Duties and Service Tax Drawback Rules, 1995 as per Notification No. 37 of 1995, dated May 26, 1995. 34. In the beginning to the notification, it is stated that on exercise of powers conferred by section 75 of the Customs Act, 1962, section 37 of the Central Excise Act, 1944, and section 93A read with section 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.-(1)(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 from 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the duty paid by the assessee and duty drawback received by the assessee. These facts along with relevant provisions of the Customs Act. 1962 and Custom and Central Excise Duty and Service Tax Drawback Rules, 1995 of which relevant portion is reproduced above, we find that the facts in the present case are distinguishable from the facts in the case of Liberty 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 the 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 from industrial undertaking' in section 80-ID. In the present case, duty drawback received by the assessee has a direct and arithmetic correlation with the customs duty paid by the assessee and, therefore, there is no income as such on account of duty drawback received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some amount for which drawback was not allowed is on this basis that the same is relatable to recoverable wastage. Under these facts, it is established by the assessee that the duty drawback received by the assessee is arithmetically equal to the duty paid by the assessee and, therefore, in the facts of the present case. We are of the considered opinion that duty drawback in the present case is nothing but refund of duty paid by the assessee 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 under section 80-IB. This ground of the assessee is allowed. We find that for earlier years in assessee's own case wherein considering the decision of Hon'ble Supreme Court in case of Liberty India (supra), the duty drawback as applicable to assessee envisage a refund of amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. After considering clause (a) of sub-section (2) of Section 75 of the Custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r A.Y. 2006-07, the co-ordinate Bench of Tribunal has noted that the duty paid by the assessee and the duty draw back received by it has direct and arithmetic correlation but, in the year under appeal, there is no such finding of either of the lower authorities. In view of the aforesaid facts, we restore the issue back to the file of Assessing Officer to decide the issue afresh in the light of the decision of Tribunal in assessee's own case for earlier years and in accordance with law. The Assessing Officer shall grant adequate opportunity of hearing to the assessee. Thus, this ground of Revenue is allowed for statistical purposes. 11. As a result, Revenue's appeal for A.Y. 2007-08 is partly allowed. 12. Now, we take ITA No. 2052/Ahd/2009 for A.Y. 2005-06. Revenue has filed this appeal on the following grounds: "1. The Ld. CIT(A)XIV, Ahmedabad erred in law and on facts in directing to delete the penalty of Rs. 1,51,36,069/-. 2. On the facts and in the circumstances of the case, the ld. Commissioner of Income-tax (A)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer." 12.1 Assessing Officer levied penalty on account of three additions: (i) Disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars of income. Further it is not the case that explanation of the appellant in respect of the various claims which have been disallowed and for which penalty has been levied has not been substantiated or found to be false so as to attract explanation 1 to section 271(1)(c). Further merely because the additions stood confirmed at the first appellate stage, there is no justification in holding that there is concealment of income and/or filing of inaccurate particulars of income. Further, the issue is disputable and debatable and so disallowances would not result into levy of penalty u/s. 271(1)(c), as the penalty proceedings are entirely different from the assessment proceedings and no penalty can be levied, unless it is established that there is clear cut furnishing of inaccurate particulars of income. In view of the above facts and case laws, I hold that it is not a fit case for levy of penalty u/s. 271(1)(c) and so I direct the penalty to be deleted. 12.2 Same has been opposed on behalf of Revenue inter alia submitting that CIT(A) was not justified in deleting the penalty of Rs. 1,51,36,069/-. Learned Departmental Representative relied on the Explanation 1 to Section 271(1)(c) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. They were paying taxes and the transactions were entered into with a commercial motive and not with a motive to save taxes as units of assessee were eligible for deduction u/s.801B. All the transactions in respect of which commission has been paid are also on similar footing. Without prejudice to the quantum addition sustained by ITAT, we find that full details of sales commission paid to remissiers alongwith names of corresponding customers to whom windmills were sold and basis of payment of commission were furnished. Assessee has engaged certain prominent parties as remissiers. Further, customers might not be aware that some commission was paid to such remissiers and non awareness of the customer does not fall back of assessee as far as penalty is concerned. In view of this, we find that assessee has furnished all the details. Assessee has neither consciously concealed any income nor has evaded any tax. Hence, in such circumstances, CIT(A) was justified in deleting penalty in question. This view is fortified by the decision of Hon'ble Supreme Court in case of Reliance Petroproducts Pvt. Ltd. reported at 322 ITR 158 (SC) . In view of above, we are not inclined to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable for Asst. Years prior to AY 2008-09. Hence, for A.Ys. prior to A.Y. 2008-09 (as in the present case). Assessing Officer has to prove the nexus that borrowed funds have been used for making investments which generate tax free income prior to making disallowance u/s 14A. In absence of Assessing Officer proving such a nexus, the method of adopting assessee's claim cannot be disturbed. Without prejudice to above, the stand of assessee has been that it was having substantial interest free funds for making such investments. In view of above, CIT(A) has granted partial relief. ITAT has confirmed proportionate disallowance u/s. 14A out of administrative expenses on which penalty has been levied. In view of above, we find that assessee has furnished all the details. Assessee has neither consciously concealed any income nor has evaded any tax. In such circumstances, penalty was rightly deleted by CIT(A) on this account. Further mere disallowance u/s 14A out of administrative expenses cannot be justified penalty u/s 271(1)(c). Same has been rightly deleted by CIT(A). We uphold the same. 12.6 As a result, appeal filed by Revenue for A.Y. 2005-06 is dismissed. 13. Now, we t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar C.O. No.62/Ahd/2014 was filed on behalf of assessee. 13.3 Learned Counsel for assessee was fair enough not to press both Cross Objections. So, same are dismissed as not pressed. 14. In ITA No.3475/Ahd/2010, Assessing Officer observed that consequent to remittance by assessee amounting to Rs. 68,70,18,465/- for consent incentive (interest) in the month of June 2009 and Rs. 10,63,50,697/- for interest during year ended March 31, 2010 to Deutsche Bank AG, London Branch payable on Foreign Currency Convertible Bonds (FCCBs), issued by assessee i.e. Suzlon Energy Limited. No tax has been deducted at the time of remittance. Assessing Officer issued a show cause notice to assessee as to why proceedings u/s.201(1) & 201(1A) r.w.s. 196C be not initiated for the above fault. Assessing Officer held that consent incentive is in nature of interest in terms of definition contained in Section 2(28)A of the act. Not agreeing with the explanation given by assessee in response to this show cause notice through various written submissions made from time to time along with documentary evidences and detailed explanations, Assessing Officer brought on record that bonds have been issued by an I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses where the assessee through a 'branch office' or through a 'permanent establishment' carries out its business outside India or makes or earns income outside India. But in the present case there is no such branch office or permanent establishment of the assesses through -which the business of the assesses is carried out or through which it can source income. In view of the above, the exemption available as per sub clause (b) of clause (v) of sub-section (2) of section 9 of the Act, is not applicable in present case and thus same is chargeable to tax in India." Assessing Officer analysed the issue in context of issue of FCCB which is governed by "Issue of foreign currency convertible bonds and ordinary shares (through Depositary Receipt (Mechanism) Scheme, 1993" notified by Department of Economic Affairs No.GSR 700(E), dated 12 November, 1993 and Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme is the notified scheme for the purpose of section 115AG(1)(a) in respect of assessment year 2002-2003 and subsequent assessment years vide CBDT notification No.SO 987 (E) dated 10/09/2002 along with the notification of Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a code itself and then travelling to another charging Section of the Act for deciding the taxability of interest income. In view of above, learned Departmental Representative requested to set aside the order of CIT(A) and that of Assessing Officer be restored. On other hand, learned Authorized Representative supported the order of CIT(A) and stated that Assessing Officer erred in law and on facts in holding that assessee company was liable to deduct tax at source u/s.196C r.w.s. 115AC of the Income Tax Act on remittance to Deutsche Bank AG, London Branch for making payment of consent incentive on is behalf of foreign currency convertible bond holders. Assessing Officer erred in not appreciating the income of recipient nonresident is not at all chargeable to tax in India and therefore, there was no obligation to deduct tax at source and therefore no question of invoking provisions of Section 201(1) of the Act. Assessing Officer erred in not appreciating that by virtue of provisions of Section 9(1)(v)(b) of the Act, interest income cannot be said to have accrued or arisen as the said interest is paid for earning income from source outside India. Once income is not accrued or arisen, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re issued by an Indian Company and interest has been paid by an Indian Company from India only and further the obligation to pay the interest rested with assessee only and accordingly chargeable u/s.5(2) of the Act; (b) For the said contention, Assessing Officer relie upon the Supreme Court decision in the case of Performing Rights Society vs. CIT 106 ITR 11 and Allahabad High Court decision in the case of Hira Mills Ltd. vs. ITO 14 ITR 417 ; (c) Assessing Officer was further of the view that once the income is covered u/s.5(2), Section 9(1)(v)(b) is not applicable; (d) Assessing Officer was further of the view that the issue of FCCB is governed by "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1992" and the said scheme is notified scheme for the purpose of Section 115AC(i)(a) of the Act and therefore, irrespective of the end use of the proceeds, once the scheme is part of the Section 115AC, deduction of tax at source @ 10% is mandate until such time the conversion option is exercised; (e) Assessing Officer further went to establish that even if the provisions of Section 9(1)(v)(b) is applicable, the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing ('ECB') guidelines. However, due to financial constraint, assessee carried out restructuring of subject FCCB in May 2009 with the permission of Reserve Bank of India and pursuant to the same, assessee replaced Zero coupon FCCB amounting to US$ 9,40,04,000/- with 7.50% interest bearing FCCB amounting to US$ 5,63,88,000/-. As a part of restructuring of assessee company has made payment to non-resident bond holders on account of 'consent incentive' for changes in the financial covenants of the Foreign Currency Convertible Bonds amounting to Rs. 68,70,18,465/- through Deutsche Bank AG London Branch. Assessee company had also remitted interest on said FCCB's amounting to Rs. 10,63,50,697/- to the nonresident bond-holders through Deutsche Bank AG London Branch. Now, the question is whether these payments are subject to tax in the hands of the recipient Non-Residents? If the answer is in affirmative, the assessee is under an obligation to deduct tax at source and if the answer in in negative, the assessee cannot be held liable to deduct tax and consequently, the orders u/s 201(1)/(1A) has to be quashed. As stated earlier, the entire issue is squarely covered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount; which in turn gave to Deutsche Trustees Co Limited London who stood nominated as the trustee of the bond holders and the said trustee made the payment in foreign currency to the clearing system where individual bond holders are having accounts. (c) In the present case also the AO on pg. no.9 vide para 6.1.4 has passed the same observations as noted in para 4.7 of Adani Enterprise Ltd. order. In the present case also, AO was of the view that the Bonds were issued by an Indian Company and interest has been paid by an Indian Company from India only and further the obligation to pay the interest rested with the Assessee only and accordingly chargeable u/s 5(2) of the Act; (d)In this case also, for the above contention AO has relied upon the Supreme Court decision in the case of Performing Rights Society vs. CIT 106 ITR 11 and Allahabad High Court decision in the case of Hira Mills Ltd. vs. ITO 14 ITR 417 ; (Pg. Nos.6-8 vide para 6.1.3 of AO order) (e)In the present case also, AO was further of the view that once the income is covered u/s 5(2), S.9(1)(v)(b) is not applicable. (Pg. No.9 vide para 6.1.4 of AO order) (f) In the present case also, AO w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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