M/s. Ravikumar Distilleries Ltd., Pondicherry V. ACIT, Pondicherry

CO 58/CHNY/2011

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 6953 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 14 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 09-03-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 25-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A C JOSEPH JT
• Assessee Lawyers: V S JAYAKUMAR
• Section: 80IB; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER] I.T.A.NO.81/MDS/2011 ASSESSMENT YEAR : 2007-08 THE ACIT CIRCLE I PUDUCHERRY 605 003 VS M/S RAVIKUMAR DISTILLERIES LTD NO.17, KAMARAJ SALAI PUDUCHERRY 605 001 [PAN :AABCR4195D] (APPELLANT) (RESPONDENT) C.O.NO.58/MDS/2011 ASSESSMENT YEAR : 2007-08 M/S RAVIKUMAR DISTILLERIES LTD NO.17, KAMARAJ SALAI PUDUCHERRY 605 001 VS THE ACIT CIRCLE I PUDUCHERRY 605 003 (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY : SHRI A.C.JOSEPH, JT. CIT ASSESSEE BY : SHRI V.S.JAYAKUMAR DATE OF HEARING : 05-03-2012 DATE OF PRONOUNCEMENT : 09-03-2012 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVEN UE AND CROSS OBJECTION FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD .CIT(A)-XII, CHENNAI, DATXED 21.10.2010. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 2 -: 2. GROUND NO.1 AND 4 OF THE APPEAL ARE GENERAL IN NATU RE AND HENCE, REQUIRES NO ADJUDICATION BY US. 3. GROUND NO.2 OF THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE LD.CIT(A) IN ALLOWING DEDUCTION OF ` 47,36,690/- U/S 80IB OF THE ACT. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE-COMPANY HAS PURCHASED CO NCENTRATED FORM OF RECTIFIED SPIRIT OF ENA WHICH WAS DILUTED TO THE LOW LEVEL SO AS TO BE FIT FOR HUMAN CONSUMPTION. THE RAW MATERIAL AND THE FINISHED PRODUCTS ARE THE SAME. THE RECTIFIED SPIRIT ENA REMAINS AS A DILUTED SPIRIT ONLY WITHOUT UNDERGOING A CHANGE. THE RECTIFIED SPIRIT ENA MADE OF GRAIN OR GRAPES OR MALT WAS MIXED WITH DEMINERALIZED WATE R IN THE REQUIRED PROPORTION TO REDUCE THE CONCENTRATION OF THE ENA A LONGWITH OTHER INGREDIENTS SUCH AS CARAMEL, SUGAR, ETC. TO BRING O UT DIFFERENT DRINKS, I.E WHISKY, BRANDY, RUM, ETC. FOR HUMAN CONSUMPTION . THE ABOVE BLENDING WAS ALLOWED TO FERMENTATION AND FILTRATION FOR A REQUIRED TIME. THEN THESE BLENDINGS ARE BOTTLED AND MARKETED AS HU MAN CONSUMPTION IMFL DRINKS. AS THE ABOVE BLENDING DOE S NOT CONSTITUTE MANUFACTURE, THE DEDUCTION U/S 80IB IS NOT ALLOWAB LE. MANUFACTURING IS THE PROCESS BY WHICH THE RAW MATERIAL WAS SUBJEC TED TO CHANGE AND A NEW FINISHED PRODUCT OF COMMERCIAL VALUE WAS OBTA INED. IN VIEW OF THE ABOVE, THE CLAIM OF DEDUCTION U/S 80IB WAS NO T ALLOWABLE. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 3 -: 5. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE LD. A.R OF THE ASSESSEE HAS RELIED UPON THE ORDER OF THE HON'BLE M ADRAS HIGH COURT IN THE CASE OF M/S VINBROS & CO. VS ITO, WARD I(1), PO NDICHERRY, WHERE THE IMFL PRODUCTION WAS ALLOWED AS MANUFACTURING EL IGIBLE FOR DEDUCTION U/S 80IB OF THE INCOME-TAX ACT, 1961. T HEREFORE, THE ASSESSEE HAD SUBMITTED THAT IN VIEW OF THE JURISDIC TIONAL HIGH COURTS ORDER, ASSESSEE WAS ELIGIBLE FOR DEDUCTION U/S 80 IB OF THE ACT. THE ASSESSING OFFICER FURTHER OBSERVED THAT IN THE ABOV E CASE, AS THE ASSESSING OFFICER HAS RECOMMENDED FOR FURTHER DEPAR TMENTAL APPEAL BEFORE THE HON'BLE SUPREME COURT AGAINST THE HON'BL E MADRAS HIGH COURTS DECISION AND AS THE MATTER IS STILL PENDING WITHOUT ANY FINALITY REACHED, IN ORDER TO MAINTAIN UNIFORM STANDING IN T HE IMFL CASES BY THE DEPARTMENT WITH DUE RESPECT TO THE HON'BLE JURI SDICTIONAL HIGH COURTS ORDER, THE ASSESSEES CLAIM FOR DEDUCTION U/S 80IB OF THE ACT IS REJECTED. 6. BEING AGGRIEVED AGAINST THE SAID ORDER, THE ASSESS EE FILED APPEAL BEFORE THE LD.CIT(A). 7. THE LD.CIT(A) ACCEPTED THE APPEAL OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO ALLOW DEDUCTION U/S 80IB OF THE ACT AS CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME BY OBSERVING AS UNDER: I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 4 -: GROUND NO.1: REGARDING THE CLAIM OF DEDUCTION U/S 80 IB OF THE APPELLANT TO THE TUNE OF ` 47,36,690/- AND DISALLOWED BY THE ASSESSING OFFICER, THE AR OF THE APPELLANT HAD SUBMITTED THAT THE HON'BLE ITAT, BENC H 'B', CHENNAI IN ITA NO.50/MDS/ 2010, ASST. YEAR 200 5- 06, VIDE ITS ORDER DT . 3.03.10, HAD DISMISSED THE APPEAL OF THE REVENUE AFTER HAVING HEARD THE RIVAL SUBMISSIONS, CONSIDERING THE FACTS AND MATERIALS AVAILABLE ON RECORD INCLUDING THE DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF CIT VS. VINBROS & CO. IN TAX CASE APPEAL NO. 1361 AND 1362 OF 2007 DT. 29.10.07, STATING THE FOLLOWING:- .. AS REGARDS THE SECOND ISSUE AS TO WHETHER THE ASSESSEE HAD ENGAGED ITSELF IN THE MANUFACTURING OR PRODUCING OF AN ARTICLE OR THING BY THE ACT OF BLEN DING, IT IS SEEN THAT THE ASSESSEE DOES NOT JUST ADD WAT ER AND SELLS THE FINAL PRODUCT. IT IS AN ADMITTED FAC T THAT QUITE APART FROM WATER, THE ASSESSEE HAD TO ADD SEVERAL ITEMS TO MAKE IT FIT FOR HUMAN CONSUMPTION. THE TRIBUNAL HELD THAT WHAT WAS PURCHASED BY THE ASSESSEE WAS NOT A POTABLE ONE AND BUT FOR THE BLENDING, THE COMMODITY COULD NOT HAVE BECOME A SALEABLE COMMODITY. CONSEQUENTLY, THE RAW AMTERIALS, EVEN THOUGH ARE NOT MANUFACTURED BY THE ASSESSE, YET THERE IS NEXUS OF THE PROCESS BY BLEND ING TO MAKE IT A SALEABLE COMMODITY TOTALLY DIFFERENT F ROM THAT OF THE ORIGINAL OBTAINED. THE TRIBUNAL ALSO POINTED OUT THAT THE END PRODUCT IS TOTALLY DIFFERE NT AND IS COMMERCIALLY DIFFERENT COMMODITY THAN THE MAJOR INPUT RECTIFIED SPIRIT, WHICH IS NOT FIT FOR HUMAN CONSUMPTION. HENCE, THE CHANGES MADE TO THE ORIGINAL PRODUCT RESULTS IN A NEW DIFFERENT COMMODI TY, WHICH IS RECOGNIZED IN THE TRADE. THE DECISION OF THE TRIBUNAL IS IN ACCORDANCE WITH THE LAW LAID DOWN BY THE SUPREME COURT ON THE INTERPRETATION OF THE CONC EPT MANUFACTURE AND THEREFORE, THE APPEALS DO NOT DESERVE ADMISSION, AS NO INTERFERENCE IS CALLED FOR BY THIS COURT. IN VIEW OF THE DEC I SION OF THE HON'BLE JURISDICTIONAL ITAT IN THE APPELLANT'S OWN CASE FOR THE ASST. YEAR 2005-06 AND IN CONSONANCE WITH THE DEC I SION OF THE HON'BLE HIGH COURT OF JUDICATURE AT MADRAS, CHENNAI, IN THE CASE OF M/S. VINBROS & CO., PONDICHERRY, CITED SUPRA, IT IS HELD THAT THE BLENDING O F TH E RAW MATERIAL IN THE APPELLANT'S U NI T AMOUNT T O MANUFACTURING ACTIVITY AND THE ASSESSING OFFICER IS HEREBY DIRECTED TO DELETE THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF CLA I M OF DEDUCTION U/S 80 IB OF THE I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 5 -: INCOME-TAX ACT, 1961 . ACCORDINGLY, APPELLANT SU C CEEDS ON THIS GROUND. 8. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OF FICER WHEREAS THE LD. A.R OF THE ASSESSEE FILED BEFORE US A COPY OF THE ORDER OF THE CHENNAI B BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06 IN I.T.A.NO.50/MDS/2010, OR DER DATED 3.3.2010, AND SUBMITTED THAT THE TRIBUNAL HAS ALLOW ED THE CLAIM FOR DEDUCTION U/S 80IB OF THE ACT IN THE SIMILAR FACTS AND CIRCUMSTANCES OF THE CASE IN ASSESSMENT YEAR 2005-06. HE PRAYED THA T FOLLOWING THE AID ORDER, THE ORDER OF THE LD.CIT(A) SHOULD BE CONFIR MED. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND MATERIALS AVAILABLE ON RE CORD. IN THE INSTANT CASE, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF M ANUFACTURING AND TRADING IN INDIAN MADE FOREIGN LIQUOR (IMFL) AND FO R THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETUR N OF INCOME SHOWING INCOME OF ` 1,06,74,516/- AFTER CLAIMING DEDUCTION U/S 80IB F OR ` 47,36,690/-. THE ASSESSEE SUBMITTED BEFORE THE A SSESSING OFFICER THAT THE HON'BLE MADRAS HIGH COURT IN THE CASE OF C IT VS VINBROS & CO IN TAX CASE APPEAL NO.1361 AND 1362 OF 2007 DATED 2 9.10.2007 HAS HELD THAT THE ACTIVITY OF MAKING LIQUOR FROM RECTIF IED SPIRIT IS MANUFACTURING AND ACCORDINGLY, THE ASSESSEE IS ELI GIBLE FOR DEDUCTION U/S 80IB OF THE ACT. THE ASSESSING OFFICER DID NOT ACCEPT THE CLAIM OF I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 6 -: THE ASSESSEE ONLY ON THE GROUND THAT THE DEPARTMEN T HAS NOT ACCEPTED THE DECISION OF THE HON'BLE MADRAS HIGH CO URT IN THE CASE OF M/S VINBROS & CO. (SUPRA) AND HAS FILED AN APPEAL B EFORE THE SUPREME COURT THERE AGAINST. THE LD.CIT(A) HAS ALLOWED THE CLAIM FOR DEDUCTION U/S 80IB OF THE ACT TO THE ASSESSEE BY FOLLOWING T HE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF M/S VINBRO S & CO. (SUPRA) AND THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CA SE IN ASSESSMENT YEAR 2005-06. THE LD. DR HAS MERELY SUPPORTED THE ORDER OF THE ASSESSING OFFICER. HE HAS NOT FILED ANY MATERIAL B EFORE US TO SHOW THAT THE ORDER OF THE HON'BLE MADRAS HIGH COURT HAS BEEN VARIED IN APPEAL BY THE HON'BLE SUPREME COURT. FURTHER, WE FIND THA T THE CHENNAI B BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN AS SESSMENT YEAR 2005-06 HAS ALLOWED THE CLAIM FOR DEDUCTION U/S 80 IB OF THE ACT TO THE ASSESSE. WE, THEREFORE, DO NOT FIND ANY GOOD AND JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A ). IT IS CONFIRMED. THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 10. GROUND NO.3 OF THE APPEAL IS DIRECTED AGAINST THE O RDER OF THE LD.CIT(A) IN DIRECTING THE ASSESSING OFFICER TO RES TRICT THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT TO ` 12,20,575/- OUT OF ` 5,45,19,462/-. IN THE CROSS OBJECTION OF THE ASSESSEE, THE GRIEVANCE OF THE ASSESSEE IS THAT THE LD.CIT(A) ERRED IN CONFIRMING THE DISALLO WANCE U/S 40(A(IA) OF THE ACT OF ` 12,20,575/- OUT OF ` 5,45,19,462/-. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 7 -: 11. SINCE BOTH THE ISSUES ARISE OUT OF SAME FACTS, FOR THE SAKE OF CONVENIENCE, THEY ARE BEING DISPOSED OF TOGETHER. 12. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED FROM THE RETURN OF INCOME THAT THE ASSESS EE HAS NOT DEDUCTED TDS FROM ROYALTY PAYMENT OF ` 5,45,19,462/-. THE ASSESSEE CONTENDED BEFORE THE ASSESSING OFFICER THAT OPERATI ONAL SUPPORT COST WAS NOT AN EXPENDITURE SUBJECT TO TDS AND FILED BEF ORE THE ASSESSING OFFICER A CERTIFICATE FROM THE CHARTERED ACCOUNTANT WHO HAD OPINED THAT THE AGREEMENT EMBODIES A CONDUCTING ARRANGEMEN T IN RESPECT OF LIQUOR MANUFACTURE AND THE PAYMENT WAS A COMPOSITE AND INDIVISIBLE WHOLE IN CONSIDERATION OF THE COMPANY BEING PERMITT ED TO CONDUCT THE BUSINESS AND THAT IT IS NOT A PAYMENT WARRANTING DE DUCTION OF TDS. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF M/S HINDUSTAN COCA COLA BEVERA GES (P) LTD VS CIT (2007) 293 ITR 226(S.C) AND CBDT CIRCULAR ON PROVIS IONS OF TDS REPORTED IN 276 ITR (ST) 151 TO 165. THE ASSESSEE FURTHER SUBMITTED THAT IN ANY EVENT IT IS A DIRECT COST AND HENCE, SE CTION 40(A)(IA) CANNOT BE INVOKED. THE ASSESSING OFFICER DID NOT ACCEPT T HE CONTENTION OF THE ASSESSEE ON THE GROUND THAT IT WAS A PAYMENT FOR RO YALTY AND THE ASSESSEE OUGHT TO HAVE DEDUCTED TDS. SINCE THE TDS WAS NOT DEDUCTED, THE EXPENDITURE WAS DISALLOWED U/S 40(A) (IA) OF THE ACT AND ADDED TO THE INCOME OF THE ASSESSE. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 8 -: 13. IN APPEAL BEFORE THE LD.CIT(A), THE ASSESSEE HAS SUBMITTED AS UNDER: REGARDING ROYALTY PAYMENT DISALLOWED U/S 40(A)(IA) OF THE ACT BY THE ASSESSING OFFICER FOR NON-DEDUCTION OF TDS, THE AR HAD FURNISHED DETAILED WRITTEN SUBMISSION, W HEREIN IT WAS MENTIONED THAT THE DISALLOWANCE OF ` 5,45,19,462/- WAS RELATING TO THE OPERATING SUPPORT COST BY WAY O F PAYMENT MADE T O 4 R E SI DENT A S SES S EES / COMPANIES . IN THIS REGARD, THE AR SUBM I TTED T HAT THERE WERE AGREEMENTS W I TH THE ABOVE PART I ES AND THESE AGREEMENTS EMBODY A CONDUCTING ARRANGEMENT I N RESPECT OF L I QUOR MANUFACTURE AND THE PAYMENT I S COMPOS I TE AND INDIVIS I BLE WHOLE IN CONS I DERATION OF THE COMPANY BEING PERMITTED TO CONDUCT THE BUSINESS. FURTHER , THE AR OF THE APPELLANT SUBMITTED THAT THE ASSESSEE COMPANY HAS N ECESSA R Y GOVE R NMENTAL PERM I SS I ONS AND ALL I NFRASTRUCTURAL FACILITIES T O MAN U FAC T URE IMFL AND THAT IN AN Y E VEN T, IT W A S A D I REC T COST A N D HENCE, SEC 40(A)( I A) OF THE INCOME TAX ACT, 1961 CANNOT BE INVOKED. THE AR OF THE APPELLANT BROUGHT TO THE NOTICE OF TH E UNDERSIGNED THAT NOTWITHSTANDING ANYTHING CONTRA R Y IN SECTIONS 30 TO 38, THE FOLLOWING AMOUN T S SHA LL N OT BE DEDUCTED I N COMPU T ING T H E IN COME CHARGEABLE UNDER T H E HEAD 'PROF I TS AND G AI NS OF BUS I NESS OR P R OFESSION ' AND THAT THE OPERATIONA L SUPPORT COST IS A D I REC T EXPEND I TURE A LL O W AB L E U/S 28 OF THE ACT AND HENCE, DOES NOT FALL W I THIN THE M I SCH I EF OF SEC . 40(A)(IA) OF THE ACT, WHICH IS RESTRICTED IN ITS OPERATION TO EXPEND I TURE REFERRED TO IN SECTIONS 30 TO 38 O NL Y. THE AR A L SO RE L IED O N T H E F O LL O WIN G APEX COUR T' S DECIS I ONS W H EREIN I T HAD BEEN D I SCUSSED I N DETA IL A BOUT P R O FI TS AND GAINS FROM BUS I NESS OR PROFESSION AS PER THE PROVISIONS OF THE INCOME-TAX ACT AND HELD THAT PROF IT - AND GAINS SHOULD BE UNDERSTOOD IN ITS COMMERCIAL SENSE AND THERE CAN BE NO COMPUTATION OF SUCH PROFITS AND GAI NS UNTIL THE EXPENDITURE, WHICH IS NECESSARY FOR THE PURP O SE OF EARN I NG THE RE C E I PT IS DEDUCTED THEREFROM . 1. CALCUTTA CO. LTD. V. CIT - 37 ITR 1 (SC) 2. MADRAS IND. INV . CORPN. LTD. V . CIT - 225 ITR 802 (SC) 3. CIT V. BILAHARI INV. P. LTD. - CIVIL APPEAL DT. 27. 02.08. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 9 -: THUS , THE AR HAD CONTENDED TH AT THE OPERAT I ONAL SUPPORT COST F ORMS PA RT O F D I REC T COS T A N D HE N CE, TH E INVOK IN G OF PROV I SIONS OF SEC. 4 0(A J (IA) O F TH E AC T BY TH E ASSE S S I NG O FFI CER WAS NO T IN ACCORDANCE W I TH LA W AND REQUESTED TH AT T H E ADDIT I ON MADE BY T H E ASSESSING OFFICER MAY PLEASE BE DELETED. FURTHER, AT THE T IME OF HEARING, THE AR WAS ASKED TO SUBMIT THE COMPONENTS OF ROYALTY PAID, IF ANY, INCLUDED IN THE DIRECT COST. IN THIS CONNECTION, THE AR OF THE APPELLANT HAD FILED ALONGWITH THE WRITTEN SUBMISSIO NS, THE DETAILS OF LABEL VALUES AMOUNTING TO ` 12,20,579/- AND SUBMITTED THAT THE SAME FORM PART OF DIRECT COST. FINALLY, THE AR OF THE APPELLANT HAD FURNISHED A COPY OF THE DECISION OF THE HYDERABAD BENCH OF THE HON'BLE ITAT, IN THE CASE OF TEJA CONSTRUCTIONS VS . ACIT I N ITA NO.308/HYD/2009 DT. 23.10.09, W H EREIN IT WAS OBSERVED BY THE HYDERABAD BENCH OF THE ITAT THAT AL L THE EXPENDITURE, JUST AS LABOUR CHARGES IN THE INST ANT CASE, WHICH REPRESENTS DIRECT COST AND THEREFORE ADJUSTABLE AGAINST REVENUE FOR THE PURPOSE OF DETERMINING THE PROF I T U/S 28(I) OF THE ACT, DO NOT COME WITHIN THE PROVISIONS U/S 40(A)(IA). IT WAS FURTHER OBSERVED BY THE HYDERABAD BENCH OF THE ITAT THAT I T IS ONLY THE DEDUCT I ON REFERRED TO IN SECT I ONS 30 TO 38 WHICH WOULD DEFIN I TELY FALL FOR CONSIDERATION OF DISALLOWANCE U/S 40 AND THEY CANNOT BE CLAIMED AS DEDUCTION U/S 28. THUS I T WAS REASONED BY THE AR OF THE APPELLANT THAT THE PROVISIONS OF SEC. 40(A)(IA) ARE APPLICABLE ONLY TO ITEMS COVERED BY SEC. 30 TO 38 AND NOT TO ITEMS COVERED U /S 28 AS D I RECT COST. HENCE , IT WAS CONTENDED BY T HE AR OF THE APPEL L ANT THAT NOT ONLY THE PAYMENTS MADE TO THE ABOVE 4 PARTIES DO NOT FALL WITH I N THE MISCHIEF OF SEC. 40(A)(IA), BUT ALSO _ THE LABEL VALUES, INCLUDED IN THE DIRECT COST COMPONENT, TOO WILL NOT FALL WITHIN THE PURVIEW OF SEC. 40(A)(IA) OF THE AC T. 14. THE LD.CIT(A), AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSE, HAS ALLOWED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER: I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 10 -: GROUND NO.2 - A PERUSAL OF THE DETAILS FILED BY TH E AR OF THE APPELLANT, REGARD I NG THE ADDITION OF ` 5,45,19 , 462/- MADE ON ACCOUNT OF DISALLOWANCE U/S 40(A)(IA) ON ROYALTY PAYMENT MADE BY THE ASSESSING OFFICER IN TH E IMPUGNED ORDER, IT IS SEEN THAT THIS AMOUNT IS A CO MPOSITE PAYMENT TO THE APPELLANT'S PRINCIPALS. IN V I EW OF THE ABOVE CITED FACTS, IT HAS ELEMENTS OF ROYALTY (BEING LABE L VALUE) AND DIREC T COSTS LIKE OPERATIONAL SUPPORT COST. THE DIRECT COSTS ARE INCURRED BY THE PRINCIPALS OF R KD L AND REIMBURSED BY RKDL . THE PAYMENTS MADE T O THE TIE-UP COMPANIES OF RKDL I . E. ` 5,32,98,887/- ( ` 5,45,19,462/ - LESS ` 12,20,575/-) ARE ONLY DIRECT COSTS I . E. OPERAT I ONAL SUPPORT C O ST, WHICH GOES INTO THE ACTUAL MANUFACTURE OF IMFL FOR THE TIE-UP COMPANIE S . IN T HIS CONNECTION, THE OBSERVATION OF THE HYDERABAD BENCH OF THE HON'BLE ITAT, IN THE CASE OF TEJA CONSTRUCTIONS VS. ACIT IN ITA NO . 308/HYD/2009 DT. 23.10.2009 IS REPRODUCED AS UNDER:- 'FURTHER, 'NOTWITHSTANDING ANYTHING TO THE CONTRA R Y IN SECTIONS 30 TO 38 WITH WHICH THE PROVISIONS . OF SEC. 40 BEGIN, TAKE THE ITEMS OF EXPENSES COVERED BY THE PROVISIONS OF SECTIONS TO 30 TO 3 8 ALONG WITHIN THE AMBIT OF SECTION 40, AND A NY ITEM OF EXPENDITURE ALLOWABLE UNDER THE PROVISIONS OF THE ACT, PRECED I NG SEC . 30, IS NOT COVERED BY THE SAID STATUTORY DISALLOWANCES ENVISAGED U/S 40. IT MAY ALSO BE OBSERVED T HAT IF AN ASSESSEE CLAIMS ANY EXPENDITURE AS NECESSARY TO EARN THE B U SINESS INCOME AND, AS SUCH, THE SAME IS ALLOWABLE U/S 28 AND NOT U /S 37, BECAUSE SEC. 28 TAXES PR O F I TS OF THE BUS I NESS WHICH C AN BE WORKED OUT ONLY AFTER ALLOWING EXPENDITURE, SUCH EXPENDITURE GOES OUT OF THE CLUTCHES OF THE DISALLOWANCE IN TERMS OF THE PROVISIONS OF SEC . 40 . IN THIS VIEW OF THE MATTER, AN ASSESSEE MAY CLAIM ALL HIS EXPENDITURES E X CEPT FOR THOSE WHICH ARE CLEARLY COVERED BY SOME OTHER SECTIONS E.G., SEC . 30 COVERING R ENT, RATES, TAXES, INSURANCE ETC . , AS ALLOWABLE U/S 28. IT MAY FURTHER BE OBSERVED THAT ALL THE EXPENDITURE, JUST AS LABOUR CHARGES IN THE INSTANT C ASE, WHICH REPRESENTS DIRECT COSTS AND, THEREFORE, ADJUSTABLE AGAINST REVENUE FOR THE PURPOSE OF DETERMINING THE PROFIT U/S 28(I) DO NOT COME WITHIN THE PROVISIONS OF SEC. 40(A)(IA) . . ... . .. ALL THE DIRECT COST/EXPENDITURE COVERED BY SEC.28 ARE BEYOND THE SCOPE OF DISALLOWANCE U/S 40(A)(IA). IN VIEW OF THE AFORESAID, THE I MPUGNED ORDER PASSED BY THE COMMISSIONER (APPEALS) UPHOLDING THE ACTION OF ASSESSING OFFICER MAKING D I SALLOWANCE U/S 40(A)(IA), WAS TO BE SET ASIDE.' I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 11 -: THUS, ` 5,32,98,887/- IS REIMBURSED BY RKDL TO ITS PRINCIPALS BEING OPERATIONAL SUPPORT COST AND THE B ALANCE ` 12,20,575/- PERTAINS TO BRAND/LABEL VALUE, I.E. 'RO YALTY PAYMENT'. IT IS ALSO SEEN THAT FOR THE ASST. YEARS 2008-09 AND 2009-10, THE APPELLANT HAS ENTERED ' INTO SPECIFIED AGREEMENT WITH ITS PRINC I PALS FOR ROYALTY WHICH WORKS TO RS.1 . 50P PER BOTTLE AND THE PAYMENTS MADE BY RKDL TO ITS PRINCIPALS ARE ` 12,16,919/- AND ` 11,92,783/- FOR THE ASST. YEARS 2008-09 AND 2009-10 RESPECTIVELY. AND HENCE, THE PAYMENT OF ` 5,32,98,887/- AS PER THE HON'BLE HYDERABAD TRIBUNAL'S DECISION AND FACTS CIT ED ABOVE ARE NOT ATTRACTED BY THE PROVISIONS OF SEC 4 0(A)(IA) OF THE INCOME - TAX ACT 1961 . THE PAYMENT OF ROYALTY IS COVERED WITHIN SECTIONS 30 TO 38 OF THE INCOME-TAX ACT, 1961 AND HENCE, FA L LS WITHIN THE AMBIT OF SEC. 40(A)(IA) OF THE INCOME-TA X ACT, 1961 AND TDS SHOULD HAVE BEEN DEDUCTED, WHICH THE APPELLANT HAD SQUARELY FAILED TO DO SO. AND HENCE, ADDITION TO THE TUNE OF ` 12,20,575/- I S SUSTAINED AND ACCORDINGLY, APPELLANT PARTLY SUCCEEDS ON THIS GROUND. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE O N RECORD. IN THE INSTANT CASE, THE ASSESSING OFFICER OBSERVED THAT ` 5,45,19,462/- WAS PAID BY THE ASSESSEE TO ITS PRINCIPALS WHICH WAS R OYALTY AND ON WHICH THE ASSESSEE WAS LIABLE TO DEDUCT TAX. AS THE AS SESSEE FAILED TO DEDUCT TAX THEREON, THE ASSESSING OFFICER DISALLOWE D THE AMOUNT BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 16. ON APPEAL, THE LD.CIT(A) OBSERVED THAT OUT OF ` 5,45,19,462/-, ` 12,20,575/- WAS THE PAYMENT OF ROYALTY AND THE BAL ANCE AMOUNT OF ` 5,32,98,887/- WAS REIMBURSEMENT OF OPERATIONAL SUPP ORT EXPENSES. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 12 -: THEREFORE, THE LD.CIT(A) DELETED THE DISALLOWANCE OF ` 5,32,98,887/- AND CONFIRMED THE DISALLOWANCE OF ` 12,20,575/-. 17. BEFORE US, THE REVENUE IS IN APPEAL IN RESPECT OF D ELETION OF ` 5,32,98,887/- AND THE ASSESSEE IS IN CROSS OBJECTI ON AGAINST CONFIRMATION OF ` 12,20,575/-. 18. THE LD. DR SUBMITTED THAT THE LD.CIT(A) HAS ADMITT ED FRESH EVIDENCES FOR ALLOWING THE CLAIM OF THE ASSESSEE W HICH WAS NOT FILED BEFORE THE ASSESSING OFFICER AND ALSO CONTENDED THA T THE EVIDENCES RELIED UPON BY THE LD.CIT(A) WERE NOT FOR THE RELE VANT ASSESSMENT YEAR. HE ALSO CONTENDED THAT THE FINDING OF THE L D.CIT(A) THAT ` 5,32,98,887/- WAS REIMBURSEMENT OF OPERATIONAL SUPP ORT EXPENSES IS NOT BASED ON ANY RELEVANT MATERIAL AND THUS, PERVER SE. HE ARGUED THAT THE ISSUE SHOULD BE SET ASIDE TO THE FILE OF T HE ASSESSING OFFICER FOR FRESH ADJUDICATION. 19. ON THE OTHER HAND, THE LD. A.R OF THE ASSESSEE ALS O ADMITTED THAT FRESH EVIDENCES WERE FILED BEFORE THE LD.CIT( A) AND HE HAS NO OBJECTION ON SENDING THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION. 20. IN RESPECT OF ` 12,20,575/- CONFIRMED BY THE LD.CIT(A), THE LD. A.R OF THE ASSESSEE DID NOT PUT ANY SERIOUS ARGUME NTS AND SUBMITTED I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 13 -: THAT AS NEW EVIDENCES WERE ADMITTED, THE GROUND OF CROSS OBJECTION IS LIABLE TO BE DISMISSED. 21. WE FIND THAT NO MATERIAL RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION HAS BEEN BROUGHT ON RECORD BY THE LD .CIT(A) ON THE BASIS OF WHICH IT CAN BE CONCLUDED THAT THE AMOUNT OF ` 5,32,98,887/- PAID BY THE ASSESSEE-COMPANY TO ITS PRINCIPALS WERE REIMBURSEMENT OF ACTUAL OPERATIONAL SUPPORT EXPENSES INCURRED BY THE PRINCIPALS AND NO ELEMENT OF INCOME OF PRINCIPAL WAS EMBEDDED THEREIN . THE LD.CIT(A) HAS ESTIMATED IT AS REIMBURSEMENT OF EXPENSES ONLY ON THE BASIS OF AGREEMENTS OF SUBSEQUENT YEARS. COPY OF AGREEMENT BETWEEN THE ASSESSEE AND ITS PRINCIPALS WERE NOT FILED BEFORE U S BY EITHER OF THE PARTIES. IN ABSENCE OF THE AGREEMENT AND IN ABSENC E OF RELEVANT MATERIALS BROUGHT ON RECORD, WE ARE NOT IN A POSITI ON TO ADJUDICATE THE ISSUE COMPLETELY. IN THE CIRCUMSTANCES, IN OUR OPI NION, IT SHALL BE FAIR AND IN THE INTEREST OF JUSTICE, TO RESTORE THE ISSU E RELATING TO ` 5,32,98,887/- TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AFTER VERIFYING THE ACTUAL MATERIAL OF RELEVANT PAY MENTS AND AFTER ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSE. 22. IN RESPECT OF ` 12,20,575/-, WE FIND NO FORCE IN THE CROSS OBJECTION OF THE ASSESSEE AND ACCORDINGLY, THE SAM E IS LIABLE TO BE DISMISSED. WE ORDER ACCORDINGLY. I.T.A.NO. 81/MDS/11 CO 58/MDS/11 :- 14 -: 23. THE GROUND OF APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES AND THE GROUND OF CROSS OBJECTION OF THE A SSESSEE IS DISMISSED. 24. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES WHEREAS THE CROSS OBJECTION OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09 -03-2012. SD/- SD/- (GEORGE MATHAN) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 9 TH MARCH, 2012 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR