K.R.Ushasree, Kollam V. ACIT, Kollam

CO 6/COCH/2008

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7137 (ITAT-COCHIN)
• Duration Of Justice: 4 year(s) 3 month(s) 8 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-04-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 26-03-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 18-01-2008
• Court: TRIBUNAL
• Department Lawyers: T J VINCENT
• Assessee Lawyers: T M SREEDHARAN
• Keywords: Unexplained investment; Transfer pricing; Search and seizure; Opportunity of being heard; International transaction; Proportionate interest; Commercial expediency
• Section: 43B; 143(3); 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NOS. 401/COCH/2006, 25/COCH/2008, 157/COCH/ 2007 & 612/COCH/2008 ASSESSMENT YEARS :2002-0 3, 2003-04 & 2004-05 K.R. USHASREE, SAI EXPORT ENTERPRISES, MANGAD, KOLLAM [PAN: AEYPP 2046K] VS. 1.THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, KOLLAM. 2.THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) I.T.A. NOS. 973/COCH/2007 & 659/COCH/2008 ASSESSMENT YEARS :2002-03 & 2004-05 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. VS. K.R. USHASREE, SAI EXPORT ENTERPRISES, MANGAD, KOLLAM (REVENUE-APPELLANT) (ASSESSEE - RESPONDENT) C.O. NO. 06/COCH/2008 (ARSG. OUT OF I.T.A. NO. 973/COCH/2007 ASSESSMENT YEAR :2002-03 K.R. USHASREE, SAI EXPORT ENTERPRISES, MANGAD, KOLLAM VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. (ASSESSEE-APPELLANT) (REVENUE-RESPOND ENT) ASSESSEE BY SHRI T.M. SREEDHARAN, SR. ADV. REVENUE BY SHRI T.J. VINCENT, SR. DR DATE OF HEARING 26/03/2012 DATEOF PRONOUNCEMENT 27/04/2012 K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 2 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: ALL THE ABOVE SAID APPEALS ARE DIRECTED AGAINST TH E ORDERS PASSED BY LD CIT(A)- III, TRIVANDRUM AND THEY RELATE TO THE ASSESSMENT Y EAR 2002-03, 2003-04 AND 2004-05. SINCE THESE APPEALS WERE HEARD TOGETHER, THEY ARE D ISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. HOWEVER, WE PREFER T O ADJUDICATE THE APPEALS ASSESSMENT YEAR WISE. (A) ASSESSMENT YEAR : 2002-03 :- IN THIS YEAR, THERE ARE TWO ASSESSMENT ORDERS, VIZ ., ONE ASSESSMENT ORDER PASSED U/S 143(3) AND ANOTHER ASSESSMENT ORDER PASSED IN R EASSESSMENT PROCEEDING U/S 143(3) R.W.S. 147 OF THE ACT. THE APPEAL OF THE ASS ESSEE NUMBERED AS ITA 401/COCH/2006 RELATES TO THE ASSESSMENT ORDER PASSE D U/S 143(3) OF THE ACT. THE OTHER APPEALS AND THE CROSS OBJECTION RELATE TO THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 147 OF THE ACT. 2. WE SHALL TAKE UP THE APPEAL FILED BY THE ASS ESSEE AND NUMBERED AS ITA 401/COCH/2006 RELATING TO THE ASSESSMENT ORDER PASS ED U/S 143(3) OF THE ACT. FOLLOWING TWO ISSUES ARE CONTESTED IN THIS APPEAL:- (A) ADDITION BASED ON TPOS ORDER ON ARMS LENGTH P RICE IN RESPECT OF INTERNATIONAL TRANSACTIONS. (B) ADDITION ON ACCOUNT OF STOCK DIFFERENCE NOTIC ED BY THE SALES TAX AUTHORITIES. 3. THE FACTS RELATING TO THESE TWO ISSUES ARE D ISCUSSED IN BRIEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT O F CASHEW KERNELS, BESIDES LOCAL SALES. THE ASSESSEE WAS HAVING INTERNATIONAL TRANS ACTIONS, I.E., IMPORTS AS WELL AS EXPORTS WITH ITS ASSOCIATED ENTERPRISES AND THE VAL UE OF SUCH INTERNATIONAL TRANSACTIONS K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 3 EXCEEDED FIVE CRORES DURING THE INSTANT YEAR. HENC E, THE AO REFERRED THE MATTER OF DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER, (TPO) WHO DETERMINED THE ALP AT RS.77084632/- IN RESPECT OF IMPORT TRANSACTIONS AND RS.23468040/- IN RESPECT OF EXPORT TRANSACTIONS THUS AGGREGATING TO RS.100552672/-. THE ASSESSEE HAD DE CLARED THE AGGREGATE VALUE OF IMPORTS AND EXPORTS IN RESPECT OF THOSE TRANSACTION S CONSIDERED BY TPO AT RS.98212054/- , THUS RESULTING IN A DIFFERENCE OF R S.2340618/-. THE SAID DIFFERENCE WAS ADDED BY THE AO TO THE TOTAL INCOME OF THE ASSESSEE . DURING THE YEAR UNDER CONSIDERATION THERE WAS AN INSPECTION BY SALES TAX AUTHORITIES AT THE BUSINESS PREMISES OF THE ASSESSEE AND THEY HAVE NOTICED STOCK DIFFERE NCE ON CERTAIN DAYS (I.E. EXCESS STOCK AS WELL AS SHORTAGE OF STOCK ON CERTAIN DAYS) . THOUGH THE ASSESSEE CONTESTED THAT NO ADDITION SHOULD BE MADE ON THE BASIS OF INS PECTION REPORT OF SALES TAX AUTHORITIES, YET HE AGREED FOR AN ADDITION OF RS.2. 50 LAKHS INITIALLY. THE ACTUAL VALUE OF DIFFERENCE IN STOCK FOUND OUT BY THE SALES TAX AUTH ORITIES WAS RS.20,26,464/-. ACCORDINGLY, THE AO PROPOSED FOR AN ADDITION OF RS. 7.50 LAKHS, WHICH THE ASSESSEE AGREED. HOWEVER THE AO ADDED THE AMOUNT OF RS.2.50 LAKHS INITIALLY OFFERED BY THE ASSESSEE AS WELL AS RS.7.50 LAKHS AGREED BY THE ASS ESSEE LATER. 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEF ORE LD CIT(A), WHO UPHELD MAJOR PORTION OF THE ADDITION RELATING TO ALP DIFFERENCE AND GRANTED A RELIEF OF RS.89,061/-.. WITH REGARD TO THE STOCK DIFFERENCE, THE LD CIT(A) ENHANCED THE ADDITION TO RS.25,91,248/-. AGGRIEVED BY THE ORDER OF LD CIT(A ), THE ASSESSEE IS IN APPEAL BEFORE US. 5. WITH REGARD TO THE ADDITION RELATING TO THE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS, THE LD A.R SUBMITTED AS UNDER:- (A) THE DIFFERENCE IN RATES NOTICED BETWEEN THE IN VOICE RATES AND THE STATISTICAL RATES REPRESENTS NORMAL BUSINESS RATES VARIATION. THERE IS TIME GAP BETWEEN THE DATE OF BOOKING ORDER AND THE DATE OF INVOICING AND ACTUAL DELIVERY. THUS THE DIFFERENCE IS MAINLY DUE TO THE WIDE MARKET FLUCTUA TIONS. K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 4 (B) THE ACTUAL DIFFERENCE COMPUTED BY THE TPO IS LESS THAN THE PERMISSIBLE LIMIT OF 5%. (C) THE TPO HAS COMPUTED THE ALP DIFFERENCE IN RES PECT OF SELECTIVE TRANSACTIONS, WHICH WERE IN FAVOUR OF REVENUE AND O MITTED THE TRANSACTIONS WHICH WERE AGAINST THE REVENUE. ON THE OTHER HAND, THE LD. D.R STOOD BY THE ORDER O F LD CIT(A). 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. IN THE INSTANT CASE, THE ASSESSEE HAS COMPARED THE INTERNA TIONAL TRANSACTIONS ENTERED BY IT WITH THE STATISTICAL DATA SUPPLIED BY CASHEW EXPORT PROMOTION COUNCIL OF INDIA. IN THE INSTANT CASE, ONE TO ONE COMPARISON OF EACH TRANSAC TION HAS BEEN MADE. THE TPO HAS CONVENIENTLY PICKED UP ONLY THOSE TRANSACTIONS WHIC H WERE IN FAVOUR OF THE REVENUE FROM OUT OF THE DATA SUPPLIED BY THE ASSESSEE, I.E. HE HAS CONSIDERED ONLY FIVE PURCHASE INVOICES OUT OF 19 IMPORTS. IN RESPECT OF EXPORTS, HE HAS PICKED UP ONLY THOSE ITEMS IN WHICH THERE WERE UNDER REALIZATION, EVEN WITHIN SIN GLE INVOICE. THE TPO HAS CONVENIENTLY OMITTED TO CONSIDER THE IMPORTS/EXPORT S WHICH WERE AGAINST THE REVENUE OR IN FAVOUR OF THE ASSESSEE. THIS APPROACH OF THE TP O, IN OUR VIEW, DOES NOT APPEAR TO BE FAIR, SINCE IT PUTS THE ASSESSEE ALWAYS IN DISAD VANTAGEOUS POSITION ONLY. ACCORDINGLY, WE ARE OF THE VIEW THAT THIS ISSUE NEEDS RE-EXAMINA TION AT THE END OF THE TPO. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD CIT(A ) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF AO WITH THE DIRECTION TO EXAMINE THE ISSUE AFRESH IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD. WITH REGARD TO THE CLAIM OF THE ASSESSEE ABOUT THE AVAILABILITY OF TOLERANCE LI MIT OF 5%, WE NOTICE THAT, IN THE CASE OF ACIT VS. ESSAR STEEL LTD (131 ITD 22)(VISAKHA) AN D ALSO IN THE CASE OF HOWORTH (INDIA) P LTD VS. DCIT (131 ITD 215)(DELHI), THE RE SPECTIVE TRIBUNALS HAVE HELD THAT THE TOLERANCE LIMIT OF 5% IS AVAILABLE ONLY WHEN AVERAG E OF TWO OR MORE PRICES ARE ADOPTED. 7. THE NEXT ISSUE RELATES TO THE ADDITION MADE ON ACCOUNT OF STOCK DIFFERENCE. IN RESPECT OF SHORTAGE OF STOCK NOTICED BY THE SALES T AX DEPARTMENT, THE LD CIT(A) TOOK THE VIEW THAT THE SAID SHORTAGE REPRESENTS UNACCOUN TED SALES. SINCE THE CORRESPONDING K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 5 PURCHASES WOULD HAVE BEEN ACCOUNTED FOR IN THE BOOK S, THE LD CIT(A) TOOK THE VIEW THAT THE ENTIRE SALES AMOUNT REPRESENTS INCOME OF T HE ASSESSEE. IN RESPECT OF EXCESS STOCK, THE LD CIT(A) TOOK THE VIEW THAT THE SAME RE PRESENTS UNACCOUNTED INVESTMENT MADE IN PURCHASE OF STOCK. IN PRINCIPLE, THE VIEW EXPRESSED BY LD CIT(A) IS CORRECT. HOWEVER, THE CONTENTION OF THE ASSESSEE IS THAT THE DIFFERENCE IN STOCK WAS FOUND DURING INTERMITTENT PERIOD AND THE DIFFERENCE, IF A NY, GETS AUTOMATICALLY ADJUSTED AT THE YEAR END WHILE TAKING THE INVENTORY. ANOTHER IMPOR TANT CONTENTION MADE BY THE LD A.R WAS THAT THE AO AND LD CIT(A) HAS SIMPLY ACCEPTED T HE REPORT OF THE SALES TAX AUTHORITIES WITHOUT MAKING INDEPENDENT EVALUATION O F THE MATERIALS IN THE CONTEXT OF THE INCOME TAX ACT. 8. WE FIND FORCE IN THE SAID CONTENTIONS. THE ACTUAL AMOUNT OF SUPPRESSION NOTICED BY THE SALES TAX INVESTIGATION WING AUTHORITIES WAS ABOUT RS.25.00 LAKHS. HOWEVER, THE SALES TAX OFFICER HAS ADOPTED THE DIFFERENCE AT ABO UT RS.20 LAKHS AND DETERMINED THE DIFFERENCE FOR THE WHOLE YEAR AT RS.75.00 LAKHS. T HE APPELLATE AUTHORITIES REDUCED THE DIFFERENCE TO RS.60.00 LAKHS. THUS IT COULD BE SEE N THAT THERE IS WIDE VARIATION IN THE VALUE OF SUPPRESSION OF STOCK THAT WAS DETERMINED A T VARIOUS STAGES OF SALES TAX PROCEEDING. IN VIEW OF THE ABOVE CITED WIDE DIFFERE NCES, IN OUR VIEW ALSO, THE MATERIALS COLLECTED BY THE SALES TAX AUTHORITIES HAVE TO BE I NDEPENDENTLY EXAMINED BY THE AO BEFORE MAKING ANY ADDITION ON THE BASIS OF THOSE DO CUMENTS. FROM THE ORDERS OF THE TAX AUTHORITIES, IT IS NOT CLEAR ON THE FOLLOWING P OINTS:- (A) WHETHER THE ASSESSEE HAS MAINTAINED ANY STOCK REGISTER. (B) IF NO STOCK REGISTER WAS MAINTAINED, HOW THE DIFFERENCE IN STOCK WAS WORKED OUT BY THE SALES TAX AUTHORITIES DURING INTERMITTEN T PERIODS. (C) IF STOCK REGISTER WAS MAINTAINED, HOW THE DI FFERENCE IN STOCK OF EARLIER DATES WAS WORKED OUT BY THE SALES TAX AUTHORITIES. (D) WHAT WAS THE EXPLANATION OF THE ASSESSEE WITH REGARD TO SUCH DIFFERENCES BEFORE THE SALES TAX AUTHORITIES? (E) WHETHER ANY RECONCILIATION STATEMENT WAS PREPA RED BY THE ASSESSEE. IN THE ABSENCE OF THE ABOVE SAID PARTICULARS, IT IS DIFFICULT TO APPRECIATE THE CONTENTION OF THE ASSESSEE THAT THE DIFFERENCE FOUND IN THE MI DDLE OF THE YEAR GETS AUTOMATICALLY K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 6 ADJUSTED AT THE YEAR END. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THIS MATTER ALSO REQUIRES RE-EXAMINATION AT THE END OF THE AO. ACCORDINGLY WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE TH E SAME TO THE FILE OF THE AO WITH THE DIRECTION TO MAKE INDEPENDENT APPRAISAL OF THE EVID ENCES COLLECTED BY THE SALES TAX AUTHORITIES AND CALL FOR EXPLANATIONS FROM THE ASSE SSEE AND THEREAFTER THE DECIDE THE MATTER IN ACCORDANCE WITH THE LAW. 9. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE IN RESPECT OF ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 147 OF THE ACT. THI S APPEAL IS BARRED BY LIMITATION BY 51 DAYS. THE ASSESSEE HAS MOVED A PETITION PRAYING TH E BENCH TO CONDONE THE DELAY. HAVING REGARD TO THE SUBMISSIONS MADE THEREIN, WE C ONDONE THE DELAY AND ADMIT THE APPEAL FOR HEARING. THE ONLY ISSUE URGED IN THIS APPEAL RELATES TO THE ASSESSMENT OF DEPB RECEIPTS. AT THE TIME OF HEARING, THE LD A.R B ROUGHT TO OUR NOTICE THAT THE ISSUE OF TAXABILITY OF DEPB RECEIPTS HAS SINCE BEEN SETTLE D BY THE HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS VS. CIT REPORTED IN (2012 )(247 CTR (SC) 353) AND ACCORDINGLY PRAYED THAT THIS ISSUE MAY BE SET ASIDE TO THE FILE OF AO FOR FRESH CONSIDERATION IN TERMS OF THE DECISION OF HONBLE S UPREME COURT REFERRED SUPRA. THE LD D.R ALSO DID NOT OBJECT TO THE SAID PLEA MADE BY LD A.R. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SA ME TO THE FILE OF AO WITH THE DIRECTION TO EXAMINE THE ISSUE OF TAXABILITY OF DEPB IN ACCORDANCE WITH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS REFERRED SUPRA. THE ASSESSEE SHOULD BE GIVEN NECESSARY OPPORTUNITY OF BEING HEAR D. 10. WE SHALL TAKE UP THE APPEAL FILED BY THE REVENUE IN RESPECT OF THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 147 OF THE ACT. THE ONLY ISSUE URGED IN THIS APPEAL RELATES TO THE DETERMINATION OF INDIRECT COST ATTRI BUTABLE TO THE EXPORT TURNOVER. THIS BENCH HAS CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF B.MOHANACHANDRAN NAIR IN ITA NO.158/COCH/2007 AND IT WAS HELD AS UNDER:- 5. THE FIRST ISSUE PERTAINS TO THE COMPUTATION OF INDIRECT COST RELATING TO EXPORT OF TRADING GOODS. U/S 80HHC(3)(C) OF THE A CT, THE PROFIT DERIVED FROM THE EXPORT OF TRADING GOODS SHALL BE THE EXPORT TUR NOVER IN RESPECT OF SUCH K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 7 TRADING GOODS AS REDUCED BY THE DIRECT AND INDIRECT COSTS ATTRIBUTABLE TO EXPORT OF SUCH TRADING GOODS. THE DISPUTE IS WITH REGARD TO THE QUANTUM OF INDIRECT COSTS ATTRIBUTABLE TO THE TRADING GOODS. THE ASSESSEE H AS TAKEN THE TOTAL AMOUNT OF INDIRECT COST AT RS.1,74,53,650/-, WHILE THE ASSESS ING OFFICER HAS TAKEN THE SAME AT RS.4,71,01,876/-. THOUGH IT IS NOT CLEARLY BORN E OUT OF RECORD, THERE APPEARS TO BE NO DISPUTE WITH REGARD TO THE ALLOCATION OF I NDIRECT COSTS BETWEEN PROCESS EXPORT AND TRADING EXPORT, WHICH ARE TO BE CARRI ED OUT IN ACCORDANCE WITH THE FOLLOWING FORMULA AS PER CLAUSE (E) OF EXPLANATION TO 80HHC(3) INDIRECT COSTS X EXPORT TURNOVER/TOTAL TURNOVER. THE ASSESSING OFFICER HAS TAKEN ALL THE EXPENSES DE BITED TO THE PROFIT AND LOSS ACCOUNT AS INDIRECT COST AND ACCORDINGLY ARRIVED AT THE FIGURE OF RS.4,71,01,876/-. HOWEVER, ACCORDING TO THE ASSESS EE, HE HAS TAKEN ONLY THOSE INDIRECT EXPENSES, WHICH ARE ATTRIBUTABLE TO THE EXPORT TURNOVER. ACCORDING TO THE ASSESSEE, HE HAS FOLLOWED THE SIMILAR METHOD OF COMPUTATION IN THE EARLIER YEARS ALSO AND THE SAID METHOD WAS ALSO ACCEPTED BY THE ASSESSING OFFICER. ACCORDINGLY, IT WAS CONTENDED, BY PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT REPORTED IN 193 ITR 321, THAT THE ASSESSING OFFICER WAS NOT CORRECT IN DEVIATING FROM THE VIEW TAKEN CONSISTENTLY IN EARLIER YEARS, IN THE ABSENCE OF AN Y MATERIAL WHICH JUSTIFIES THE SAID CHANGE. THE LD A.R ALSO PLACED RELIANCE ON TH E FOLLOWING DECISION IN SUPPORT OF THE COMPUTATIONS MADE BY THE ASSESSEE. (A) GLAXO SMITHKLINE ASIA (P) LTD VS. ACIT (97 TTJ (DEL) 108) (B) SURENDRA ENGINEERING CORPN. VS. ACIT (78 TTJ (M UM)(SB)347) (C) ORDER DATED 31-01-2007 PASSED BY SMC BENCH OF COCHIN ITAT IN THE CASE OF M/S POYILAKADA TRUST VS. DCIT. 5.1 WE NOTICE THAT THE SMC BENCH OF THE COCHIN TRIBUNAL HAS CONSIDERED THE OTHER TWO DECISIONS REFERRED SUPRA AND HAS DECIDED AN IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE. IN THE CASE OF SURENDRA ENGINEERING C ORPORATION, SUPRA, THE SPECIAL BENCH OF THE TRIBUNAL HAS OBSERVED AS UNDER: THE COMMISSIONER (APPEALS) VIEW THAT AS PER THE DE FINITION OF INDIRECT COSTS IN EXPLANATION (E) BELOW SUB SECTION (3), EXC EPT FOR THE ALLOCATION BETWEEN EXPORT TURNOVER IN RESPECT OF TRADING GOODS AND TOTAL TURNOVER IN A CASE WHERE THE ASSESSEE HAVE BOTH EXPORTS AND LOC AL SALES, NO OTHER APPORTIONMENT IS CONTEMPLATED, APPEARED TO OVER LOO K THE IMPORT OF THE WORDS ATTRIBUTABLE TO SUCH EXPORT APPEARING IN CL AUSE (B) OF SUB-SECTION (3). THE DEFINITION OF INDIRECT COSTS MUST BE GOV ERNED OR CONTROLLED BY THE WORDS ATTRIBUTABLE TO SUCH EXPORT APPEARING I N CLAUSE (B) OF SUB- SECTION (3) SINCE THE ATTEMPT IS TO FIND OUT, IN A REASONABLE MANNER, THE PROFITS DERIVED FROM THE EXPORT OF TRADING GOODS, A ND THEREFORE, WHATEVER EXPENDITURE IS NOT RELEVANT OR CANNOT BE REASONABLY STATED TO HAVE BEEN INCURRED IN CONNECTION WITH THE EXPORTS OR CAN BE R EASONABLY SAID TO HAVE BEEN INCURRED IN CONNECTION WITH OTHER ACTIVITIES O R RECEIPTS WOULD HAVE TO BE EXCLUDED. K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 8 IN THE CASE OF SMITHKLINE ASIA (P) LTD. VS. ACIT, S UPRA, THE DELHI BENCH HAS HELD THAT THE INDIRECT COST ATTRIBUTABLE TO THE EXPORT I S TO BE REDUCED FOR COMPUTING DEDUCTION U/S 80HHC IN RESPECT OF EXPORT OF TRADING GOODS AND NOT ALL COSTS OTHER THAN DIRECT COSTS. WHILE COMING TO THIS CONCLUSION , THE DELHI BENCH HAS FOLLOWED THE DECISION OF MUMBAI SPECIAL BENCH IN THE CASE OF SURENDRA ENGG. CORPORATION, REFERRED SUPRA. 5.2 ON A CAREFUL READING OF THE DECISIONS REFER RED SUPRA, WE NOTICE THAT THE INDIRECT COSTS NOT RELATABLE TO THE EXPORT TURNOVER (BOTH PROCESSING EXPORT AND TRADING EXPORT) HAVE TO BE EXCLUDED FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC. FROM THE EXPLANATIONS FURNISHED BY THE ASSESSEE BEFORE LD CIT(A), WHICH ARE PLACED IN PAGES 14 TO 18 OF THE ASSESSEE S PAPER BOOK, CERTAIN EXPENSES EXCLUSIVELY PERTAIN TO THE MANUFACTURING/PROCESSING UNIT. IN OUR VIEW, THE QUESTION OF ALLOCATION OF INDIRECT COSTS SHALL AR ISE ONLY IN RESPECT OF THOSE EXPENSES WHICH HAVE BEEN INCURRED COMMONLY BOTH FOR PROCESS EXPORT AND TRADING EXPORT. IN THE EXPLANATIONS FILED BEFORE L D CIT(A), THE ASSESSEE HAS POINTED OUT THAT CERTAIN TYPES OF INDIRECT EXPENSES HAVE BEEN INCURRED EXCLUSIVELY FOR PROCESS EXPORT. AS PER SEC. 80HHC(3), THE PROF ITS DERIVED FROM TRADING GOODS SHALL BE THE EXPORT TURNOVER IN RESPECT OF SUCH TRA DING GOODS AS REDUCED BY THE DIRECT AND INDIRECT COSTS ATTRIBUTABLE TO EXPORT OF SUCH TRADI NG GOODS . IF A PARTICULAR TYPE OF INDIRECT EXPENSE IS PROVED TO HA VE BEEN INCURRED ONLY IN RESPECT OF PROCESSED EXPORTS, IN OUR VIEW, THE SAME COULD N OT BE ALLOCATED TO TRADING EXPORTS. HENCE, IN OUR VIEW, THE QUESTION OF DETE RMINATION OF SUCH TYPES OF INDIRECT COSTS REQUIRES RE-EXAMINATION. ACCORDINGL Y, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FI LE OF THE ASSESSING OFFICER WITH A DIRECTION TO DETERMINE THE QUANTUM OF INDIRECT COS TS AS PER THE DECISIONS RELIED UPON BY THE ASSESSEE AND ALSO BY DULY CONSIDERING T HE DISCUSSIONS MADE ABOVE AND THERE AFTER ASCERTAIN THE AMOUNT OF INDIRECT CO STS ATTRIBUTABLE TO THE TRADING EXPORTS AS PER THE FORMULA GIVEN IN SEC. 80HHC OF T HE ACT. IN THE INSTANT CASE ALSO, THIS ISSUE REQUIRES RE-EX AMINATION IN THE LIGHT OF DISCUSSIONS MADE ABOVE. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) AND RESTORE THE SAME TO THE FILE OF AO WITH THE DIRECTION TO EXAMINE THE IS SUE AFRESH IN THE LIGHT OF DISCUSSIONS MADE ABOVE AND ALSO IN ACCORDANCE WITH THE LAW. 11. THE ASSESSEE HAS FILED CROSS OBJECTIONS ONL Y TO SUPPORT THE ORDER OF LD CIT(A). SINCE WE HAVE SET ASIDE THE ISSUE CONTESTED BY THE DEPARTMENT TO THE FILE OF AO, THE CROSS OBJECTION FILED BY THE ASSESSEE IS LIABLE TO BE DISMISSED. K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 9 (B) ASSESSMENT YEAR : 2003-04 :- 12. IN THIS, THE ASSESSEE HAS FILED APPEAL BEFO RE US CONTESTING FOLLOWING ISSUES:- (A) DISALLOWANCE U/S 43B OF THE ACT. (B) ADDITION ON ACCOUNT OF STOCK DIFFERENCE FOUND BY SALES TAX AUTHORITIES. (C) ADDITION OF ALP DIFFERENCE ON THE BASIS OF TP OS REPORT. (D) ALLOCATION OF INDIRECT COSTS RELATING TO EXPO RT TURNOVER. (E) ASSESSMENT OF DEPB RECEIPTS. (E) DISALLOWANCE OF EXPENSES TOWARDS PERSONAL USE. 13. ALL THE ISSUES NUMBERED AS (B) TO (E) IN THE PRECEDING PARAGRAPH WERE ALSO CONSIDERED WHILE CONSIDERING THE APPEALS RELATING T O THE ASSESSMENT YEAR 2002-03, SUPRA, AND FOR THE REASONS STATED THEREIN ALL THESE ISSUES WERE SET ASIDE TO THE FILE OF AO FOR FRESH CONSIDERATION OF THE SAME. IT WAS STA TED THAT THE FACTS IN RESPECT OF THESE ISSUES ARE IDENTICAL IN THIS YEAR ALSO. ACCORDINGL Y, CONSISTENT WITH THE VIEW TAKEN IN THE APPEALS RELATING TO THE ASSESSMENT YEAR 2002-03, WE SET ASIDE THE ORDER OF LD CIT(A) ON THE ISSUES NUMBERED AS (B) TO (E), SUPRA, AND RE STORE THEM TO THE FILE OF AO WITH SIMILAR DIRECTIONS. 14. THE DISALLOWANCE MADE U/S 43B RELATES TO TH E PROVIDENT FUND PAYMENTS. THE LD A.R SUBMITTED THAT THIS ISSUE IS COVERED BY THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS REPORTED IN 309 ITR 306. AC CORDINGLY WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF AO WITH THE DIRECTION TO EXAMINE THIS ISSUE IN ACCORDANCE WITH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS REFERRED SUPRA. 15. THE LAST ISSUE RELATES TO THE DISALLOWANCE O F 10% OF VEHICLE EXPENSES FOR PERSONAL USE. BEFORE US, THE ASSESSEE DID NOT FURNISH ANY M ATERIAL TO SHOW THAT THERE WAS NO PERSONAL USE OF VEHICLES IN ORDER TO COMPEL US TO I NTERFERE WITH THE DECISION OF LD CIT(A) ON THIS ISSUE. HENCE WE UPHOLD THE ORDER OF LD CIT(A) ON THIS ISSUE. K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 10 (C) ASSESSMENT YEAR 2004-05 :- 16. BOTH THE PARTIES HAVE FILED APPEALS CHALLEN GING THE ORDER OF LD CIT(A) PASSED FOR THE ASSESSMENT YEAR 2004-05. 17. IN THE APPEAL FILED BY THE ASSESSEE, FOLLOW ING ISSUES ARE CONTESTED:- (A) ADDITION ON ACCOUNT OF STOCK DIFFERENCE FOUND BY SALES TAX AUTHORITIES. (B) ADDITION ON ACCOUNT SUPPRESSION OF SALES ESTIM ATED BY THE SALES TAX AUTHORITIES. (C) EXCLUSION OF 90% OF EXPORT HOUSE PREMIUM FOR TH E PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT. (D) ASSESSMENT OF DEPB RECEIPTS. 18. THE ADDITION ON ACCOUNT OF STOCK DIFFERENCE AND SUPPRESSION SALES ARE ARISING OUT OF THE INSPECTION REPORT OF SALES TAX AUTHORITIES. WHILE DEALING WITH AN IDENTICAL ISSUE IN THE APPEAL RELATING TO THE ASSESSMENT YEAR 2002-03, WE HAD SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR FRESH CONSIDERATION OF THE SAME AFTER MAKING INDEPENDENT APPRAISAL OF THE MATERIALS COLLECTED BY THE SALES TAX AUTHORITIE S. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE SET ASIDE THE ORDER OF LD CIT(A) ON THE SE TWO ISSUES AND RESTORE THE SAME TO THE FILE OF AO WITH SIMILAR DIRECTIONS. 19. THE OTHER TWO ISSUE RELATE TO THE EXCLUSION OF 90% OF EXPORT HOUSE PREMIUM AND ASSESSMENT OF DEPB RECEIPTS IN THE CONTEXT OF DEDUCT ION U/S 80HHC OF THE ACT. IT WAS SUBMITTED BEFORE US BY LD A.R THAT BOTH THE ISSUES REQUIRE RECONSIDERATION IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CAS E OF TOPMAN EXPORTS, SUPRA. LD D.R ALSO DID NOT OBJECT TO THE PLEA MADE BY THE LD A.R. ACCORDINGLY, WE SET ASIDE THE ORDERS OF LD CIT(A) ON BOTH THE ISSUES AND RESTORE THE SAME TO THE FILE OF AO FOR FRESH CONSIDERATION IN ACCORDANCE WITH THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS, REFERRED SUPRA. K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 11 20. IN THE APPEAL FILED BY THE REVENUE, THE ONLY ISSUE CONTESTED BEFORE US RELATES TO THE DISALLOWANCE OF INTEREST EXPENDITURE OF RS.28.5 0 LAKHS ON ACCOUNT OF DIVERSION OF FUNDS TO THE SISTER CONCERN. 21. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE AO NOTICED THAT THERE WERE HUGE TRANSACTIONS INVOLVING TRANSFER OF FUNDS WITH THE ASSESSEES HUSBANDS CONCERN NAMED M/S PRASHANTHI CASHEW COMPANY. THERE WAS OPE NING DEBIT BALANCE OF RS.4.25 CRORES AS AT THE BEGINNING OF THE YEAR. THE BALANC E ROSE TO RS.5.74 CRORES IN THE MONTH OF JUNE AND TO RS.7.14 CRORES IN THE MONTH OF AUGUS T. THE BALANCE FINALLY CAME DOWN TO RS.6.50 CRORES AT THE YEAR END. THE AO ALSO NOT ICED THAT THE ASSESSEE HAS AVAILED LOAN FACILITIES FROM BANKS AND PAID INTEREST THEREO N TO THE TUNE OF RS.1.46 CRORES. HOWEVER, NO INTEREST WAS COLLECTED BY THE ASSESSEE FROM THE ABOVE SAID CONCERN. ACCORDINGLY, BY PLACING RELIANCE ON THE FOLLOWING C ASE LAW, THE AO TOOK THE VIEW THERE WAS DIVERSION OF INTEREST BEARING FUNDS AND ACCORDI NGLY PROPOSED TO MAKE DISALLOWANCE OF PROPORTIONATE INTEREST. (A) CIT VS. V.I. BABY (254 ITR 268 (KERALA)) (B) K.SOMASUNDARAM & BROS. VS. CIT (238 ITR 939 ( MAD)) (C) CIT VS.ABHISHEK INDUSTRIES LTD (286 ITR 1 (P& H)) THE ASSESSEE HAD AVAILED BANK LOANS REFERRED AS PC FC LOAN AND PC LOAN AT THE INTEREST RATES RANGING FROM 2.75% TO 6.75%. THE AS SESSEE CONTENDED THAT ALL THE TRANSACTIONS ENTERED WITH THE SISTER CONCERN CITED ABOVE ARE BUSINESS RELATED TRANSACTIONS. THE AO REJECTED THE SAID CONTENTION SINCE ALL THE TRANSACTIONS WERE IN THE NATURE OF TRANSFER OF FUNDS ONLY. ACCORDINGLY, THE AO CALCULATED THE INTEREST ON DIVERTED FUNDS AT AN AVERAGE RATE OF 4.75% AND DISALLOWED A SUM OF RS.28.50 LAKHS OUT OF THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. 22. IN THE APPEAL FILED BY THE ASSESSEE, THE LD CIT(A) ALSO NOTICED THAT THE TRANSACTIONS ENTERED WITH THE SISTER CONCERN CITED ABOVE WERE IN THE NATURE OF TRANSFER OF FUNDS. THE LD CIT(A), AT PARAGRAPH 6 OF HER ORDER, HAS ALS O GIVEN A FINDING THAT THE FUNDS HAVE BEEN TRANSFERRED FROM OUT OF TH E PACKING CREDIT LOAN AVAILED FROM VYSYA BANK AND THUS DIRECT NEXUS FOR T HE FUND TRANSFER IS NOT K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 12 OWN FUNDS BUT BORROWED FUNDS . HOWEVER, THE LD CIT(A) CAME TO THE CONCLUSION THAT THERE WAS COMMERCIAL EXPEDIENCY IN TRANSFERRING FUN DS TO THE SISTER CONCERN. THE RELEVANT OBSERVATIONS MADE BY LD CIT(A) ARE EXTRACT ED BELOW:- BOTH THE APPELLANT AND ITS SISTER CONCERN ARE IN T HE SAME LINE OF BUSINESS. THE FUNDS WERE TRANSFERRED FROM THE PACKING CREDIT ACCO UNT OF THE APPELLANT TO MEET THE BUSINESS REQUIREMENTS OF ITS SISTER CONCERN. T HE SISTER CONCERN HAS UTILLISED THE FUNDS FOR THE PURPOSE OF BUSINESS AND BEING PAC KING CREDIT LOAN THE FUNDS HAVE NECESSARILY TO BE UTILIZED TO MEET EXPORT OBLI GATIONS. THEREFORE, ON THE FACTS OF THIS CASE I HOLD THAT THE TRANSFERS WERE M ADE ON GROUNDS OF COMMERCIAL EXPEDIENCY. IN THE LIGHT OF DECISION OF THE SUPREM E COURT IN SA BUILDERS, THIS GROUND IS ALLOWED AND THE ADDITION OF RS.28,50,000/ - IS DELETED. 23. FROM THE OBSERVATIONS MADE BY LD CIT(A), IT IS VERY MUCH CLEAR THAT SHE HAS MISDIRECTED HERSELF IN LOOKING AT THE ASPECT OF COM MERCIAL EXPEDIENCY FROM THE POINT OF VIEW OF THE SISTER CONCERN, WHERE AS THE REQUIREMEN T IS TO LOOK AT THE ASPECT OF THE COMMERCIAL EXPEDIENCY FROM THE POINT OF VIEW OF THE ASSESSEE HEREIN. THERE SHOULD BE A COMMERCIAL EXPEDIENCY OR BUSINESS COMPULSION OR A BUSINESS ADVANTAGE FOR THE ASSESSEE HEREIN IN TRANSFERRING FUNDS TO ITS CONCER N. THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY MATERIAL ON RECORD TO SHOW THAT THERE EX ISTED A COMMERCIAL EXPEDIENCY, I.E., BUSINESS COMPULSION OR BUSINESS ADVANTAGE TO THE AS SESSEE HEREIN, IN TRANSFERRING FUNDS TO ITS SISTER CONCERN. 24. THE LD A.R REITERATED THE ASSESSEES CONTENTI ON THAT THE SHE WAS POSSESSED OF INTEREST FREE FUNDS AND HENCE THE DIVERSION OF FUND S IS OUT OF SUCH INTEREST FREE FUNDS. WE ARE AFRAID THAT WE CANNOT ENTERTAIN THE SAID CON TENTION AT THIS STAGE FOR THE REASON THAT THE ASSESSEE HAS NOT CHALLENGED THE CATEGORICA L FINDING GIVEN BY LD CIT(A) THAT THE FUNDS HAVE BEEN DIVERTED FROM OUT OF PACKING CREDIT LOAN AVAILED FROM VYSYA BANK AND THERE EXISTED DIRECT NEXUS BETWEEN BORROWED FUNDS A ND THE FUNDS SO TRANSFERRED. 25. THE LD D.R, ON THE OTHER HAND, PLACED RELIA NCE ON THE ORDER DATED 11-02-2008 PASSED BY CO-ORDINATE BENCH OF ITAT, COCHIN IN THE CASE OF M/S P.T.ANTONY & SONS IN K.R. USHASREE SAI EXPORT ENTERPRISES, KOLLAM 13 ITA NO.698 (COCH)/2005. IN THAT CASE, THE TRIBUNAL HAS CONFIRMED THE DISALLOWANCE OF INTEREST MADE ON ACCOUNT OF DIVERSION OF FUNDS, SIN CE THE ASSESSEE THEREIN FAILED TO SHOW THAT THE DIVERSION WAS ON ACCOUNT OF ANY COMME RCIAL EXPEDIENCY. IN THE INSTANT CASE, THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY MA TERIAL TO SHOW THAT THE DIVERSION OF FUNDS WAS ON ACCOUNT OF COMMERCIAL EXPEDIENCY. FUR THER THE LD CIT(A) HAS GIVEN A CATEGORICAL FINDING THAT THE SAID DIVERSION OF OUT OF BORROWED FUNDS. 26. IN VIEW OF THE FOREGOING DISCUSSIONS, WE SE T ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE ADDITION MADE BY THE AO. 27. IN THE RESULT THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR 2004-05 IS ALLOWED. THE APPEAL OF THE ASSESSEE FOR THE ASSESSM ENT YEAR 2004-05 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ALL OTHER APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE TREATED AS ALLOWED FOR STATISTIC AL PURPOSES. THE CROSS OBJECTION FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2002-03 IS DISM ISSED. PRONOUNCED ACCORDINGLY ON 27-04-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 27TH APRIL, 2012 GJ COPY TO: 1. K.R. USHASREE, SAI EXPORT ENTERPRISES, MANGAD, KOL LAM. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. 3. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOLLAM. 4. THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, TR IVANDRUM. 5. THE COMMISSIONER OF INCOME-TAX,TRIVANDRUM. 6. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 7. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN