ACIT, Hyderabad V. M/s Navabharat Ferro Alloys Ltd., Hyderabad

ITA 1244/HYD/2004

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59113 (ITAT-HYDERABAD)
• Duration Of Justice: 7 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-10-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 29-12-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Business income; Search and seizure; Block assessment
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, AM & SMT. ASHA VIJAYARAGHAVAN , JM ITA NO.1244/HYD/2004 ASSESSMENT YEAR 2001-02 THE ACIT, CIRCLE 2(3), HYEDERABAD VS M/S NAVABHARAT FERRO ALLOYS LIMITED, NAVABHARAT CHAMBERS, RAJBHAVAN ROAD, HYDERABAD (PAN AACN7327 C) APPELLANT RESPONDENT APPELLANT BY : SHRI V. SRINIVAS RESPONDENT BY : SHRI V. SIVAKUMAR DATE OF HEARING :8.11.2011 DATE OF PRONOUNCEMENT :12.1.2012 ORDER PER ASHA VIJAYARAGHAVAN, JM . THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER PASSED BY THE CIT(A) III, HYDERABAD DATED 20 .9.2004 AND IT PERTAINS TO THE ASSESSMENT YEAR 2001-02. 2. THE FIRST GROUND IN REVENUES APPEAL IS AGAINST THE DELETION BY THE CIT(A) THE DISALLOWANCE MADE TOWARDS FREIGHT CH ARGE OF RS 98,61,244/-. THE ASSESSEE IS IN THE BUSINESS OF MAN UFACTURING VARIOUS FERRO ALLOYS, SUGAR, RECTIFIED SPIRIT, FABR ICATION OF MACHINERY AND EQUIPMENT AND LEASING. 3. THE ASSESSING OFFICER DISALLOWED RS 98,61,244/- PAID TO M/.S GLOBE MARKETING CORPORATION LTD (M/S GMCL) TOWARDS FREIGHT CHARGES ON THE GROUND THAT M/S GMCL HAS NOT RENDERE D ANY SERVICES TO THE ASSESSEE COMPANY. DURING THE COURS E OF ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 2 ASSESSMENT PROCEEDINGS THE ASSESSEE COMPANY FILED A DETAILED REPLY DATED 26.3.2004 IN RESPONSE TO A LETTER DATED 25.3.2004 ISSUED BY THE AO, EXPLAINING THE CIRCUMSTANCES UNDE R WHICH IT HAD PAID THE AMOUNT TO M/S GMCL AND STATED THAT THERE I S NO JUSTIFICATION IN DISALLOWING THE SAID EXPENDITURE. IGNORING THE SAID SUBMISSIONS OF THE ASSESSEE THE ASSESSING OFFICER D ISALLOWED RS 98,61,244/- PAID TO M.S GMCL. THE ARGUMENTS RAISED BEFORE CIT(A) WERE THE SAME AS THOSE RAISED BEFORE THE ASS ESSING OFFICER VIDE ASSESSEES REPLY DATED 26.3.2004. 4. THE CIT(A) HELD AS FOLLOWS: THE ASSESSEE IS PURCHASING RAW MATERIAL FROM A COMP ANY VIZ.,M/S. DURGA MINERALS AND META INDUSTRIES (P) LT D BHUBANESWAR (M/S DMMIL)IN THE BOOKS OF ACCOUNTS THE ASSESSEE COMPANY HAD PAID COST OF RAW MATERIAL TO M /S DMMIL. BESIDES THE COST OF RAW MATERIAL ANOTHER SUM OF RS 98,61,244/- WAS TO BE PAID AS AN AMOUNT TOWARDS CL EARING AND FORWARDING CHARGES AGAINST THIS PURCHASE OF RAW MATERIAL. THIS SUM WAS PAID TO M/S GMCL IT IS THIS CLAIM WHICH IS UNDER EXAMINATION, THE ASSESSING OFFICER H AD RECEIVED AN INTIMATION DATED 10.3.2004 FROM THE ASS ISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1) BHUBANESWAR WHO ASSESSED THE CASE OF M/S DMMIL. THE IMPORTANT CONTE NT OF THIS LETTER IS REPRODUCED AS UNDER SINCE THEY HAVE BEEN RELIED UPON BY THE ASSESSING OFFICER TO REACH TO THE ADVER SE CONCLUSION. IN THE CASE OF M/S DURGA INDUSTRIES (P) LTD, DURGA EXPORTS AND GLOBE MARKETING CORPORATION, BLOCK ASSESSMENT O RDERS U/S 158BC WERE PASSED IN THE MONTH OF JANUARY 2004. DURING THE BLOCK ASSESSMENT PROCEEDINGS IT CAME TO NOTICE ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 3 THAT YOUR ASSESSEE M/S NAVA BHARAT FERRO ALLOYS LTD 6-3- 1109,/1 NAVA BHARATH HOUSE, RAJ BHAVAN ROAD, SOMAJI GUDA, HYDERABAD WITH PAN NO. AAACN 7327 C PAID HUGE AMOUN TS TO M/S GLOBE MARKETING CORPORATION TOWARDS C & F CH ARGES ON PURCHASE OF CHROME ORE BUT IN REALITY NO SUCH SERVI CES ARE RENDERED BY GLOBE MARKETING CORPORATION. IN FACT F ROM THE RECORDS IT IS SEEN THAT FRIABLE QUALITY ORE IS DIRE CTLY LIFTED BY THE SUPPLIER M/S DURGA MINERALS AND METAL INDUSTRIES (P ) LTD FROM SOUTH KALLAPANI MINES OF ORISSA MINING CORPORATION AND DELIVERED AT FACTORY OF NAVA BHARATH FERRO ALLLOYS LTD., AT MERAMUNDALL DHENKANAL (DISTRICT) ORISSA. THE CONTR ACT TERMS INCLUDE INTRA FREIGHT CHARGES AND THESE CHARGES ARE ENOUGH TO COVER THE FREIGHT TO THE FACTORY OF YOUR ASSESSEE. 5. IT APPEARS THAT THERE WAS SEARCH AND SEIZURE OP ERATION IN THE CASE OF M/S DMMIL WHEREIN AT THE TIME OF BLOCK ASS ESSMENT ASSESSING OFFICER CAME TO A CONCLUSION THAT M/S GLO BE MARKETING CORPORATION LTD (M/S GMCL) WAS NOT RENDERING ANY GE NUINE SERVICES AND THEREFORE THE MONIES PAID BY OUR ASSES SEE TO M.S GMCL WERE PAID WITHOUT ANY CONSIDERATION AND THEREF ORE THE SAME NEEDED TO BE DISALLOWED IN THE CASE OF OUR ASSESSEE . WHILE THESE FACTS WERE CONFRONTED TO THE ASSESSEE IT WAS REPLIE D VIDE THEIR REPLY DATED 26.3.2004. THE CONTENTS OF THIS LETTER ARE A LREADY AVAILABLE IN PARA NO.1.4 OF THE ASSESSMENT ORDER. THE ESSENCE OF THE ASSESSEES REPLY IS THAT THEY HAD MADE INQUIRES FRO M SEVERAL SUPPLIERS OF THE RAW MATERIAL. THE RAW MATERIAL UND ER CONSIDERATION IS CHROME ORE. THE PARTICULAR VARIET Y IS CALLED FRIABLE ORE. ALL RATES TO BE CONSIDERED BELOW WILL REFER TO THIS VARIETY OF ORE. THE MOST EXPENSIVE SUPPLIER WAS TISCO, WHIC H WAS TO CHARGE RS 3,025/-PER TONNE. THEREFORE, FINALLY DUR ING THE YEAR THERE WERE ONLY TWO COMPETITIVE MATERIAL SUPPLIERS AVAILABLE I.E M/S ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 4 ORISSA MINING CORPORATION LTD WAS TO SUPPLY THE RAW MATERIAL AT A TOTAL LANDED COST OF RS. 2,863/-PMT (PER METRIC TON NE) AND THE TOTAL LANDED COST FROM M/S DIMMIL WAS RS 2600/- PMT . IN THE TOTAL PRICE CHARGED, IT IS TO BE SEEN THAT M/S ORIS SA MINING CORPORATION LTD WAS INCLUDING A CHARGE RS 318/- PMT AS CLEARING AND FORWARDING CHARGES M/S ORISSA MINING CORPORATIO N WAS TO RECEIVE THIS RS 318/- PMT OF CLEARING AND FORWARDIN G CHARGES TO ITSELF WHICH WAS INCLUDED IN THEIR TOTAL COST OF RS 2863/- PMT SIMILARLY AFTER INCLUDING RS 1000/- PMT OF CLEARING AND FORWARDING CHARGES IN THE OFFER FROM M/S DMML, THE TOTAL COST WAS RS 2600/- PMT. THE ASSESSEE COMPANY FOUND THAT THE TOTAL COST FOR THE RAW MATERIAL INCLUDING THE CLEARING AND FORWARDING CHA RGES WAS LESS IN THE CASE OF M/S DMMIL AND THEREFORE THE CONTRACT TO SUPPLY THE RAW MATERIAL WAS GIVEN TO THEM. THE OFFER DOCUMENT OF M/S DMMIL IS DATED 15.7.2000 A COPY OF WHICH WAS ALSO B ROUGHT TO THE NOTICE OF THE ASSESSING OFFICER. BESIDES THE RATE T HIS OFFER ALSO CONTAINED THE FOLLOWING DETAILS. 6. WE ARE PLEASED TO OFFER YOU FOR SUPPLY OF THE F OLLOWING HAND LUMPY AND FBL CHROME ORE FINES TO YOUR FACTORY AT K HADAG PRASAD MERAMUNDALI IN DHENKANAL. 1. HARD LUMPY 36-38% RS 1590 38.40% RS.1940 40-42% RS2150 42-44% RS 2340 44-46% RS2680 2.FBL CHROME ORE FINES 50-52%RS 1600 ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 5 50% BASIS PLEASE NOTE THE ABOVE PRICES ARE INCLUDES OF SALES TAX WE SHALL CHARGE YOU RS 1000 PMT FOR CLEARING AND FORWARDING FOR ALL THE GRADES OF MATERIALS THROUGH OUR SISTER CONCERN NAME S AS M/S GLOBE MARKETING CORPORATION WHO WILL RAISE THEIR BI LLS SEPARATELY TO YOU. 7. ON THE BASIS OF ABOVE OFFER THE ASSESSEE HAS AR GUED THAT THEIR TOTAL COST WAS RS 2600/- PMT TO BE PAID TO M/ S DMMIL SINCE THEY WERE SUPPLYING THE RAW MATERIAL. M/S DMMIL CLE ARLY STATED THAT THEY WILL CHARGE RS 1600/- PMT FOR THE MATERIA L AND RS 1000/- PMT FOR CLEARING AND FORWARDING FOR ALL THE GRADES OF MATERIAL THROUGH THEIR SISTER CONCERN NAMED AS M/S GMCL WHO WERE TO RAISE THEIR BILLS SEPARATELY TO THE ASSES SEE. ON THIS BASIS THE ARGUMENT OF THE ASSESSEE IS THAT THEY HAD NEGOT IATED WITH M/S DMMIL FOR THE TOTAL PURCHASE AND DELIVERY OF THE RA W MATERIAL. THEY HAVE PAID ONLY THAT MUCH MONEY WHICH THEY HAVE NEGOTIATED WITH M/S DMMIL. IT WAS A DECISION OF M/S DMMIL TO R ECEIVE THE ENTIRE CONSIDERATION OF RS 2600/- PMT IN TWO PARTS I.E. RS 1600/- PMT TO M/S DMMOL AND RS 1000/- PMT TO THEIR SISTER CONCERN M/S GMCL. IN THIS ENTIRE TRANSACTION THE ASSESSEE HAD NEITHER NEGOTIATED NOR WAS CONCERNED WITH M/S GMCL. IT WAS AN INTERNAL AGREEMENT BETWEEN M/S DMMIL AND M/S GMCL. THE ASSES SEE HAD AGREED TO PAY A SUM OF RS 1000/- PMT AS CLEARING AN D FORWARDING CHARGES AS A SUB CLAUSE OF THEIR AGREEMENT WITH M/S DMMIL. IN CASE OF THE ASSESSING OFFICER OF M/S DMMIL HAD COM E TO A CONCLUSION THAT NO SERVICE WERE RENDERED BY M/S GMC L THEN IT CANNOT HAVE ANY RELEVANCE AS FAR AS THE ASSESSMENT OF THIS ASSESSEE IS CONCERNED. THIS ASSESSEE HAD NEGOTIATE D FOR A TOTAL CONTRACT WITH M/S DMMIL FOR SUPPLY OF THE RAW MATER IAL AND IF THE SUPPLIER OF THE RAW MATERIAL WANTED THE TOTAL PAYM ENT IN TWO ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 6 SEPARATE PARTS THEN THE ASSESSEE COULD NOT HAVE CON CERNED WITH THIS CONDUCT OF THE SUPPLIER. THE ONLY REQUIREMENT FOR THE ASSESSEE WAS TO ENSURE THAT THE RAW MATERIAL WAS DELIVERED A T THE PRICE NEGOTIATED, THE TOTAL PAYMENT MADE WAS ONLY AS PER THE CONTRACT NEGOTIATED IN FURTHER SUPPORT OF THEIR CASE THE ASS ESSEE HAS ARGUED THAT THE TOTAL COST PAID BY THEM IS ONLY RS 2600/- PMT. THIS COST IS LESS THAN THE PRICE OF RS 2863/- PMT OFFERED BY THE ONLY OTHER SUPPLIER OF THE RAW MATERIAL I.E. M/S ORISSA MINING CORPORATION. THIS COST IS ALSO LOWER THAN THE RATE OF SAME QUALI TY OF CHROME ORE QUOTED BY TISCO AT RS 3025/- PMT. 8. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE OB SERVING AS UNDER: I HAVE CONSIDERED ALL THE FACTS AND ARGUMENTS RAIS ED AND FIND THAT THE ASSESSEE HAS PAID ONLY FOR THE MATERIAL RE CEIVED. THE PAYMENT MADE BY THE ASSESSEE IS NOT IN EXCESS OF TH E MARKET COST. THE PAYMENT MADE IS AS PER THE CONTRACT ENTER ED WITH M/S DMMIL. IT IS A PART OF THE CONTRACT ITSELF THA T A BILL FOR RS 1000/- PMT WILL BE RAISED SEPARATELY BY MS GMCL TOW ARDS CLEARING AND FORWARDING CHARGES. WHILE THE ASSESSEE RECEIVED A ILL FOR RS 1000/- FROM M/SGMCL, THE OTHER BILL FO R THE COST OF MATERIAL RECEIVED FROM M/S. DMMIL WAS FOR ONLY RS 1 600/- PMT. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE PAID ANY MONEY TO M/S DMMIL AND M/S GMCL WITHOUT RECEIVING A NY SERVICES. THE ASSESSEE WAS PAYING A TOTAL SUM OF R S 2600/- PMT ONLY FOR THE SUPPLY OF RAW MATERIAL. IT RATHER APPEARS THAT THE ISSUE IS OF A FAIR DISTRIBUTION OF THE TOTAL PR ICE OF RS 2600/- PMT TO BE RECEIVED BY M/S DMMIL BETWEEN THEMSELVES AND M/S GMCL. IT IS THEIR INTERNAL ARRANGEMENT AND NOT HING TO DO WITH THE AFFAIRS OF THE ASSESSEE. IN CASE THE ASSES SING OFFICER OF M/S DMMIL HAD COME TO A CONCLUSION THAT M/S GMCL HAD ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 7 NOT RENDERED ANY SERVICES THEN THE MONIES DIVERTED TO M/S GMCL SHOULD HAVE BEEN BROUGHT TO TAX IN THE HANDS O F M/S DMMIL BECAUSE THESE MONIES WERE PAID TO M/S GMCL UN DER THE SPECIFIC INSTRUCTION OF M/S DMMIL. THE PRIMARY RIGHT OVER THESE MONIES WAS WITH M/S DMMIL AND IN CASE THEY W ERE FOUND DIVERTING THESE MONIES TO M/S GMCL THEN THE P ROPER HANDS TO BRING THEM TO TAX WILL BE THE HANDS OF M/S DMMIL ONLY, AS FAR AS THE CASE OF THE ASSESSEE IS CONCER NED THE MONIES ARE PAID FOR RAW MATERIAL RECEIVED IN ACCORD ANCE WITH THE CONTRACT. I AM CONSTRAINED TO COME TO THIS CONC LUSION BECAUSE THE ASSESSING OFFICER HAS NOT MADE ANY ENQU IRIES WHATSOEVER EITHER WITH M.S DMMIL OR WITH M/S GMCL W HO ARE THE COUNTER PARTIES INVOLVED IN THIS TRANSACTION. THEIR RECORDS HAVE NOT BEEN CALLED FOR, THE ADDITION IS BASED UPO N A MERE INTIMATION. SUCH AN INTIMATION CAN BE A CAUSE FOR POTENTIAL EXAMINATION OF THE CONTRACTS AND TRANSACTIONS INVOL VED. BUT AN INTIMATION ALONE CANNOT BE THE EVIDENCE. THEREFO RE I DO NOT UPHOLD THE DISALLOWANCE OF THE PAYMENT OF RS 98,61, 244/- AND THE SAME IS HEREBY DELETED. 9. AGGRIEVED THE REVENUE IS ON APPEAL. 10. THE FIRST EFFECTIVE GROUND RAISED BY THE DEPAR TMENT IS THAT THE CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE TOWARDS FREIGHT CHARGE OF RS.98,61,244/- 11. AT THE TIME OF THE APPELLATE PROCEEDINGS THE L EARNED DEPARTMENT REPRESENTATIVE SUBMITTED THAT DMMIL DID NOT HAVE MINES OF THEIR OWN AND HAD PURCHASED THE ORE SUPPLI ED BY THEM FROM OMC. HENCE DMMIL COULD NOT HAVE SUPPLIED THE O RE AT A PRICE LOWER THAN THAT OF OMC. THE ORE PURCHASED BY DMMIL FROM OMC IS OF A LOWER GRADE AND HENCE THE ENTIRE TRANSA CTION BETWEEN ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 8 DMMIL AND OMC IS COLLUSIVE. THE TEST REPORTS OF THE QUALITY OF THE ORE PRODUCED BY THE ASSESSEE CANNOT BE RELIED ON AS IT IS AN INTERNAL REPORT. THERE CANNOT BE SUCH A VARIANCE BE TWEEN THE PRICE OF THE SAME GRADE OF ORE AS QUOTED BY OMC AND THAT QUOTED BY DMMIL. THEREFORE THE DR CONTENDED THAT THE PAYMENT FOR FREIGHT IS NOT THE MAIN ISSUE BUT THE VERY TRANSACTION BETWEEN THE ASSESSEE AND DMMIL IS SUSPECT. 12. IN REPLY THE LEARNED AR OF THE ASSESSEE SUBMIT TED THAT THE ASSESSEE HAD SUBMITTED THE ORE ANALYSIS REPORT COND UCTED BY RENOWNED OUTSIDE ANALYST IN THE COURSE OF ASSESSMEN T PROCEEDINGS FOR AY 2000-01, WHEREIN THE GRADE OF THE ORE SUPPLI ED BY DMMIL WERE SUBSTANTIATED. LEARNED AR ALSO SUBMITTED THAT THE BASIS RATE QUOTED BY DMMIL IS RS. 2600/-. THIS IS THE PRICE TH AT SHOULD BE COMPARED WITH THE QUOTES OF OTHER COMPANY AND THE I NTERNAL SPLITTING UP OF THE PRICE BETWEEN DMMIL AND GMC ARE THEIR INTERNAL AFFAIR. THEREFORE IT WAS SUBMITTED THAT TH E CIT(A) WAS RIGHT IN DELETING THE ADDITION. 13. AS PER THE FACTS BROUGHT OUT, THE ASSESSEE HAS ENTERED INTO CONTRACT WITH DMMIL FOR PURCHASE OF CHROME ORE TO A SSESSEES FACTORY AT RS 1600/- PMT. DMMIL HAS ALSO CLEARLY IN DICATED THAT THEY SHALL CHARGE RS. 1000/- PMT FOR CLEARING & FOR WARDING THROUGH THEIR SISTER CONCERN M/S GLOBAL MARKETING C ORPORATION, WHO WILL RAISE THE BILL ON THE ASSESSEE SEPARATELY. THERE IS NO DISPUTE THAT THE ASSESSEE HAS RECEIVED THE ORE AND HAS UTILISED THE SAME IN THE MANUFACTURE OF FERRO ALLOYS. IT IS NOT DISPUTED THAT THE ASSESSEE PAID A TOTAL OF RS. 2600/- PMT: RS. 1600/- PMT TO DMMIL AND RS.1000/- PMT TO GMC AS PER CONTRACT. THE CONTRACT FOR CLEARING AND FORWARDING IS ARRANGED BY THE SUPP LIER M/S. DMMIL AS A PART OF THE SINGLE CONTRACT FOR SUPPLY O F THE ORE AT THE ASSESSEES FACTORY. THE ASSESSEE HAS NO CONTRACT WI TH M/S. GMC. ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 9 THE ASSESSEES OBLIGATION IS TO PAY RS. 1000/- PMT TO GMC ON THE BASIS OF CONTRACT WITH DMMIL. IT IS NOT REQUIRED OF THE ASSESSEE TO VERIFY WHAT WAS THE SERVICES RENDERED BY THE SUPPLI ER AND WHAT WAS THE SERVICES RENDERED BY GMC. THE ASSESSEE CANNOT R EDUCE ANY PART OF THE PAYMENTS AS AGREED WITH DMMIL ON THE GR OUND M/S. GMC HAS NOT RENDERED ANY SERVICES AS THERE IS NO DI RECT CONTRACT BETWEEN ASSESSEE AND GMC. PAYMENT TO GMC WERE MADE ON THE BASIS OF CONTRACT WITH DMMIL FOR DELIVERY OF CHROME ORE- WHICH WAS EXECUTED. IF AT ALL, IT CAN ONLY BE A DIVERSION OF PROFITS BY DMMIL TO GMC, FOR WHICH THE ASSESSEE IS NOT A PARTY . WE THEREFORE AGREE WITH THE DECISION OF THE CIT(A) THAT NO PART OF THE PAYMENT OF RS. 2600/- PMT FOR PURCHASE OF CHROME ORE, PAID TO M/S DMMIL AND M/S GMC CAN BE DISALLOWED. 14. AT THE TIME OF HEARING THE DR STRESSED THAT TH E ENTIRE CONTRACT WITH DMMIL IS SUSPECT AND THE SUPPLY OF OR E WAS OF AN INFERIOR QUALITY. THIS IS PURELY BASED ON SUSPICION AND SURMISES. THERE IS NOTHING IN RECORD TO SHOW IT SO. THE ASSES SEE HAD PRODUCED AN ANALYSIS REPORT OF THE ORE FOR THE AY 2 000-01 AND IT HAS NOT BEEN CONTROVERTED. THE AO HAS RECEIVED A LE TTER FROM THE ACIT ASSESSING DMMIL THAT GMC HAS NOT RENDERED ANY SERVICES, ON THE BASIS OF WHICH THE PORTION OF THE PURCHASE P RICE ALLOCATED BY THE SUPPLIER TOWARDS FREIGHT CHARGES WERE DISALLOWE D. IT IS NOT CLEAR AS TO WHY THE AO HAD NOT SOUGHT CLARIFICATION FROM THE AO OF DMMIL ABOUT THE QUALITY OF ORE SUPPLIED BY THEM AND THE PURCHASE PRICE OF ORE TO DMMIL. HAVING NOT DONE THAT, THE AO MERELY BASED ON SURMISES DISALLOWS THE FREIGHT PORTION OF THE PU RCHASE PRICE. THE AO HAS NOT ESTABLISHED THAT DMMIL HAS SUPPLIED INFE RIOR ORE THAN CONTRACTED. THE ONLY EVIDENCE ON RECORD IS THE ANAL YSIS OF AN EXTERNAL AGENCY WHICH SUPPORTS THE CASE OF THE ASSE SSEE. THIS BEING SO, IT IS NOT POSSIBLE TO COME TO CONCLUSION THAT DMMIL HAS ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 10 SUPPLIED INFERIOR QUALITY OF ORE. THE AO HAS FINALL Y DISALLOWED ONLY THE CHARGES ALLOCATED TOWARDS CLEARING AND FORWARDI NG AND NOT OVERALL PRICE OF THE ORE BASED ON THE QUALITY. ONCE IT IS HELD SO, THEN THE DISALLOWANCE OF PART OF THE PURCHASE PRICE AGREED WITH THE SUPPLIER CANNOT BE SUSTAINED. ON THE ONE HAND THE D EPARTMENT CONTENDS THAT THE PRICE OF THE ORE SUPPLIED IS LOW BUT ON THE OTHER HAND PART OF THE PURCHASE PRICE IS DISALLOWED, WHIC H WILL MAKE THE PURCHASE PRICE EVEN LOWER. 15. WE AGREE WITH THE CONCLUSIONS OF THE CIT(A) IN DELETING THE ADDITION OF RS 98,61,244/- OUT OF THE CONTRACTED P URCHASE PRICE OF CHROME ORE. THE GROUND OF APPEAL OF THE REVENUE ON THIS ISSUE IS DISMISSED. 16. THE 3 RD & 4 TH GROUND RAISED BY THE REVENUE APPEALS ARE AS FOLLOWS: THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE MIS E NTITLED TO DEDUCTION CLAIMED U/S 80HHC. THE CIT(A) ERRED IN HOLDING THAT THE OTHER INCOME OF RS.2,96,077,102/- CONSTITUTES BUSINESS INCOME FOR P URPOSE OF DEDUCTION U/S 80HHC. 17. DURING THE COURSE OF ASSESSMENT PROCEEDINGS TH E ASSESSING OFFICER HAD FURTHER REDUCED A SUM OF RS 318.49 LAKH S APPLYING THE SAME CLAUSE (BAA). THE DETAILS OF THIS SUM ARE AS UNDER: MISCELLANEOUS RECEIPTS OF RS 174,78,418/- 1. SALES OF SCRAP AND BY PRODUCTS RS 85,98,745 2. AGRICULTURAL INCOME RS.1,78 ,834 3. PACKING CHARGES RECEIVED FROM TISCO RS40,11,020 4. FREIGHT CHARGES RECOVERED RS. 3,54,7 62 5. RESIZING AND SCREENING CHARGES(TISCO) RS 469,794 ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 11 6. MODVAT ON MS ROUNDS RS 476,951 7. CREDIT BALANCES WRITTEN BACK RS968,116 8. INCOME PERTAINING TO EARLIER YEARS RS 247,819 9. RECOVERIES MADE FROM CUSTOMERS FOR DELAY IN LIFTING OF EQUIPMENT RS .19,80,000 10. OTHER RECEIPTS RS 1,92,377 ------------------------- RS. 1,74,78,418 A. INCOME FROM INVESTMENTS (DIVIDENDS) RS.857,562 B. RENTS EARNED RS 19,14,700 C. PROFIT ON SALE OF ASSETS RS.36,04,352 EXCESS PROVISIONS WRITTEN BACK RS 29 ,65,302 D. CLAIMS RECEIVED RECEIVABLE RS. 50,29,145 ----------------------- RS.3,18,49,479 ----------------------- 18. WE FIND THAT THE AO HAS NOT GIVEN ANY REASON F OR EXCLUDING THE ABOVE AMOUNTS FOR THE PURPOSE COMPUTING THE REL IEF U/S 80HHC. THE CIT(A) HELD THAT THE ASSESSEE HAS PROVI DED DETAILED FACTS AND ARGUMENTS BEFORE HIM. THE CIT(A) HAS THE N PROCEEDED TO DISCUSS THE ISSUES AND DECIDED EACH ONE OF THEM SEP ARATELY. WE FIND THAT THE FACTS AND DETAILS PRODUCED BEFORE THE CIT(A) HAVE NOT BEEN PLACED BEFORE THE ASSESSING OFFICER IN THESE C IRCUMSTANCES. WE REMIT THE ISSUES REGARDING COMPUTATION OF RELIEF U/S 80HHC TO THE FILES OF THE OFFICER TO REDO IN ACCORDANCE WITH THE LAW AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE. ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 12 19. THE FIFTH GROUND IS THAT THE CIT(A) ERRED IN H OLDING THAT JOB WORK INCOME OF RS.7738.94 LAKHS CONSTITUTES BUSINE SS INCOME FOR PURPOSE OF DEDUCTION U/S 80HHC: 20. THE ASSESSING OFFICER WHILE COMPUTING THE DEDU CTION U/S 80HHC OF THE ACT REDUCED 90% OF JOB INCOME OF RS 77 38.94 LAKHS AND OTHER INCOME OF RS 318.49 LAKHS APPLYING CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC OF THE ACT, THUS THE A SSESSING OFFICER DID NOT ALLOW ANY DEDUCTION U/S 80HHC AS AG AINST THE DEDUCTION OF RS 83,60,284/- CLAIMED BY THE ASSESSEE UNDER THIS SECTION. DETAILED EXPLANATION OF THE ASSESSEE COMPA NY IS AS UNDER: JOB INCOME OF RS 7738.94 LAKHS: 21. IN THIS CONNECTION THE ASSESSEE COMPANY SUBMIT TED THAT IT WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF FERROALLOYS WHICH ARE USED AS RAW MATERIALS IN MANUFACTURE OF VARIOUS STEEL PRODUCTS AND FABRICATION OF INDUSTRIAL EQUIPMENT. DURING THE ASSESSMENT YEAR 2001-02 THE ASSESSEE HAD DONE JOB W ORK OF MANUFACTURE OF FERRO CHROME TO THE TATA IRON AND ST EEL COMPANY LTD., (TISCO) AND JOB WORK OF FABRICATION OF INDUST RIAL MACHINERY TO VARIOUS INDUSTRIES LIKE BHEL, SPIC ETC. THE RAW M ATERIAL REQUIRED FOR MANUFACTURE OF FERRO CHROME ON JOB WORK WERE SU PPLIED BY TISCO AND THE ASSESSEE PERFORMED THE OPERATIONS LIK E BRIQUETTING CHARGING OF MATERIAL, SMELTING OF MATERIAL TAPPING BREAKING AND SIZING IN MANUFACTURE OF FERROCHROME USING ITS PROD UCTION FACILITIES VIZ., FURNACES AND OTHER EQUIPMENT. THE ASSESSEE FU RTHER SUBMITTED THAT THE FURNACES USED BY IT FOR THE JOB WORK THE SAME WHICH WERE REGULARLY USED BY IT TO MANUFACTURE FER RO ALLOYS THE VERY PRODUCTS MANUFACTURED AND SOLD BY IT. THEREFOR E IT IS SUBMITTED THAT THE JOB CHARGES EARNED BY IT SHOULD BE HELD TO BE INCOME DERIVED FROM INDUSTRIAL UNDERTAKING ONLY, SI MILARLY THE RAW ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 13 MATERIAL LIKE STEEL AND OTHER COMPONENTS REQUIRED F OR FABRICATION OF INDUSTRIAL MACHINERY WERE SUPPLIED BY THE CUSTOMERS AND THE ASSESSEE PERFORMED THE OPERATIONS OF FABRICATION WO RK TO FABRICATE THE MACHINERY USING ITS PLANT AND MACHINERY MANPOWE R ETC., FURTHER IT WAS SUBMITTED THAT THE PLANT AND MACHINE RY MANPOWER ETC USED BY IT FOR THE JOB WORK WAS ONE AND THE SAM E WHICH WAS REGULARLY USED BY IT FOR FABRICATION OF INDUSTRIAL MACHINERY. THEREFORE IT WAS ARGUED THAT THE JOB RECEIPTS EARNE D BY IT ARE NOTHING BUT INCOME DERIVED FROM INDUSTRIAL UNDERTAK ING ONLY AND SO SUCH PART OF GROSS TURNOVER. 22. THE ASSESSEE FURTHER ARGUED THAT IT IS NOT COR RECT TO EQUATE ITS RECEIPTS UNDER TITLE JOB CHARGES WITH BROKERAGE COMMISSION RENT CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE IN CLUDE IN PROFITS AS STATED IN CLAUSE (BAA) TO EXPLANATION TO SECTION 80HHC AND THEREBY ATTRIBUTING ONLY 10% OF JOB CHARGES AS EXPE NDITURE AND CONSIDERING BALANCE 90% AS NET INCOME FROM JOB CHAR GES. THE ARGUMENT OF THE ASSESSEE IS THAT THE INTENTION OF T HE LEGISLATURE FOR REDUCING 90% AND ALLOWING ONLY 10% OF THE RECEIPTS AS EXPENDITURE WHILE CALCULATING THE DEDUCTION U/S 80HHC IS FOR TH E REASON THAT THERE WOULD NOT BE MUCH EXPENDITURE IN EARNING BROK ERAGE OMISSION INTEREST RENT ETC., WHICH IS NOT THE CASE WITH JOB CHARGES IN THIS CASE SINCE JOB WORK INVOLVES SUBSTANTIAL EX PENDITURE IN THE SAID MANUFACTURING ACTIVITY. IN VIEW OF THE ABOVE IT WAS SUBMITTED THAT SINCE JOB CHARGES WERE EARNED BY IT BY UTILIZ ING ITS FURNACES POWER CONSUMABLES LABOUR ETC IN THE COURSE OF ITS I NDUSTRIAL ACTIVITY OF MANUFACTURING FERRO ALLOYS JOB CHARGES SHOULD BE CONSIDERED TO HAVE BEEN DERIVED FROM THE OPERATIONS OF INDUSTRIAL UNDERTAKING ONLY AND 90% OF THE SAID JOB CHARGES CA NNOT BE REDUCED FROM PROFITS AND GAINS OF BUSINESS APPLYING CLAUSE (BAA) TO EXPLANATION TO SEC 80HHC OF THE ACT. IN THIS CONNEC TION THE ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 14 ASSESSEE RELIED ON THE FOLLOWING DECISIONS WHEREIN IT WAS HELD THAT JOB WORK CHARGES PROCESSING CHARGES ARE HELD TO BE INCOME DERIVED FROM INDUSTRIAL UNDERTAKING ONLY. 1. CIT VS BANGALORE CLOTHING CO (260 ITR 371(BOM) 2. DCIT VS HARJUVANDAS JUTHABHAL ZAVERI AND ANR (258 I TR 785 (GUJ) 3. CIT VS RANE (MADRAS) LTD (238 ITR 377)(MAD) 4. ACIT VS HERBAL ISOLATES (P) LTD (83 ITD 310 (COCHIN ) 5. ACIT VS ASWINI FISHEIES LTD (77 ITD 561(MAD) 6. SAMRAKSHNA ELECTRICALS LTD VS JCIT ITA 824 & 825/HYD/2002 DATED 291.2003, HYD ERABAD. 23. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE O BSERVING AS UNDER: I HAVE EXAMINED THE CLAIM OF THE ASSESSEE AND FI ND THAT THE JOB CHARGES OF RS 7739.94 LAKHS REPRESENT REGULAR B USINESS INCOME OF THE ASSESSEE WHICH IS EARNED BY USING THE PLANT AND MACHINERY OWNED BY THE ASSESSEE AND USED IN ITS REGULAR BUSINESS. SUCH JOB CHARGES ARE CORRECTLY EARNED BY UTILIZING IS OWN FURNACES POWER CONSUMABLES LABOUR ETC IN THE VE RY COURSE OF ITS INDUSTRIAL ACTIVITY OF MANUFACTURING OF FERROALLOYS, THIS IS ALSO THE RATIO OF THE CASE LAWS RELIED UPON BY THE ASSESSEE WHEREIN UNDER SIMILAR CIRCUMSTANCES JOB CH ARGES WERE HELD TO BE INCOME EARNED FROM THE BUSINESS AND NOT AFFECTED BY THE PROVISIONS OF CLAUSE (BAA) TO EXPLA NATION SEC 80HHC. I THEREFORE ALLOW THIS CLAIM OF THE ASSESSE E. 24. AGGRIEVED THE REVENUE IS ON APPEAL. AS POINTED OUT BY THE LEARNED DR, THE DECISION OF THE APEX COURT IN THE C ASE OF RAVINDRANATHAN NAIR REPORTED IN 295 ITR 288 HAS T O BE CONSIDERED IN THIS CONTEXT. IN THAT CASE THE APEX C OURT HAS HELD ITA NO.1244/HYD/2004 M/S NAVA BHARAT FERRO ALLOYS LTD., HYDERABAD 15 THAT PROCESSING CHARGES RECEIVED FOR PROCESSING OF CASHEW, BEING INDEPENDENT INCOME HAS TO BE EXCLUDED FROM BUSINESS PROFITS UNDER EXPLANATION BAA TO SEC 80HHC FOR THE PURPOSE OF COMPUTING RELIEF U/S 80HHC. WE FIND THAT THE DECISION OF SHR I RAVINDRANATH NAIR (295 ITR 288) (SC) SQUARELY APPLIES TO THE CAS E OF THE ASSESSEE BEFORE US. HENCE WE ALLOW THIS GROUND RAISED BY T HE REVENUE. 25. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON: 12.1.20 12 SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 12 TH JANUARY, 2012 COPY FORWARDED TO: 1. THE ACIT, CIRCLE 2(3), HYDERABAD 2. M/S NAVABHARAT FERRO ALLOYS LTD., NAVABHARAT CHAMBE RS, RAJBHAVAN, HYDERABAD 3. CIT(A) III, HYDERABAD 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/