SCHMETZ INDIA P. LTD, NAVI MUMBAI V. ITO WD 7(2)-2, MUMBAI

ITA 3604/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9532 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 22-11-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 06-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA MR MOHIT JAIN
• Assessee Lawyers: N H GAJRIA
• Keywords: Depreciation; Transfer pricing
• Section: 143(3); 260A

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI . . , , ! '# ! '# ! '# ! '# , ,, , $ $ $ $ % % % % BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 3604/MUM./2010 ( $' ( )( / ASSESSMENT YEAR : 200506 ) SCHMETZ INDIA PVT. LTD. E218, VASHI INTERNATIONAL INFOTECH PARK 2 ND FLOOR, VASHI RAILWAY STATION, VASHI NEW MUMBAI 400 703 .. *+ / APPELLANT ' V/S THE INCOME TAX OFFICER WARD7(2)2, MUMBAI .... ,-*+ / RESPONDENT * . / PERMANENT ACCOUNT NUMBER AAFCS7536M . / ITA NO. 5781/MUM./2010 ( $' ( )( / ASSESSMENT YEAR : 200506 ) THE INCOME TAX OFFICER WARD7(2)2, MUMBAI .. *+ / APPELLANT ' V/S SCHMETZ INDIA PVT. LTD. E218, VASHI INTERNATIONAL INFOTECH PARK 2 ND FLOOR, VASHI RAILWAY STATION, VASHI NEW MUMBAI 400 703 .... ,-*+ / RESPONDENT * . / PERMANENT ACCOUNT NUMBER AAFCS7536M $' (/! 0 1 / ASSESSEE BY : MR. N.H. GAJRIA 0 1 / REVENUE BY : MR. S.D. SRIVASTAVA MR. MOHIT JAIN ' 0 ! / DATE OF HEARING 22.11.2012 ' 23) 0 ! / DATE OF ORDER 30.11.2012 SCHMETZ INDIA PVT. LTD. 2 ' ' ' ' / ORDER ! '# ! '# ! '# ! '# , ,, , $ $ $ $ 4 4 4 4 / PER AMIT SHUKLA, J.M. THESE CROSS APPEAL ARE DIRECTED AGAINST THE IMPUGNE D ORDER DATED 5 TH JANUARY 2010, PASSED BY THE LEARNED COMMISSIONER ( APPEALS)XIII, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT), FOR ASSESSMENT YEAR 2005 06. 2. WE FIRST TAKE UP REVENUES APPEAL IN ITA NO.5781/MUM./2010 , VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN COMING TO THE CONCLUSION THA T THERE WAS NOTHING ON RECORD TO SHOW THAT THE PROFITS ARRIVED BY THE ASSESSEE IN RESPECT OF THE 10A UNIT WAS OUT OF EXTRAORDINARY AR RANGEMENTS OF COLLUSION BETWEEN THE ASSESSEE AND THE GERMAN COMPA NY MERELY FOR THE PURPOSE OF BOOSTING THE ASSESSEES PROFIT AND, IN THAT VIEW, HOLDING THAT THE PROFITS OF RS.20,53,26,910/- DERIV ED BY THE ASSESSEE FROM THE EXPORT ORIENTED UNIT SHOULD BE CO NSIDERED FOR RELIEF U/S 10A OF THE ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN LAW IN HOLDING THAT THERE WA S NO MATERIAL AVAILABLE WITH THE A.O. TO ESTIMATE THE PROFITS OF THE 10A UNIT ELIGIBLE FOR DEDUCTION INVOKING THE PROVISIONS OF SECTION 80 1A(1O) READ WITH SECTION 10A(7) OF THE ACT WAS BASED ON PROPER AND R EASONABLE APPRAISAL OF THE MATERIAL AVAILABLE ON RECORD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT THE DED UCTION U/S 10A OF THE ACT HAS TO BE COMPUTED WITHOUT SETTING OFF OF T HE LOSS FROM THE TRADING UNIT AGAINST THE PROFITS OF THE EXPORT ORIE NTED UNIT ENTITLED TO DEDUCTION U/S 10A . SCHMETZ INDIA PVT. LTD. 3 3. AT THE OUTSET, BOTH THE PARTIES FAIRLY ADMIT BEFORE US THAT THE ISSUE INVOLVED IS COVERED BY THE EARLIER YEARS DECISION OF THE TRIBUNAL RENDERED IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200405, WHICH HAS NOW BEEN AFFIRMED BY THE HON'BLE JURISDICTIONAL HIGH COURT. 4. THE RELEVANT FACTS, APROPOS GROUNDS NO.1 AND 2, ARE THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY CARRYING ON BU SINESS OF MANUFACTURE AND TRADING IN INDUSTRIAL SEWING MACHINE NEEDLES. T HE ASSESSEE HAS TWO UNITS, ONE IS A MANUFACTURING UNIT AT KANDLA IN THE KANDLA FREE TRADE ZONE, WHICH MANUFACTURES INDUSTRIAL SEWING MACHINE NEEDLES AND EXPORTING THE ENTIRE PRODUCTION TO ITS PRINCIPALS A T GERMANY, AND THE OTHER ONE IS A TRADING UNIT LOCATED IN MUMBAI CARRYING ON THE BUSINESS OF TRADING IN INDUSTRIAL SEWING MACHINE NEEDLES. IT IMPORTS IN DUSTRIAL SEWING MACHINE NEEDLES FROM ITS PRINCIPALS AND SELLS THE SAME IN I NDIA AND TO THE NEIGHBORING COUNTRIES. 5. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD D ECLARED HIGHER PROFIT WHICH IS NOT NORMAL AS COMPARED TO THE COMPA RABLE CASES SUBMITTED BY THE ASSESSEE IN ITS TRANSFER PRICING ANALYSIS RE PORT. BEFORE THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED DETAILED REASONS FO R SHOWING HIGHER PROFIT, HOWEVER, THE ASSESSING OFFICER STILL TREATED THE SA ID EXPLANATION TO BE IMPROPER AND IN VIEW OF THE TERMS OF PROVISIONS OF SECTION 10A(7) AND SECTION 80IA(10) OF THE ACT, HE ESTIMATED THE PROFI T OF THE BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 10A BY ADOPTING 60% GROSS PROFIT RATE AS AGAINST 67.91% SHOWN BY THE ASSESSEE. HE ESTIMAT ED THE ELIGIBLE PROFIT OF THE BUSINESS AS DONE IN THE EARLIER ASSESSMENT Y EARS IN THE FOLLOWING MANNER: GROSS PROFITS OF THE ASSESSEE ADOPTED AS ABOVE 6 0% THEREFORE G.P. RATE AT 60% OF ` 49.92 CRORES TURNOVER OF THE ASSESSEE WORKS OUT TO 29.95 C RORES LESS: EXPENSES CLAIMED BY ASSESSEE AMOUNT IN CRORES SCHMETZ INDIA PVT. LTD. 4 EMPLOYEE COST 1.82 OTHER MFG. EXPENSES 1.59 SELLING AND DISTRIBUTION EXP. 0.06 MISC. EXPENSES 1.49 INTEREST 0.85 DEPRECIATION 1.16 TOTAL 6.97 ESTIMATED PROFITS OF THE ASSESSEE FOR THE PURPOSE OF DEDUCTION U/S 10A 22.98 ==== 5. ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 10A OF ` 27,16,27,629 BALANCE AMOUNT OF ` 4,18,27,629 IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10A AND IS TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. 6. THE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE E ARLIER YEARS ORDER PASSED BY THE TRIBUNAL FOR ASSESSMENT YEAR 2 00405, IN ITA NO.7629/MUM./2007, VIDE ORDER DATED 30 TH JULY 2008, ALLOWED THE ASSESSEES GROUND AS PER THE DISCUSSION APPEARING I N PARAS2.2 TO 2.4 OF THE APPELLATE ORDER. 7. AFTER CAREFULLY CONSIDERING THE ORDERS PASSED BY TH E ASSESSING OFFICER AS WELL BY THE LEARNED COMMISSIONER (APPEALS) AND T HE ORDER PASSED BY THE TRIBUNAL, WE FIND THAT THE TRIBUNAL HAS DECIDED THE SIMILAR ISSUE AFTER DISCUSSING THE FACTS AS REPRODUCED BELOW: L0. THE ASSESSEE HAS TWO SEPARATE ACTIVITIES 1) M ANUFACTURING ACTIVITY AT KANDLA, WHICH IS A 100% EXPORT ORIENTED UNIT AND 2) UNIT AT MUMBAI WHERE INDUSTRIAL SEWING NEEDLES ARE IMPOR TED FROM GERMANY AND SOLD LOCALLY AS WELL AS ABROAD. INDUSTR IAL SEWING NEEDLES IMPORTED FROM GERMANY ARE OF DIFFERENT VARI ETY FROM THOSE MANUFACTURED AND EXPORTED FROM THE KANDLA UNIT. THE ENTIRE PRODUCTION OF KANDLA UNIT IS EXPORTED TO 100% HOLDI NG COMPANY SCHMETZ GMBH. THE MANUFACTURING UNIT AT KANDLA MADE A PROFIT OF ABOUT RS.20.53 CRORES WHICH WAS CLAIMED EXEMPT UNDE R SECTION 10A AND THE TRADING UNIT AT MUMBAI MADE A LOSS OF ABOUT RS.71,00,000. THE AO FELT THAT PROFIT MADE IN THE MANUFACTURING U NIT WAS EXCESSIVE AND APPLYING THE PROVISIONS OF 10A(7) REA D WITH 801A(1O) HOLDING THAT THE BUSINESS BETWEEN THE ASSESSEE AND ITS HOLDING COMPANY HAS BEEN SO ARRANGED THAT THE BUSINESS TRAN SACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY SCHMETZ INDIA PVT. LTD. 5 PROFITS WHICH MIGHT BE EXPECTED TO ARISE FROM THE B USINESS OF THE INDUSTRIAL UNDERTAKING AND ACCORDINGLY HAS ESTIMATE D THE PROFIT WHICH ACCORDING TO HIM IS REASONABLE AND GRANTED RE LIEF U/S.10A FOR THE SAME. SECTION 801A(10) READS AS UNDER: WHERE IT APPEARS TO THE ASSESSING) OFFICER THAT, OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYI NG ON THE BUSINESS OF THE INDUSTRIAL UNDERTAKING OR TH E HOTEL OR THE OPERATION OF THE SHIP (OR THE BUSINESS OF REPAIRS TO OCEAN-GOING VESSELS OR OTHER POWERED CRA FT) TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEE N THEM IS SO ARRANGED THAT (HE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N THE BUSINESS OF THE INDUSTRIAL UNDERTAKING OR THE HOTEL OR THE OPERATION OF THE SHIP (OR THE BUSINESS OF REPAI RS TO OCEAN-GOING VESSELS OR OTHER POWERED CRAFT), THE (ASSESSING) OFFICER SHALL, IN COMPUTING THE PROFIT AND GAINS OF THE INDUSTRIAL UNDERTAKING OR THE HOTEL OR THE SHIP (OR THE BUSINESS OF REPAIRS TO OCEAN-GOING VES SELS OR OTHER POWERED CRAFT) FOR THE PURPOSES OF THE DEDUCTION UNDER THIS .SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. IT IS APPARENT FROM THE ABOVE THAT THERE SHOULD BE AN ARRANGEMENT OF HE BUSINESS TRANSACTION WHICH HAS RESULTED IN EX TRAORDINARY PROFITS TO THE ASSESSEE. WHENEVER THERE IS AN EXTRA ORDINARY PROFIT, IT WILL NOT FOLLOW THAT THE PARTIES HAVE SO ARRANGED T HE TRANSACTION AMONG THEMSELVES TO PRODUCE EXTRAORDINARY PROFITS. IT WOULD BE PENALIZING EFFICIENT FUNCTIONING. WE FEEL, IT IS FO R THE AO TO PROVE THAT THERE IS AN ARRANGEMENT BETWEEN THE PARTIES WH ICH HAS RESULTED IN AN EXTRAORDINARY PROFIT TO THE ASSESSEE. IT MAY BE BY WAY OF HIGHER SALE PRICE OF GOODS, SHARING OF EXPENSES WHE N IT IS NOT REQUIRED TO DO SO OR SUCH OTHER METHODS WHICH CLEAR LY RESULT IN TRANSFER OF PROFITS TO THE ASSESSEE. BUT THE ASSESS ING OFFICER HAS NOT PROVED THAT ANY PART OF THE TRANSACTION IS OUT OF T HE ORDINARY. IT HAS NOT HEN SHOWN THAT THE SALE PRICE BY THE ASSESSEE T O ITS HOLDING COMPANY IS HIGHER THAN THE MARKET VALUE. HE HAS ALS O NOT PROVED THAT NONE OF THE EXPENDITURE INCURRED HAS BEEN UNDE RSTATED IN ORDER TO INCREASE THE PROFITABILITY OF THE EXPORT ORIENTE D UNIT. THE ASSESSEE ALSO SUBMITS WT THE TRANSACTIONS BETWEEN THE ASSESS EE AND THE GERMAN COMPANY HAVE BEEN THOROUGHLY SCRUTINIZED AND ACCEPTED BY THE TRANSFER PRICING AUTHORITIES IN GERMANY WHO HAVE ACCEPTED THE PRICING OF EXPORT OF GOODS AS WELL AS OTHER TRA NSACTIONS BETWEEN THE ASSESSEE AND THE GERMAN COMPANY. 12. WITHOUT ANY SPECIFIC MATERIAL TO SHOW HOW THE P ROFIT HAS BEEN OVERSTATED WITH COGENT REASONING AND SUPPORTING MAT ERIAL AND EVIDENCE IT IS NOT POSSIBLE TO SUPPORT THE CONCLUSI ON THAT ANY PROFIT SCHMETZ INDIA PVT. LTD. 6 FOR EXTRAORDINARY NATURE SHOULD NOT BE ACCEPTED AND ONLY AVERAGE PROFITS MADE BY OTHER COMPANIES SHOULD BE ADOPTED F OR COMPUTING RELIEF U/S. 10A. THIS WOULD ACT AS-A GREAT DISINCEN TIVE FOR AN EFFICIENT PERSON MAKING MORE PROFITS THAN OTHERS. THE AO HAS GIVEN A TABLE OF COMPARISON AND GROSS PROFITS TO SALES AS WELL AS PE RCENTAGE OF NET PROFIT TO SALES OF ABOUT 11 COMPANIES. WE FIND EXCL UDING THE ASSESSEE THE NET PROFIT TO SALES VARIES FROM 0.29% TO 7.20% AND PERCENTAGE OF GROSS PROFIT TO SALES VARIES FROM 9.3 5% TO 52.19%. THE VARIATION IS WIDE AND THE HIGHEST FIGURE IS MAN Y TIMES THE LOWEST FIGURE. IF THE REASONING OF THE AO IS TO BE APPLIED IT IS NOT CLEAR WHY THE PROFIT OF ONE OF THE UNITS VIZ. KITEX GARMENTS SHOULD BE TAKEN AND NOT THAT OF THE COMPANY WITH THE LOWES T PROFITABILITY. THERE DOES NOT APPEAR TO BE ANY SPECIFIC REASON ON THE BASIS OF WHICH THE AO HAS COME TO THE CONCLUSION THAT THERE HAS BEEN AN ARRANGEMENT BETWEEN THE ASSESSEE AND THE GERMAN COM PANY SO THAT THE ASSESSEE HAS MADE EXTRAORDINARY PROFITS. 13. ONE OF THE POINTS WE OBSERVED FROM THE TABLE FU RNISHED IS THE COST OF RAW MATERIAL FOR THE ASSESSEE IS VERY LOW C OMPARED TO THE RAW MATERIAL COST OF OTHER COMPANIES. THE ASSESSEE HAS EXPLAINED THAT ITS ENTIRE BASIC RAW MATERIAL IS SUPPLIED TO I T BY THE GERMAN COMPANY. THE AO HAS NOT FOUND ANYTHING WRONG IN THE COST OF RAW MATERIAL BEING LOW. FURTHER, THE ASSESSEE HAS ALSO SUBMITTED THAT ITS ENTIRE PRODUCTION IS SOLD TO THE GERMAN COMPANY IN BULK SO THAT PACKING, MARKETING AND INVENTORY CARRYING COSTS ARE REDUCED; TECHNICAL KNOW-HOW WILL BE SUPPLIED BY THE GERMAN C OMPANY TO THE ASSESSEE FREE OF CHARGE AND WITHOUT ANY ROYALTY AND FINANCE WAS PROVIDED BY THE GERMAN COMPANY TO THE ASSESSEE COMP ANY. THESE CERTAINLY DO HAVE A BEARING IN REDUCING THE COST OF OPERATIONS OF A COMPANY AND THIS HAS BEEN THE POSITION IN THE EARLI ER YEARS ALSO. THERE IS NOTHING IN RECORD TO SHOW THAT BUSINESS TR ANSACTION WAS SO ARRANGED SO THAT THE PROFITS OF THE ASSESSEE WERE B OOSTED. 14. IN THE CIRCUMSTANCES WE HAVE NO HESITATION IN H OLDING THAT THE AO AND CIT(A) ERRED IN CONCLUDING THAT THERE WAS AN ARRANGEMENT FOR BOOSTING THE PROFITS OF THE ASSESSEE. THERE IS NOTHING ON RECORD TO SHOW THAT THE PROFITS ARRIVED BY THE ASSESSEE WA S NOT IN THE NORMAL COURSE OF ITS BUSINESS AND THE PROFITS WAS O UT OF EXTRAORDINARY ARRANGEMENTS OR COLLUSION BETWEEN THE ASSESSEE AND THE GERMAN COMPANY, MERELY LOT THE PURPOSE OF BOUST ING THE ASSESSEES PROFITS. IN THE CIRCUMSTANCES WE HOLD TH AT THE PROFITS DERIVED BY THE ASSESSEE FROM THE EXPORT ORIENTED UN IT OF RS.20,53,26,910 SHOULD HE CONSIDERED FOR THE PURPOS E OF RELIEF U/S. 10A . 8. AGAINST THE AFORESAID ORDER PASSED BY THE TRIBUNAL, THE REVENUE PREFERRED AN APPEAL BEFORE THE HON'BLE JURISDICTION AL HIGH COURT UNDER SECTION 260A OF THE ACT ON THE FOLLOWING SUBSTANTIA L QUESTIONS OF LAW. SCHMETZ INDIA PVT. LTD. 7 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW THE TRIBUNAL WAS JUSTIFIED A) IN COMING TO THE CONCLUSION THAT THERE WAS NOTHI NG ON RECORD TO SHOW THAT THE PROFITS ARRIVED AT BY THE ASSESSEE IN RESPECT OF THE 10A UNIT CARRYING ON THE BUSINESS OF MANUFACTURING INDUSTRIAL SEWING MACHINE NEEDLESS WAS NOT IN THE NORMAL COURS E OF ITS BUSINESS, AND THAT THE ABNORMALLY HIGH PROFIT WAS D UE TO EXTRAORDINARY ARRANGEMENT BETWEEN THE ASSESSEE AND THE GERMAN COMPANY ENTERED INTO ONLY WITH A VIEW TO BOOST THE PROFITS OF ASSESSEE AND THEREFORE ALLOWING DEDUCTION OF RS.20, 54,27,335/? B) IN HOLDING THAT THE THERE WAS NO MATERIAL AVAILA BLE WITH THE A.O. TO ESTIMATE THE PROFITS OF THE 10A UNIT ELIGIBLE FO R DEDUCTION INVOKING THE PROVISIONS OF S.80 IA(10) READ WITH S.10A(7) OF THE ACT WAS BASED ON PROPER AND REASONABLE APPRAISAL OF THE MAT ERIAL AVAILABLE ON RECORD? 9. THE RELEVANT FINDINGS OF THE HON'BLE JURISDICTIONAL HIGH COURT CONFIRMING THE AFORESAID TRIBUNAL ORDER ARE AS UNDE R: 8. SO FAR AS QUESTIONS (A) & (B) ARE CONCERNED, WE FIND THAT THE TRIBUNAL HAS CONSIDERED THE ENTIRE EVIDENCE AND ON FACTS COME TO THE CONCLUSION THAT THE PROFITS EARNED BY KANDLA DIVISI ON OF THE RESPONDENT-ASSESSEE IS NOT ABNORMALLY HIGH DUE TO A NY ARRANGEMENT BETWEEN THE RESPONDENTASSESSEE AND ITS GERMAN PRIN CIPAL. THE TRIBUNAL CORRECTLY HELD THAT EXTRAORDINARY PROFITS CANNOT LEAD TO THE CONCLUSION THAT THIS IS AN ARRANGEMENT BETWEEN THE PARTIES. THIS WOULD PENALIZE EFFICIENT FUNCTIONING. FURTHER, THE AUTHORITIES HAVE ALSO RECORDED A FINDING THAT THE INDUSTRIAL SEWING MACHINE NEEDLES IMPORTED AND TRADED BY THE MUMBAI DIVISION ARE DIFF ERENT FROM THOSE MANUFACTURED & EXPORTED BY THE KANDLA DIVISION. CON SEQUENTLY, THIS ALSO NEGATIVES ANY ARRANGEMENT BETWEEN THE PARTIES TO SHOW EXTRAORDINARY PROFITS IN RESPECT OF ITS KANDLA DIVI SION SO AS TO CLAIM DEDUCTION UNDER SECTION 10A OF THE ACT. THESE ARE F INDINGS ONE OF FACT. THE APPELLANTREVENUE HAVE NOT BEEN ABLE TO S HOW THAT THE FINDINGS ARE PERVERSE OR ARBITRARY. IN THE CIRCUMST ANCES, QUESTIONS (A) AND (B) AS FORMULATED BY THE APPELLANT/REVENUE DO NOT RAISE SUBSTANTIAL QUESTIONS OF LAW IN THE PRESENT FACTS A ND ARE THEREFORE DISMISSED. 10. THUS, FOLLOWING THE AFORESAID DECISION OF THE HONB LE JURISDICTIONAL HIGH COURT, GROUNDS NO.1 AND 2, RAISED BY THE REVEN UE ARE DISMISSED. SCHMETZ INDIA PVT. LTD. 8 11. GROUND NO.3, RAISED BY THE REVENUE IS WHOLLY MISCON CEIVED AS THE ISSUE OF SETOFF OF LOSS OF THE TRADING UNIT (NON 1 0A UNIT) AGAINST THE PROFITS OF EOU UNIT (10A UNIT) HAS BEEN DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. THEREFORE, THIS GROUND IS DI SMISSED AS INFRUCTUOUS. 12. $' (/!: 0 / 0 ! 67 8 12. IN THE RESULT, REVENUES APPEAL IS DISMISSED. WE NOW TAKE UP ASSESSEES APPEAL IN ITA NO.3604/MUM./2010 , VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: 1. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THAT THE LOSSES OF THE NONEXEMPTED UNIT (10-A UNIT) ARE REQ UIRED TO BE ADJUSTED AGAINST THE PROFITS OF THE 10A EXEMPTED U NIT. 2. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE AS SESSING OFFICER TO ARRIVE AT THE GROSS TOTAL INCOME BEFORE ALLOWING DEDUCTION UNDER SECTION 10A OF THE ACT. 13. AS ADMITTED BY BOTH THE PARTIES, THIS ISSUE TOO HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY T HE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER ASSESSMENT YEAR 2004 05, WHICH HAS NOW BEEN AFFIRMED BY THE HONBLE JURISDICTIONAL HIGH CO URT. 14. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS D ECLARED TRADING LOSS OF ` 6,31,531, FROM ITS TRADING BUSINESS FROM MUMBAI UN IT (I.E., NON 10A UNIT) AND THE ASSESSEE HAS NOT SETOFF THIS TRA DING LOSS AGAINST MANUFACTURING INCOME (OF 10A UNIT) BEFORE CLAIMING DEDUCTION UNDER SECTION 10A. BEFORE THE ASSESSING OFFICER, THE ASSE SSEE SUBMITTED THAT DEDUCTION UNDER SECTION 10A, IS TO BE ALLOWED AT TH E STAGE OF COMPUTATION OF INCOME FOR EACH ELIGIBLE UNDERTAKING, REGARDLESS OF WHETHER FINAL TOTAL INCOME IS POSITIVE OR NEGATIVE. THE A.O. HELD THAT SUCH AN INTERPRETATION OF THE ASSESSEE IS AGAINST THE PROVISIONS OF SECTION 1 0A WHICH PROVIDES SCHMETZ INDIA PVT. LTD. 9 THAT DEDUCTION SHALL BE ALLOWED ON THE TOTAL INCOME OF THE ASSESSEE. AFTER RELYING ON THE DECISION OF THE TRIBUNAL, MUMBAI BEN CH, IN NAVIN BHARAT INDUSTRIES LTD. V/S DCIT, ORDER DATED 10 TH MARCH 2004, HE HELD THAT THE ASSESSEE HAS TO SETOFF LOSSES FROM 10A UNIT. HE AL SO NOTED THAT IN THE EARLIER YEARS, RIGHT FROM THE ASSESSMENT YEARS 2001 02 TO 200405, THIS ISSUE HAS BEEN ALLOWED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE, HOWEVER, THE REVENUE HAS NOT ACCEPTED THE SAID DECISION AND AN APPEAL IS SUBJUDICE BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT. 15. THE LEARNED COMMISSIONER (APPEALS), PRIMARILY, UPHE LD THE CONCLUSION DRAWN BY THE ASSESSING OFFICER. 16. AFTER CAREFULLY CONSIDERING THE FINDINGS GIVEN BY T HE ASSESSING OFFICER AS WELL AS BY THE LEARNED COMMISSIONER (APPEALS), W E FIND THAT THIS ISSUE HAS BEEN DEALT WITH IN DETAIL BY THE TRIBUNAL IN AS SESSEES OWN CASE FOR ASSESSMENT YEAR 200405 AFTER OBSERVING AND HOLDING AS UNDER: 15. THE NEXT ISSUE IN THE ASSESSEES APPEAL IS REGA RDING COMPUTATION OF RELIEF UNDER SECTION 10A AFTER ADJUS TING THE LOSS OF TRADING DIVISION OF ` 70,29,930. THE ASSESSING OFFICER RELIED ON THE VARIOUS DECISIONS, WHERE THE COURTS HAVE HELD THAT WHILE COMPUTING THE RELIEF UNDER SECTION 80I ETC. UNDER CHAP. VIA, CARRIED FORWARD LOSSES WILL HAVE TO BE SET OFF. THE ASSESSEE SUBMIT TED THAT VARIOUS DECISION RELIED ON BY THE ASSESSING OFFICER RELATES TO DEDUCTION UNDER CHAPTER-VIA AND ARE NOT DIRECTLY APPLICABLE TO THE PROVISIONS OF SECTION 10A. 16. ON APPEAL, THE COMMISSIONER OF INCOME-TAX (APPE ALS RELIED ON THE THIRD MEMBER DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF NAVIN BHARAT INDUSTRIES LTD VS DCIT 90 LTD 1 AND REJECTED THE CONTENTION OF THE ASSESSEE AND HELD THAT LOSS FROM THE TRADING UNIT HAS TO BE SET OFF AGAINST THE PROFIT OF THE ELIGIBL E UNIT BEFORE COMPUTING THE RELIEF UNDER SECTION 10A. 17. AGGRIEVED, THE ASSESSEE IS ON APPEAL BEFORE US. THE RELIEF UNDER SECTION 10A HAS UNDERGONE MARKED CHANGE BY THE FINA NCE ACT 2001 WITH EFFECT FROM 01.04.2001. UNDER SECTION 10A AS I T STOOD ON THE FIRST DAY OF THIS ASSESSMENT YEAR, THE RELIEF TO BE GRANTED UNDER THAT SECTION IS IN THE NATURE OF DEDUCTION OF THE PROFIT S DERIVED FROM THE ELIGIBLE UNDERTAKING FROM THE TOTAL INCOME. WHEREAS PRIOR TO 01.04.2001, PROFIT AND GAINS DERIVED FROM THE 100% EOU WAS EXCLUDED FROM THE TOTAL INCOME, THUS, AFTER 01.04.2 001 EVEN THOUGH SCHMETZ INDIA PVT. LTD. 10 THE SECTION WAS INCLUDED UNDER CHAPTER III IE., INC OME WHICH DO NOT FORM PART OF THE TOTAL INCOME, THE ACTUAL RELIEF WA S IN THE NATURE OF DEDUCTION FROM THE TOTAL INCOME. IN ANY EVENT, DEDU CTION AVAILABLE UNDER SECTION 10A IS TO BE DETERMINED AS PER SUB SE CTION (4) THEREOF WHICH READS AS UNDER: (4) FOR THE PURPOSES OF [SUB-SECTIONS (1) AND (IA), THE PROFITS DERIVED FROM THE EXPORT OF ARTICLES OR THIN GS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS T O THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO TH E TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING]. 18. IT IS CLEAR FROM THE ABOVE, THAT RELIEF UNDER S ECTION 10A IS TO HE COMPUTED ONLY ON THE PROFIT OF THE BUSINESS OF THE UNDERTAKING AS DISTINCT FROM THE PROFIT AND GAINS OF BUSINESS OF T HE ASSESSEE AS A WHOLE. THUS IT IS APPARENT FROM THE WORDING OF SUB-SECTION (4) ONLY PROFIT AND GAINS OF THE UNDERTAKING WHICH HAS TO BE TAKEN FOR THE PURPOSE OF COMPUTING RELIEF UNDER SECTION 1 OA WITHOUT BEIN G INCREASED OR REDUCED BY THE PROFIT OF THE ANY OTHER UNIT OF THE ASSESSEE IT IS NOT THE DEPARTMENT CASE THAT IF THE OTHER NON ELIGIBLE UNITS MAKE PROFIT IT WILL ALSO BE TAKEN INTO ACCOUNT WHILE COMPUTING REL IEF UNDER SECTION 10A. THAT BEING THE CASE, LOSSES INCURRED BY THE NO N ELIGIBLE UNITS CANNOT REDUCE THE RELIEF UNDER SEC 10A. 19. WE THEREFORE FEEL THAT DEDUCTION UNDER SECTION 10A SHOULD BE ON THE BASIS OF SUB-SECTION 4 OF SECTION 10A AND COMPU TED ON THE PROFIT AND GAINS OF THE BUSINESS OF THE UNDERTAKING MULTIP LIED BY EXPORT TURNOVER TO THE TOTAL TURNOVER OF THE BUSINESS CARR IED ON BY THE UNDERTAKING. THE FORMULA CANNOT BE EXPANDED BY INCL UDING PROFITS (OR LOSS), EXPORT TURNOVER OR TOTAL TURNOVER OF OTH ER UNITS. RELIANCE IS PLACED ON THE DECISION IN THE CASE OF M/S. HUAWEL T ECHNOLOGIES (I) PVT. LTD., VS. ACIT IN ITA NO. 9/BANG/07 B BENCH (UNREPORTED) WHEREIN IT HAS BEEN HELD AS UNDER: IN THE CASE OF NAVEEN BHARAT INDUSTRIES LTD. SUPRA) , IT WAS HELD THAT THERE IS NO PROVISION IN THE ACT BY W HICH THE ASSESSEE CAN BE FORCED TO AVAIL THE BENEFIT UND ER SEC 10A FOR FIVE YEARS. IN CASE, THE ASSESSEE WANTS TO PUT THE INCOME UNDER THE NORMAL COMPUTATION PROVISI ON THEN THERE APPEARS TO BE NO BAR FOR DOING SO. IN VI EW OF THAT, IT WAS HELD THAT LOSS OF 10A UNIT CAN BE ADJU STED AGAINST NON 10A UNIT AS THE ASSESSEE IS NOT CLAIMIN G BENEFIT UNDER SECTION 1 OA. THIS DECISION IS NOT APPLICABLE IN THE INSTANT CASE. SCHMETZ INDIA PVT. LTD. 11 KEEPING IN VIEW OF THE DISCUSSION AS CONTAINED IN E ARLIER PARAGRAPHS, IT IS HELD THAT LD. CIT(A) WAS JUSTIFIE D IN DIRECTING THE AO TO ALLOW DEDUCTION U/S.10A WITHOUT SETTING OFF BROUGHT FORWARD AND CURRENT YEAR LOSSES OF NON I OA UNIT. FURTHER WE FIND THAT THE AFORESAID VIEW OF THE TRIB UNAL IS SUPPORTED BY THE DECISION OF BOMBAY HIGH COURT I N THE CASE OF SIEMENS INFORMATION SYSTEM LTD. V/S ACI T (293 ITR 548). FOLLOWING FINDING HAS BEEN RECORDED BY THE HONBLE HIGH COURT - SO FAR AS THE SECOND CONTENTION IS CONCERNED, LD. COUNSEL HAS DRAWN OUR ATTENTION, FIRSTLY TO THE PROVISIONS OF SECTION 4 OF THE ACT WHICH SETS OUT T HAT ANYWHERE ACT ENACTED THAT INCOME-TAX SHALL BE CHARG ED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOM E- TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FO R THAT YEAR IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIO NS, INCLUDING THE PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX IN RESPECT OF THE TOTAL INCOME FOR THE PREVIOUS YEAR OF EVERY PERSON. OUR ATTENTION IS INV ITED TO SECTION 2(45). TOTAL INCOME MEANS THE TOTAL AMOUNT OF INCOME REFERRED TO IN SECTION, COMPUTED I N THE MANNER LAID DOWN IN THIS ACT. NEXT, OUR ATTENTI ON IS INVITED TO WHAT IS GROSS TOTAL INCOME U/S. 80B(5). THE GROSS TOTAL INCOME HAS BEEN DESCRIBED TO BE THE TOT AL INCOME COMPUTED IN ACCORDANCE WITH THE PROVISIONS O F THE ACT BEFORE MAKING ANY DEDUCTION UNDER THE RELEV ANT CHAPTER. A PERUSAL OF SECTION 10A(1), AS IT STOOD A T THE RELEVANT TIME, CLEARLY SETS OUT THAT SUBJECT TO THE PROVISIONS OF THIS SECTION, ANY PROFITS AND GAINS D ERIVED BY AN ASSESSEE FROM AN INDUSTRIAL UNDERTAKING WHICH THE SECTION APPLIES SHALL NOT BE INCLUDED IN THE TO TAL INCOME OF THE ASSESSEE. IN OTHER WORDS, IT IS CLEAR THAT THE INCOME DERIVED FROM AN INDUSTRIAL UNDERTAKING B Y THE ASSESSEE TO WHICH SECTION 10A APPLIES COULD NOT BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. ONCE THAT IS THE CASE, THE PETITIONER WAS RIGHT IN FILING THE INCOME BY EXCLUDING THE INCOME OF INCOME IN TERMS OF SECTI ON 10A. LD. COUNSEL FOR THE RESPONDENTS HAS DRAWN OUR ATTENTION TO THE JUDGMENT OF THE KARNATAKA HIGH COU RT IN THE CASE OF HIMATASINGIKE SEIDE LTD. (2006) 286 ITR 255 WHICH WAS CONSIDERING THE PROVISIONS OF SECTION 10B. AFTER PERUSING THE FACTS IN ISSUE IN THIS CASE AND THE FACTS BEFORE THE KARNATAKA HIGH COURT, IN OUR OPINION, THE SAID CASE IS NOT APPLICABLE TO THE FAC TS OF THIS CASE. SCHMETZ INDIA PVT. LTD. 12 LOOKING TO THE AFORESAID CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT THE RELIEF U/S. 1 OA SHOULD NO T BE RESTRICTED BY ALLOWING LOSS/DEPRECIATION OF EARLIER YEARS AND CURRENT YEARS NON-10A UNIT . 20. IN THE CIRCUMSTANCES, WE HOLD THAT RELIEF UNDER SECTION 10A HAS TO BE COMPUTED WITHOUT SETTING OFF OF THE LOSS FROM THE TRADING UNIT AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE . 17. AGAINST THE AFORESAID ORDER PASSED BY THE TRIBUNAL, THE REVENUE HAS PREFERRED APPEAL BEFORE THE JURISDICTIONAL HIGH COU RT UNDER SECTION 260A, VIDE INCOME TAX APPEAL NO.4508 OF 2010, ON THE FOLL OWING SUBSTANTIAL QUESTIONS OF LAW: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW THE TRIBUNAL WAS JUSTIFIED C) IN HOLDING THAT THE DEDUCTION UNDER S. 10A OF TH E ACT HAS TO BE COMPUTED WITHOUT SETTING OFF OF THE LOSS FROM THE T RADING UNIT AGAINST THE PROFITS OF THE EXPORT ORIENTED UNIT ENT ITLED TO DEDUCTION UNDER S.10A OF THE ACT? 18. THE HON'BLE JURISDICTIONAL HIGH COURT DEDICED THE I SSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE AFTER OBSERVIN G AND HOLDING AS UNDER: 9. SO FAR AS, QUESTION (C) IS CONCERNED, BOTH THE RESPONDENT ASSESSEE AND APPELLANTREVENUE AGREE THAT THE ISSUE IS COVERED IN FAVOUR OF THE RESPONDENTASSESSEE BY THE DECISION O F THIS COURT IN ITA (LODGING) NO. 1237 OF 2011 IN CIT V. BLACK & VEATCH CONSULTING PVT. LTD. DATED 09.04.2012 . THEREFORE, QUESTION (C) IS ANSWERED IN THE AFFIRMATIVE I.E. IN FAVOUR OF THE RESPONDENT AS SESSEE AND AGAINST THE APPELLANT REVENUE. 19. THUS, RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL WHICH HAS BEEN AFFIRMED BY THE HON'BLE JURISDICTION AL HIGH COURT, THE GROUND RAISED BY THE ASSESSEE STANDS ALLOWED. SCHMETZ INDIA PVT. LTD. 13 20. / !9 $' (/! 0 ! : 0 ! 67 8 20. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 21. $' (; '<, 0 / 0 ! 67 $' (/! 0 ! : 0 ! 67 8 21. TO SUM UP, REVENUES APPEAL IS DISMISSED AND AS SESSEES APPEAL IS ALLOWED. ' 0 3) = >'9 30 TH NOVEMBER 2012 3 0 ? 8 ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER 2012 SD/- . .. . . . . . R.S. SYAL ACCOUNTANT MEMBER SD/- ! ! ! ! '# '# '# '# $ $ $ $ AMIT SHUKLA JUDICIAL MEMBER MUMBAI, >' >' >' >' DATED: 30 TH NOVEMBER 2012 ' 0 ,$! @ A@)! / COPY OF THE ORDER FORWARDED TO : (1) $' (/! / THE ASSESSEE; (2) / THE REVENUE; (3) B () / THE CIT(A); (4) B / THE CIT, MUMBAI CITY CONCERNED; (5) @E? ,$!$' , , / THE DR, ITAT, MUMBAI; (6) ?F( G / GUARD FILE. -@! ,$! / TRUE COPY '' / BY ORDER , . HI / PRADEEP J. CHOWDHURY /J $' H / SR. PRIVATE SECRETARY K / 6 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI SCHMETZ INDIA PVT. LTD. 14 DATE INITIAL ORIGINAL DICTATION PAID IS ENCLOSED WITH ITA NO.360 4/M/2010 1. DRAFT DICTATED ON 22.11.2012 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 23.11.2012 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 23.11.2012 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 23.11.2012 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 23.11.2012 SR.PS 6. DATE OF PRONOUNCEMENT 30.11.2012 SR.PS 7. FILE SENT TO THE BENCH CLERK 30.11.2012 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER