M/s. FFE Minerals India Pvt. Ltd. (Now known as FL Smidth Minerals Pvt. Limited), CHENNAI V. ACIT, CHENNAI

ITA 517/CHNY/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4632 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 21-07-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 17-03-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: DR ANITHA SUMANTH
• Section: 143(3); 80HHC; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH D CHENNAI BEFORE SHRI N.S. SAINI, AM AND SHRI GEORGE MATHAN, J.M. .. I.T.A. NO. 517/MDS/2008 [ASSESSMENT YEAR 2002-03] M/S FFE MINERALS INDIA PVT. LTD [NOW KNOWN AS FL SMIDTH MINERALS PVT. LTD FL SMIDTH HOUSE, 34, EGATOOR KELAMBAKKAM, OMR ROAD CHENNAI 603 103. PAN : AABCM 9888 N VS ASSISTANT COMMISSIONER OF INCOME-TAX OFFICER COMPANY CIRCLE II(1) CHENNAI (APPELLANT) (RESPONDENT) ASSESSEE BY : DR. ANITHA SUMANTH DEPARTMENT BY : SHRI ANIRUDH RAI, CIT, DR O R D E R PER N.S. SAINI, A.M :- THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER PASSED BY THE CIT, CHENNAI DATED 29.03.2007 U/S 263 OF THE INCOME- TAX ACT, 1961 [IN SHORT, THE ACT] FOR ASSESSMENT YE AR 2002-03. PAGE 2 OF 12 I.T.A. NO. 517/MDS/2008 2. GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE RELAT ES TO THE JURISDICTION OF THE LD. CIT(A) IN INVOKING THE PROV ISIONS OF SECTION 263 OF THE ACT. THE OTHER GROUNDS OF APPEAL ARE DIRECT ED AGAINST THE ORDER OF THE LD. CIT(A) HOLDING THAT WHILE COMPUTIN G DEDUCTION U/S 80HHC(3)(B) OF THE ACT, THE ENTIRE INDIRECT COST SH OULD BE TAKEN INTO CONSIDERATION WHILE ALLOCATING TO EXPORT SALES WITH OUT EXCLUDING COST RELATED TO LOCAL SALES. 3. ON JURISDICTIONAL ASPECT, THE LD. A.R. SUBMITTED THAT THE TWIN CONDITIONS WHICH HAVE TO BE SATISFIED BEFORE INVOKI NG THE PROVISIONS OF SECTION 263 OF THE ACT ARE THAT THE ORDER OF THE ASSESSING OFFICER SHOULD BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE HAVE NOT BEEN SATISFIED IN THIS CASE. SHE SUBMITTE D THAT THE ASSESSEE CLAIMED DEDUCTION U/S 80HHC(3)(B) OF THE A CT AT RS. 1,69,86,773/- WHICH WAS ALLOWED BY THE ASSESSING OF FICER IN AN ASSESSMENT MADE U/S 143(3) DATED 16.2.2009. ASSESS EE HAS COMPUTED THE SAID DEDUCTION BY EXCLUDING THE INDIRE CT COST OF RS. 4,69,59,222/- OUT OF TOTAL INDIRECT EXPENSES OF RS. 8,95,63,093/- WHICH WERE NOT ATTRIBUTABLE TO THE EXPORT OF TRADIN G GOODS. THE ASSESSEE, IN DOING SO, WAS SUPPORTED BY THE DECISIO N OF THE BOMBAY PAGE 3 OF 12 I.T.A. NO. 517/MDS/2008 SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SUREND RA ENGINEERING CORPORATION VS. ACIT 86 ITD 121 [MUM] [SB]. THE D ECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IS DATED 12.12.2002 W HEREAS THE ORDER U/S 143(3) OF THE ACT WAS PASSED BY THE ASSESSING O FFICER ON 16.2.2005. THUS, ON THE DATE OF PASSING OF THE ORD ER BY THE ASSESSING OFFICER, THE SPECIAL BENCH DECISION WAS T HE ONLY LAW AVAILABLE AND THERE WAS NO CONTRARY VIEW TO THAT VI EW. THE LD. CIT, BY INVOKING THE PROVISIONS OF SECTION 263 OF THE AC T ON 21.2.2007 ON THE GROUND THAT THE DEDUCTION U/S 80HHC WAS NOT COM PUTED CORRECTLY AS SECTION 80HHC(3)(B) OF THE ACT PROVIDE S THAT INDIRECT COST HAS TO BE DETERMINED BY TAKING TOTAL INDIRECT COST INCURRED BY THE ASSESSEE AS A PROPORTION OF EXPORT TURNOVER OF TRADING GOODS DIVIDED BY TOTAL TURNOVER BY THE ASSESSEE. IN THE INSTANT CASE, THE ASSESSEE HAS APPLIED THIS RATIO BY REDUCING FROM TO TAL INDIRECT COST THE INDIRECT COST NOT ATTRIBUTABLE TO THE EXPORT OF TRADING GOODS, WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 263 OF THE ACT. FURTHER, IT WAS THE SUBMISSION OF THE LD. A.R. THAT ON MERITS ALSO, THE ASSESSEE IS SUPPORTED BY THE DECISION OF THE SP ECIAL BENCH OF THE TRIBUNAL WHICH WAS ALSO FOLLOWED BY THE HON'BLE PUN JAB AND HARYANA HIGH COURT AND HON'BLE GAUHATI HIGH COURT. PAGE 4 OF 12 I.T.A. NO. 517/MDS/2008 4. ON THE OTHER HAND, THE LD. D.R. SUPPORTED THE O RDERS OF THE LD. CIT. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE, THE LD. CIT, VIDE ORDER UNDER CONSIDE RATION REVISED THE ASSESSMENT ORDER DATED 16.2.2005 PASSED BY THE ASSE SSING OFFICER U/S 143(3) OF THE ACT. THE LD. CIT WAS OF THE VIEW THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN ALLOCATING O NLY A PART OF INDIRECT COST IN THE PROPORTION OF EXPORT TURNOVER TO TOTAL TURNOVER BY EXCLUDING CERTAIN INDIRECT EXPENSES FOR DETERMIN ING EXPORT PROFIT FROM TRADING GOODS. IN THE INSTANT CASE, THE ASSES SEE, WHO WAS ENGAGED IN THE DOMESTIC BUSINESS AS WELL AS EXPORT OF TRADING GOODS, WHILE CALCULATING DEDUCTION ALLOWABLE U/S 80HHC FOR DETERMINING THE AMOUNT OF INDIRECT COST ATTRIBUTABLE TO THE EXP ORT OF TRADING GOODS EXCLUDED RS. 4,26,07,871/- OUT OF TOTAL INDI RECT COST OF RS. 8,95,63,093/-AND ALLOCATED BALANCE AMOUNT IN THE PR OPORTION OF EXPORT TURNOVER OF TOTAL TURNOVER. THE AMOUNT OF R S. 4,26,07,871/- COMPRISED OF RS. 2,62,22,476/- SELLING EXPENSES AT TRIBUTABLE TO PAGE 5 OF 12 I.T.A. NO. 517/MDS/2008 LOCAL SALES, RS. 43,16,125/- WARRANTY AND LIQUIDAT ING DAMAGES AND RS. 20,69,270-/- DIMINUTION IN VALUE OF INVESTMENT AND SAME WERE EXCLUDED ON THE GROUND THAT THESE INDIRECT EXPENSE HAD NO RELATION WITH EXPORT OF TRADING GOODS. THE ASSESSING OFFICE R ACCEPTED THE ABOVE COMPUTATION OF THE ASSESSEE VIDE ITS ORDER DA TED 16.2.2005. THE LD. CIT WAS OF THE VIEW THAT EITHER THE ENTIRE INDIRECT COST SHOULD HAVE BEEN APPORTIONED IN RATIO OF EXPORT TUR NOVER TO TOTAL TURNOVER OR WHEN INDIRECT COST WHICH WERE RELATED T O ONLY DOMESTIC SALES WERE EXCLUDED, THEN THE ENTIRE REMAINING INDI RECT COST SHOULD HAVE BEEN CONSIDERED AGAINST EXPORT SALES FOR DETER MINING THE PROFIT FROM EXPORT OF TRADING GOODS. 6. BEFORE US, THE LD. A.R. RELIED UPON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SURENDRA ENGIN EERING CORPORATION VS ACIT 86 ITD 121 [MUM] [SB] WHICH WAS ALSO FOLLOWED BY THE TRIBUNAL IN THE CASE OF GLAXO SMITHLINE ASIA [P] LTD VS. ACIT [2005] 97 TTJ [DEL] 108 FOR THE SUBMISSION THAT THE VIEW TAKEN BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER WAS A POSSIBLE VIEW AND THEREFORE, THE LD. CIT WAS NOT JUSTIFIED IN INV OKING THE PROVISIONS OF SECTION 263 IN RESPECT OF THE SAME. WE FIND THAT THE PAGE 6 OF 12 I.T.A. NO. 517/MDS/2008 SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SUREND RA ENGINEERING CORPORATION [SUPRA], VIDE ITS ORDER DATED 12.12.200 2 HELD AS UNDER: THE AMENDMENT MADE BY SUBSTITUTING SUB-SECTION (3) HAS INTRODUCED A DIFFERENT BASIS FOR ALLOWING DEDUCTION IN RESPECT OF EXPORT PROFITS. WHEREAS PRIOR THERETO, T HE DEDUCTION WAS ALLOWED IN RESPECT OF THAT PORTION OF THE PROFITS AND GAINS OF THE BUSINESS' AS PER THE ASSE SSMENT WHICH IS PROPORTIONATE TO THE RATIO WHICH THE EXPOR T TURNOVER BEARS TO THE TOTAL TURNOVER, AFTER THE AMENDMENT DIFFERENT BASES WERE PROVIDED DEPENDING O N WHETHER THE ASSESSEE IS AN EXPORTER OF MANUFACTURIN G GOODS EXCLUSIVELY OR A COMBINATION OF BOTH. WE ARE CONCERNED WITH AN ASSESSEE UNDISPUTEDLY IS AN EXPOR TER OF TRADING 'GOODS' EXCLUSIVELY AND THEREFORE CLAUSE (B ) OF SUB-SECTION (3) . IN THE CASE OF SUCH AN EXPORTER, THE EXPORT PROFITS SHALL BE THE EXPORT TURNOVER IN RESP ECT OF SUCH TRADING GOODS AS REDUCED BY (1) THE DIRECT COS T, AND (2) THE INDIRECT COSTS. BOTH THESE COSTS SHOULD HOW EVER BE ATTRIBUTABLE TO SUCH EXPORT', WHICH MEANS THE EXPOR T OF TRADING GOODS. BY USING THESE WORDS IN CLAUSE (B) O F SUB- SECTION (3) AND THEREBY INTRODUCING A CONDITION THA T BOTH THE DIRECT AND THE INDIRECT COSTS MUST BE ATTRIBUTA BLE TO THE EXPORT OF TRADING GOODS, THE LEGISLATURE HAS MANIFESTED AN INTENTION THAT ANY COSTS, WHICH ARE PAGE 7 OF 12 I.T.A. NO. 517/MDS/2008 ATTRIBUTABLE TO RECEIPTS OTHER THAN THE EXPORT TURN OVER OF TRADING GOODS MUST BE LEFT OUT OF RECKONING AT THE THRESHOLD ITSELF. THIS CONDITION THUS FORMS THE SUBSTRATUM OR BEDROCK OF THE COMPUTATION OF THE EXPORT PROFITS. THEREFORE, IF ANY PART OF THE DIRECT OR IN DIRECT COSTS ARE ATTRIBUTABLE NOT TO THE EXPORT OF THE TRADING GO ODS - IN OTHER WORDS, THE EXPORT TURNOVER - THAT PART SHOULD BE LEFT OUT OF CONSIDERATION. THE DEFINITION OF 'DIRE CT COSTS' IS A LITTLE ARTICULATE IN THE S ENSE THAT IT EXPRESSLY SAYS THAT THESE ARE 'COSTS DIRECTLY ATTRIBUTABLE TO THE TRADING GOODS EXPORTED OUT OF INDIA INCLUDING THE PURCHASE PRICE OF SUCH GOODS. THE DEFINITION OF 'INDIRECT COSTS' IS HOWEVER NOT SO ARTICULATE AND MERELY SAYS THAT THES E ARE 'COSTS, NOT BEING DIRECT COSTS, ALLOCATED IN THE RA TIO OF THE EXPORT TURNOVER IN RESPECT OF TRADING GOODS TO THE TOTAL TURNOVER. IT IS THUS COUCHED IN A SOMEWHAT NEGATIVE FORM, CONTRASTED WITH DIRECT COSTS. THAT IS TO SAY, ALL COSTS WHICH ARE NOT DIRECT COSTS ARE TO BE CONSIDER ED AS INDIRECT COSTS. IF AN ASSESSEE IS ENGAGED IN BOTH E XPORT OF TRADING GOODS AND LOCAL SALES OF TRADING GOODS, THE RE SHALL BE AN ALLOCATION 'MENTIONED IN THE DEFINITION. BUT THE DEFINITION ALSO IMPLIES THAT ONLY THOSE COSTS ARE T O BE CONSIDERED AS INDIRECT COSTS WHICH ARE ATTRIBUTABLE TO THE TRADING GOODS EXPORTED OUT OF INDIA, FOR THE PURPOS ES OF CLAUSE (B) OF SUB-SECTION (3). WHEN THE DIRECT COST S, BY DEFINITION, ARE THOSE COSTS 'ATTRIBUTABLE TO THE TR ADING PAGE 8 OF 12 I.T.A. NO. 517/MDS/2008 GOODS EXPORTED OUT OF INDIA, INCLUDING (PURCHASE PR ICE OF SUCH GOODS, AND WHEN THE INDIRECT COSTS ARE DEFINED AS COSTS NOT BEING DIRECT COSTS, IT FOLLOWS BY IMPLICA TION THAT THE INDIRECT COSTS SHOULD ALSO BE ATTRIBUTABLE TO T HE TRADING GOODS EXPORTED OUT OF INDIA, INCLUDING THE PURCHASE PRICE OF SUCH GOODS. THE BASIC IDEA WHICH RUNS THROUGH CLAUSE (B) OF SUBSECTION AND CLAUSES (E) AN D (D) OF THE EXPLANATION BELOW TO SUBSECTION IS THAT THE IND IRECT COSTS SHOULD BE ATTRIBUTABLE TO THE EXPORT TURNOVER IN RESPECT OF THE TRADING GOODS. AS A CORONARY, IT FOLL OWS THAT INDIRECT COSTS WHICH ARE NOT ATTRIBUTABLE TO T HE EXPORT TURNOVER OF TRADING GOODS ARE NOT TAKEN IN B Y THESE PROVISIONS. IT IS THEREFORE, FOLLOWS THAT AN Y INDIRECT COSTS WHICH CAN REASONABLY BE ATTRIBUTED T O RECEIPTS OTHER THAN THE EXPORT TURVOVER OF TRADING GOODS WILL HAVE TO BE LEFT OUT OF CONSIDERATION AT THE TH RESHOLD ITSELF 7. FURTHER, THE TRIBUNAL VIDE ITS ORDER DATED 16.8. 2005 IN THE CASE OF GLAXO SMITHLINE ASIA [P] LTD HELD AS UNDER: 32. WE HAVE HEARD THE RIVAL SUBMISSIONS. CLAUSES (B) AND (C) OF SUB-SO (3) OF S. 80HHC OF THE ACT PROVIDE FOR DETERMINATION OF PROFIT DERIVED FROM EXPORT OF TRADING GOODS AS UNDER: PAGE 9 OF 12 I.T.A. NO. 517/MDS/2008 (B) WHERE THE EXPORT OUT OF INDIA IS OF TRADING GOODS, THE PROFITS DERIVED FROM SUCH EXPORT SHALL BE THE EXPORT TURNOVER IN RESPECT OF SUCH TRADING GOODS AS REDUCED BY THE DIRECT COSTS AND INDIRECT COSTS ATTRIBUTABLE TO SUCH EXPORTS; (C) WHERE THE EXPORT OUT OF INDIA IS OF GOODS OR MERCHANDISE MANUFACTURED OR PROCESSED BY THE APPELLANT AND OF TRADING GOODS, THE PROFIT DERIVED FROM SUCH EXPORT SHALL,- (II) IN RESPECT OF TRADING GOODS, BE THE EXPORT TURNOVER IN RESPECT OF SUCH TRADING GOODS AS REDUCED BY THE DIRECT AND INDIRECT COSTS ATTRIBUTABLE TO EXPORT OF SUCH TRADING GOODS. N PROFIT FROM THE EXPORT OF TRADING GOODS IS TO BE DETERMINED BY REDUCING FROM THE EXPORT TURNOVER OF SUCH TRADING GOODS, DIRECT COST AND INDIRECT COSTS ATTRIBUTABLE TO SUCH EXPORT. THE TERMS DIRECT COST AND INDIRECT COST HAVE BEEN DEFINED IN C1. (D) AND CL. (E) OF EXPLANATION BELOW S. 80HHC(3) OF THE ACT AS UNDER: (D) 'DIRECT COSTS' MEANS COSTS DIRECTLY ATTRIBUTABLE TO THE TRADING GOODS EXPORTED OUT OF INDIA INCLUDING THE PURCHASE PRICE OF SUCH GOODS. N PAGE 10 OF 12 I.T.A. NO. 517/MDS/2008 (E) 'INDIRECT COSTS' MEANS COSTS, NOT BEING DIRECT COSTS, ALLOCATED IN THE RATIO OF THE EXPORT TURNOVE R IN RESPECT OF TRADING GOODS TO THE TOTAL TURNOVER. FROM A HARMONIOUS READING OF DEFINITION OF 'INDIREC T COST' IN EXPLN. (E) BELOW SUB-SO (3) OF S. 80HHC AND D. ( B) OF THAT SECTION IT WOULD BE APPRECIATED THAT ONLY INDI RECT COST ATTRIBUTABLE TO THE EXPORT IS TO BE REDUCED FO R COMPUTING DEDUCTION FROM EXPORT OF TRADING GOODS. EXPLANATION (E) TO SUB-SO (3) OF S. 80HHC CANNOT OV ERRIDE THE PROVISION OF C1. (B) OF S. 80HHC(3). THE SPECIAL BENCH OF TRIBUNAL IN SURENDRA ENGINEERI NG CORPN. VS. ASSTT. CIT (2003) 78 TTJ (MUMBAI)(SB) 34 7 : (2003) 86 ITD 121 (MUMBAI)(SB) HELD THAT INDIRECT C OSTS WHICH ARE NOT ATTRIBUTABLE TO EXPORT TURNOVER OF TR ADING GOODS SHOULD NOT BE TAKEN INTO CONSIDERATION. IT IS CLEAR FROM THE AFORESAID ORDER OF THE TRIBUNAL THAT FOR T HE PURPOSE OF COMPUTING DEDUCTION UNDER S. 80HHC, INDIRECT COSTS RELATED TO THE EXPORT OF TRADING GOO DS IS TO BE APPORTIONED AND NOT ALL COSTS OTHER THAN DIRECT COSTS HAVE TO BE PRORATED TO ARRIVE AT THE INDIRECT COSTS THAT HAVE TO BE REDUCED. IT IS ONLY THOSE COSTS WHICH HA VE SOME RELATION TO THE EXPORT OF TRADING GOODS THAT N EED TO BE ALLOCATED. THE AO IS, THEREFORE, DIRECTED TO RECOMPUTE THE DEDUCTION UNDER S. 80HHC OF THE ACT I N RESPECT OF TRADING GOODS BY EXCLUDING FROM THE INDI RECT PAGE 11 OF 12 I.T.A. NO. 517/MDS/2008 EXPENSES, SUCH EXPENSES NOT RELATED TO THE EXPORT O F TRADING GOODS. 8. THE LD. D.R. BROUGHT NO MATERIAL BEFORE US TO CO NTROVERT THE SUBMISSIONS OF THE ASSESSEE. WE FIND THAT IN THE I NSTANT CASE IT IS NOT IN DISPUTE THAT INDIRECT COST WHICH WAS EXCLUDE D FROM APPORTIONMENT BY THE ASSESSING OFFICER HAD NO RELAT ION WITH THE EXPORT SALES. ON THE ABOVE FACTS, KEEPING IN VIEW T HE ABOVE CITED DECISIONS, WE ARE OF THE CONSIDERED OPINION THAT TH E VIEW TAKEN BY THE ASSESSING OFFICER IN ITS ORDER DATED 16.2.2005 CANNOT BE HELD TO BE NOT A POSSIBLE VIEW. THEREFORE, IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MAX IN DIA LTD 295 ITR 282 [SC] WHEREIN IT WAS HELD THAT WHEN A VIEW ADOPT ED BY THE ASSESSING OFFICER WAS ONE OF THE POSSIBLE VIEW, THE N PROVISIONS OF SECTION 263 CANNOT BE INVOKED TO TAKE ANOTHER POSSI BLE VIEW WE SET ASIDE THE IMPUGNED ORDER PASSED U/ 263 OF THE ACT A ND ALLOW THE APPEAL OF THE ASSESSEE. PAGE 12 OF 12 I.T.A. NO. 517/MDS/2008 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 28 TH JULY 2011. SD/- SD/- ((GEORGE MATHAN ) (N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 28 TH JULY, 2011. VL COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE