DCIT, CHENNAI V. Sree Ramcides Chemicals Pvt Ltd., CHENNAI

ITA 660/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6203 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Double taxation relief; Deemed to accrue or arise in india; Permanent establishment
• Section: 80IB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A BENCH, CHENNAI . . . , . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.660/MDS/2016 ( / ASSESSMENT YEAR: 2011-12) THE DCIT, CORPORATE CIRCLE 6(2), CHENNAI 34. VS M/S. SREE RAMCIDES CHEMICALS PVT. LTD., 7 TH FLOOR, VBC SOLITAIRE, NO.47 & 49, BAZULLAH ROAD, T.NAGAR, CHENNAI 600017. PAN: AAACS3784N ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SMT. RUBY GEORGE, JCIT /RESPONDENT BY : SHRI T. BANUSEKAR, FCA /DATE OF HEARING : 01.08.2017 /DATE OF PRONOUNCEMENT : 13.09.2017 / O R D E R PER A. MOHAN ALANKAMONY, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEA LS)-5, CHENNAI DATED 08.12.2015 IN ITA NO.9/CIT(A)/14-15 F OR THE ASSESSMENT YEAR 2011-12 PASSED U/S.250(6) R.W.S.1 43(3) OF THE ACT. 2. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL HOWEVER THE CRUXES OF THE ISSUE ARE THAT:- 2 I TA NO.660/MDS/2016 I. THE LD.CIT(A) HAS ERRED IN ALLOWING DEDUCTION U/S.80IB OF THE ACT, EVEN THOUGH THE LD.AO HAD MADE A FINDING THAT THE NET PROFIT OF THE ENTIRE BUSINESS ON THE SALE OF THE IDENTICAL PRODUCT IS ON LY 0.88% WHILE AS THE NET PROFIT OF THE 80IB UNIT IS 41.2%. II. THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MADE BY THE LD.AO U/S.40(A)(I) OF THE ACT, BY HOLDING THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE ON THE OVERSEAS COMMISSION PAYMENTS MADE TO THE NON-RESIDENT U/S.195(2) OF THE ACT OUTSIDE INDIA. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF INSECTICIDES, HAVING MANUFACTURING UNITS THROUGH OUT INDIA, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-1 2 ON 30.09.2011, DECLARING TOTAL INCOME OF RS.NIL. THE CASE WAS SELECTED FOR SCRUTINY AND FINALLY ASSESSMENT ORDER U/S.143(3) OF THE ACT WAS MADE ON 30.03.2014, WHEREIN THE LD.AO A SSESSED THE INCOME OF THE ASSESSEE AT RS.2,13,88,923/-. 3 I TA NO.660/MDS/2016 4. GROUND NO.2(I) : DISALLOWANCE U/S.80IB OF THE ACT THE ASSESSEE HAD DECLARED PROFIT OF RS.22,82,28,77 4/- IN ITS 80IB JAMMU UNIT WITH RESPECT TO MANUFACTURE AND SALE OF INSECTICIDES. THE NET PROFIT OF THIS 80IB UNIT WOR KS OUT TO 41.2% AS AGAINST THE NET PROFIT OF THE ENTIRE BUSINESS UN ITS OF THE ASSESSEE AT 0.88% WHICH IS EVEN LESS THAN 1%. ON F URTHER SCRUTINY, THE LD.AO OBSERVED THAT THE SALE OF THE 8 0IB UNITS TO THE OTHER UNITS WERE AT AN EXORBITANT PRICE, WHICH IS MUCH LESS THAN THE PRICE SOLD BY THE OTHER UNITS TO THE END C USTOMERS. THEREFORE THE LD.AO OPINED THAT THE ASSESSEE IS CON SCIOUSLY AND DELIBERATELY INFLATING THE PROFIT OF THE JAMMU UNIT WHICH IS 80IB UNIT. HENCE, THE LD.AO INVOKED THE PROVISIONS OF 80IB(13) R.W.S. 80IA(8) OF THE ACT AND PROCEEDED TO ARRIVE A T THE PROFIT OF THE ASSESSEE AT A REASONABLE BASIS. ACCORDINGLY TH E LD.AO WORKED OUT THE ELIGIBLE PROFIT OF THE 80IB UNIT AS NIL, BASED ON THE FOLLOWING COMPUTATION:- NET PROFIT (NP) OF 80-IB UNIT ASSESSMENT ORDER (NP OF BUSINESS/GROSS RECEIPT (GR) OF BUSINESS)*GR OF 80-I B UNIT = (10669228 / 1208305113)*530435869 =RS.46,8 3,702/- PROFIT ELIGIBLE FOR 80-IB DEDUCTION = NET PROFIT + DEPRECIATION AS PER COMPANY ACT DEPRECIATION AS P ER IT ACT =4683702+3456437-8916939= RS.(7,76,800) 4 I TA NO.660/MDS/2016 SINCE THE PROFIT ELIGIBLE FOR 80-IB DEDUCTION IS NE GATIVE, THE SAME IS REDUCED TO RS.NIL/- LIMIT DEDUCTION UNDER SECTION 80-IB TO RS.N IL/- 4.1. BEFORE THE LD.CIT(A), THE LD.AR SUBMITTED AS FOLLOWS:- 5.1.1 THERE IS NO TRANSFER BY WAY OF SALE OF FINI SHED GOODS HELD FOR THE PURPOSE OF ELIGIBLE BUSINESS TO THE OT HER UNITS SO AS TO WARRANT THE APPLICATION OF SEC.80-IB(13) R.W. S 80-IA(8). IN OTHER WORDS, THERE IS NO INTER-UNIT SALES AS CON TEMPLATED IN SEC.80-IB(13) R.W.S. 80-IB(8). IT IS REITERATED THA T JAMMU UNIT IS A SELF CONTAINED ENTITY IN RESPECT OF WHICH SALE S AND PURCHASES ARE CLEARLY IDENTIFIABLE, HAVE BEEN IDENT IFIED BY THE ASSESSEE AND ACCOUNTED AS SUCH IN A SEPARATE SET OF BOOKS MAINTAINED FOR THIS UNIT. THEREFORE IT IS SUBMITTED THAT THE PROVISO TO SEC.80-IA(S) FOR COMPUTING PROFITS AND G AINS OF THE ELIGIBLE UNIT ON A REASONABLE BASIS DOES NOT ARISE AS THERE ARE NO EXCEPTIONAL DIFFICULTIES IN COMPUTING THE SAID P ROFITS. AFTER CONSIDERING THE SUBMISSION OF THE LD.AR, THE LD.CIT(A) HELD THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION U/ S. 80IB OF THE ACT, WITH RESPECT TO ITS 80IB UNIT BY OBSERVING AS UNDER:- 5.1.2 I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE APPELLANT ALONG WITH THE COPIES OF LEDGER ACCOUNTS. THE AO HAS MADE A CONCLUSION THAT THE PROFIT IN JAMMU UNIT IS BEING INFLATED CONSCIOUSLY AND HE HAS CALCULATED PROFIT E LIGIBLE FOR DEDUCTION U/S 80-IB AS NEGATIVE AD DISALLOWED THE D EDUCTION U/S 80-LB. HOWEVER, IT IS SEEN THAT GOODS ARE TRANS PORTED TO DEPOTS FOR FURTHER SALE TO PARTIES AND SALES ARE BO OKED IN ACCOUNTS OF THAT PARTICULAR UNIT ONLY. SINCE EXCISE DUTY IS APPLICABLE ON MANUFACTURED GOODS, THE APPELLANT HAS TO MAKE RELEVANT ENTRIES IN BOOKS OF ACCOUNTS. THE SALE PRI CE BEING LESSER THAN THE INTER UNIT TRANSFER PRICE IS EVIDEN T IN A FEW CASES ONLY WHICH IS DUE TO THE DISCOUNT OFFERED AS HAS BEEN 5 I TA NO.660/MDS/2016 OBSERVED BY THE AO ALSO. IN VIEW OF THESE OBSERVATI ON, THE APPELLANT IS ENTITLED TO DEDUCTION U/S 80-IB. THE A O IS DIRECTED TO ALLOW DEDUCTION U/S 80-IB. 4.2. BEFORE US THE LD.DR VEHEMENTLY ARGUED IN SUPPO RT OF THE ORDER OF THE LD.AO, WHILE AS THE LD.AR PLEADED FOR SUSTAINING THE ORDER OF THE LD.CIT(A) BY REITERATING HIS FINDINGS. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFU LLY PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LD.AO HAS C ATEGORICALLY MADE A FINDING IN HIS ORDER THAT THE ASSESSEE IS IN FLATING THE SALE OF THE PRODUCTS FROM ITS 80IB UNIT TO THE OTHER UNI TS AND THE OTHER UNITS SALE PRICE TO THE END USERS ARE MUCH LESS TH AN THE PURCHASE PRICE OF THE PRODUCTS PURCHASED FROM THE 8 0IB UNITS. WHILE AS THE LD.CIT(A) IN HIS ORDER STATES THAT THE SALE PRICE TO THE END USERS IS LESSER THAN THE INTER UNIT TRANSFE R PRICE ONLY IN FEW CASES AND THAT WAS DUE TO THE DISCOUNT OFFERED. THEREAFTER THE LD.CIT(A) ABRUPTLY ALLOWS THE ISSUE IN FAVOUR O F THE ASSESSEE WITHOUT MAKING ANY OTHER FINDING OR EXPLANATION. T HEREFORE, WE DO NOT FIND ANY MERIT IN THE ORDER OF THE LD.CIT(A) . WE ALSO DO NOT UNDERSTAND THE RATIO BEHIND THE COMPUTATION MAD E BY THE LD.AO WHILE ARRIVING AT THE PROFIT OF THE 80IB UNIT AS NIL AND ASSESSING THE GROSS TOTAL INCOME OF THE ASSESSEE AT 6 I TA NO.660/MDS/2016 RS.1,05,36,987/-, WHEN THE LD.AO HAS MADE A FINDING THAT THE PROFIT DECLARED BY THE 80IB UNIT RS.22,82,28,774/-. FROM THESE FACTS IT APPEARS THAT THE ASSESSEE HAD DECLARED LOS S OF RS.21,76,91,787/- (RS.22,82,28,774 - RS.1,05,36,987 ) IN ITS OTHER UNITS. THESE FACTS ARE NOT ELABORATED IN THE ORDER OF THE LD.AO. CONSIDERING THE COMPLEXITY OF THE ISSUE, WE ARE OF THE CONSIDERED VIEW THAT THE ENTIRE ISSUE HAS TO BE LOO KED INTO AFRESH BY THE LD.AO. THEREFORE, WE HEREBY REMIT THE MATTE R BACK TO THE FILE OF LD.AO FOR DE-NOVA CONSIDERATION. 5. GROUND NO.2(II) : DISALLOWANCE U/S.40(A)(IA) OF THE ACT:- THE ASSESSEE HAD MADE PAYMENTS TO NON-RESIDENTS OUTSIDE INDIA AS DETAILED HEREIN BELOW: 1. RESEARCH & DEVELOPMENT (VIETNAM) RS.1,10,565 /- 2. COMMISSION (BRAZIL) - RS.5,21,430/- 3. ADVERTISEMENT AND SALE PROMOTION - RS.2, 10,150/- (BURKINO FASO) -------------------- TOTAL RS.8,42,145/- ============ THE LD.AO HAD OPINED THAT THE AFORE STATED PAYMENTS FALLS UNDER THE FIELD FEES FOR TECHNICAL SERVICES AS EN SHRINED IN THE EXPLANATION 2 TO SECTION 9(1)(VII) OF THE ACT, BECA USE IT IS IN THE 7 I TA NO.660/MDS/2016 NATURE OF FEE FOR MANAGERIAL, TECHNICAL OR CONSULT ANCY SERVICES. HE THEREFORE FURTHER OPINED THAT ALL THE ABOVE PAYM ENTS MADE TO FOREIGN AGENTS WILL BE DEEMED TO ACCRUE OR ARISE IN INDIA AS PROVIDED IN SECTION 9(I)(VII)(B) OF THE ACT. SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE FOR THE AFORE STATED PAYMENTS, THE LD.AO INVOKED THE PROVISIONS OF SECTION 40(A)(I A) OF THE ACT AND DISALLOWED THE EXPENDITURE. 5.1 ON APPEAL THE LD.CIT(A) HELD THE ISSUE IN FAVOU R OF THE ASSESSEE BY OBSERVING AS UNDER: 5.3.2 I HAVE CONSIDERED THE FINDINGS GIVEN BY THE AO AND ALSO SUBMISSIONS MADE BY THE AR OF THE APPELLANT. THE AO HAS DISALLOWED R&D(VIETNAM) AMOUNTING TO RS.1,10,565/- DUE TO NON DEDUCTION OF TAX AT SOURCE. AS THE FOREIGN AGEN T HAS NO PERMANENT ESTABLISHMENT IN INDIA AND BY VIRTUE OF D TAA BETWEEN INDIA AND VIETNAM, THE INCOME DOES NOT ARIS E IN INDIA. THEREFORE, THE AO IS DIRECTED TO ALLOW THE S AME. THE AO HAS DISALLOWED COMMISSION (BRAZIL) PAYMENT OF RS.5, 21,430/- AS NO TAX WAS DEDUCTED. THE COMMISSION PAID TO FORE IGN AGENTS FOR PROCESSING ORDERS CANNOT BE CALLED EITHER TO RE NDERING OF TECHNICAL SERVICES OR MANAGERIAL OR CONSULTING SERV ICES. THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)-II U/S PANALFA AUTOELE KTRIK LTD. 49 TAXMANN.COM 412 HAVE HELD THAT SERVICES RENDERED FOR PROCUREMENT OF EXPORT ORDERS ETC. CANNOT BE TREATED AS MANAGERIAL SERVICES PROVIDED BY THE NON RESIDENTS. THEREFORE, THE AO IS DIRECTED TO ALLOW COMMISSION, PAYMENT OF RS.5,21,430/-. THE AO HAS DISALLOWED ADVERTISEMENT AND SALES PROMOTION OF RS.2,10,150/- PAID TO M/G INERA, CENTR E REGIONAL DE RECHERCHES ENVIRONNMENTALES ET AGRICOLE S DE 8 I TA NO.660/MDS/2016 L'OUEST IN BURKINA FASO. THE APPELLANT STATES THAT DTAA IS NOT APPLICABLE. DELHI ITAT IN THE CASE OF DCIT CIRCLE 1 2(1), NEW DELHI VS. HERO MANAGEMENT SERVICES LTD. VIDE ITA NO.5646/DEI/2012 DATED 21.02.2014 HAS DECIDED THE I SSUE IN FAVOUR OF THE ASSESSEE REGARDING MARKET DEVELOPMENT EXPENSES. IN VIEW OF THE FACT THAT NO PE IS IN INDI A AND DELHI ITAT JUDGEMENT, THE AO IS DIRECTED TO ALLOW ADVERTI SEMENT AND SALES PROMOTION EXPENSES. THIS GROUND OF APPEAL IS ALLOWED. 5.2 THE LD.DR ARGUED BY REITERATING THE FINDINGS OF THE LD.AO WHILE AS THE LD.AR RELIED ON THE ORDER OF THE LD.CI T(A). 5.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CARE FULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LD. CIT(A) HAS MADE A CATEGORICAL FINDING THAT THE FOREIGN AGENTS DID NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA WITH RESPECT T O RESEARCH & DEVELOPMENT FEES RECEIVED BY THEM. FURTHER PLACING RELIANCE IN THE DTAA TREATY BETWEEN INDIA AND VIETNAM, THE LD.C IT(A) ARRIVED AT THE CONCLUSION THAT IN THE CASE OF THE A SSESSEE INCOME DID NOT ARISE IN INDIA TO THE FOREIGN AGENT AND HEN CE PROVISIONS OF SECTION 195 OF THE ACT IS NOT APPLICABLE. WE FIND MERIT IN THE ORDER OF THE LD.CIT(A) ON THIS ISSUE BECAUSE THE FA CTS ARE NOT DISPUTED AND IN SUCH CIRCUMSTANCE THE ASSESSEE IS N OT BOUND TO DEDUCT TAX AT SOURCE BECAUSE THE INCOME CANNOT BE D EEMED TO BE ACCRUED OR ARISE IN INDIA AS PER THE PROVISIONS OF THE ACT. 9 I TA NO.660/MDS/2016 THEREFORE WE DO NOT FIND ANY REASON TO INTERFERE WI TH THE ORDER OF THE LD.CIT(A) ON THIS ISSUE. 5.3.2 WITH RESPECT TO COMMISSION PAID TO FOREIGN A GENTS, THE LD.CIT(A) PLACED RELIANCE IN THE ORDER OF THE H ONBLE DELHI HIGH COURT IN THE CASE DIT(INTERNATIONAL TAXATION II) VS. PANALFA AUTOELEKTRIK LIMITED REPORTED IN 49 TAXMANN.COM 412 , WHEREIN IT WAS HELD THAT THE SERVICES FOR PROCURING EXPORT ORD ERS ETC., CANNOT BE TREATED AS MANAGERIAL SERVICES AND ACCORD INGLY ALLOWED THE APPEAL OF THE ASSESSEE. ON THIS ISSUE WE ARE ALSO REMINDED OF THE DECISION OF THE HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE CIT VS. FAIZON SHOES PVT. LTD. REPORTED IN3 67 ITR 0155, WHEREIN IT WAS HELD THAT THE PROVISIONS OF SE CTION 195 OF THE ACT WILL NOT BE APPLICABLE WHEN COMMISSION IS P AID OUTSIDE INDIA FOR RENDERING SERVICES OUTSIDE INDIA. ON THI S ISSUE ALSO, WE FIND MERIT IN THE ORDER OF THE LD.CIT(A) BECAUSE TH E ASSESSEES CASE IS IDENTICAL TO THE CASE M/S. FAIZON SHOES SUP RA AND THEREFORE DOES NOT CALL FOR ANY INTERFERENCE IN HIS ORDER. 5.3.3 THE PAYMENT MADE TOWARDS ADVERTISEMENT AND S ALES PROMOTION IS ALSO SIMILAR TO THE ISSUE WITH RESPECT TO PAYMENT OF COMMISSION OUTSIDE INDIA FOR SERVICES RENDERED OUTS IDE INDIA 10 ITA NO.660/MDS/2016 WHICH IS COVERED BY THE DECISION OF THE HONBLE JUR ISDICTIONAL HIGH COURT IN THE CASE FAIZON SHOES SUPRA . THEREFORE THE DECISION RENDERED BY THE LD.CIT(A) DOES NOT CALL FO R ANY INTERFERENCE. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 13 TH SEPTEMBER,2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER SD/- ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER !' /CHENNAI, #$ /DATED 13 TH SEPTEMBER, 2017 RSR $% &'(' /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. , ( )/CIT(A) 4. , /CIT 5. '-. / /DR 6. .01 /GF