M/s. Ivax Paper Chemicals Limited, Hyderabad V. Addl.CIT, Range-8, Hyderabad

ITA 708/HYD/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74761 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 07-05-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S RAVI
• Keywords: Business income; Depreciation; Principle of natural justice; Fair market value; Capital receipt
• Section: 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 708/HYD/2012 ASSESSMENT YEAR 2008-09 M/S. IVAX PAPER CHEMICALS LTD., HYDERABAD PAN: AAACI2693G VS. THE ADDL. CIT RANGE-8 HYDERABAD [ASSESSEE] [RESPONDENT] ITA NO. 892/HYD/2012 ASSESSMENT YEAR 2008-09 THE ASST. CIT CIRCLE-8(1) HYDERABAD VS. M/S. IVAX PAPER CHEMICALS LTD., HYDERABAD PAN: AAACI2693G [ASSESSEE] [RESPONDENT] ASSESSEE BY: SRI S. RAVI REVENUE BY: SRI SOLGY JOSE T. KOTTARAM DATE OF HEARING: 22.01.2014 DATE OF PRONOUNCEMENT: 21.03.2014 ORDER PER CHANDRA POOJARI, AM : THE ABOVE APPEALS ARE CROSS APPEALS DIRECTED AGAIN ST THE ORDER OF THE CIT(A)-III, HYDERABAD DATED 28 TH MARCH, 2012 FOR A.Y. 2008-09. 2. FACTS OF THE CARE ARE THAT THE ASSESSEE IS A COMPAN Y ENGAGED IN THE BUSINESS OF MANUFACTURING AND PRODUC TION OF PAPER SIZING CHEMICALS, POLYMERS, DEFOAMERS, BIOCID ES AND CLEANING CHEMICALS. FOR THE ASSESSMENT YEAR UNDER ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 2 CONSIDERATION, THE ASSESSEE ADMITTED TOTAL INCOME O F RS. 2,99,66,125. THE ASSESSEE IS HAVING THREE UNITS: (I) MANUFACTURING UNIT AT KALLAKAL, HYDERABAD (ESTABLISHED SOME TIME IN 1992) (FOR SHORT 'KALLAKAL UNIT') (II) KANCHIPURAM, TAMIL NADU WHICH WAS OPERATIVE FOR A.YS. 2007-08 AND 2008-09 AND WAS CLOSED IN FEBRUARY 2008 (FOR SHORT 'KANCHIPURAM UNIT'). (III) KATHUA, JAMMU (ESTABLISHED IN FEBRUARY 2006) IN RESPECT OF WHICH 100% TAX EXEMPTION UNDER SECTION 80IB(4) IS CLAIMED (FOR SHORT 'KATHUA UNIT'). 3. THE ASSESSEE MAINTAINS SEPARATE SET OF BOOKS FOR AL L THE ABOVE UNITS. AS PER THE BOOKS OF ACCOUNTS, THE PROF ITS REPORTED BY THE ASSESSEE FOR THE RESPECTIVE UNITS A T KALLAKAL, KANCHIPURAM AND KATHUA UNITS ARE RS. 2,82,40,824/-, (-) RS. 99,093/- AND RS. 6,92,24,879/-, RESPECTIVELY. THE A SSESSING OFFICER IN THE COURSE OF ASSESSMENT ENTERTAINED A S USPICION THAT THE ASSESSEE HAS ORGANIZED ITS BUSINESS IN A M ANNER WHEREBY THE PROFITS IN THE NON-EXEMPTED UNITS ARE TRANSFERRED TO KATHUA UNIT (WHICH IS A 100% TAX EXE MPTED UNIT) BY TRANSFERRING FINISHED GOODS/RAW MATERIALS T HERE BY ENABLING KATHUA UNIT TO MAKE MORE PROFITS. FOR EXAM INING THE ABOVE ISSUE, THE ASSESSING OFFICER HAD CALLED FOR D ETAILS OF THE RAW MATERIALS DEALT WITH BY THE ASSESSEE IN RES PECTIVE UNITS, DETAILS OF FINISHED PRODUCTS MANUFACTURED BY RESPECTIVE UNITS AND DETAILS OF FINANCIAL DATA FOR THE ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 3 RESPECTIVE UNITS. THE DETAILS OF PROFIT AND LOSS A/C . ARE AS FOLLOWS: PARTICULARS AS ON 31.3.08, HYD. (RS.) AS ON 31.3.08 KATHUA (RS.) AS ON 31.3.08 KANCHI (RS.) SALES 310967269 187929738 42616498 OTHER INCOME 2348016 10926502 644415 EXPENDITURE: A) RAW MATERIAL CONSUMED 199353377 101667533 30868931 B) MANUF. EXPENSES 15592858 5308409 2591174 C) PAYMENTS & PROVISIONS TO EMPLOYEES 13854301 4015194 123605 D) ADMIN., SELLING & OTHER EXPENSES 54370246 17447299 6491064 E) AUDITOR'S REMUNERATION 150000 - - F) FINANCIAL CHARGES 1794147 125609 1992332 G) DEPRECIATION 4249925 1842090 118680 TOTAL (A) TO (G) 289364853 69224879 (-) 99093 PROFIT % 9.08 36 .8 LOSS 3.1 FROM THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER CAME TO A CONCLUSION THAT THERE W AS TRANSFER OF FINISHED GOODS FROM KALLAKAL UNIT TO KA THUA UNIT TO THE EXTENT OF RS. 4,11,14,262. THE ASSESSING OF FICER GAVE A FINDING THAT THE KATHUA UNIT IS MAKING HIGHER PROFI T WHEN COMPARED TO OTHER TWO UNITS. THE ASSESSING OFFICER VIEWED THE EXPENDITURE OF RS. 2.45 LAKHS ON R&D AS SIGNIFI CANT INVESTMENT IN KALLAKAL UNIT. LIKEWISE SHE ARRIVED AT THE CONCLUSION THAT FREIGHT CHARGES IS NIL AT KATHUA UN IT. THE ASSESSING OFFICER BASED ON THE ABOVE FINDING DOUBTE D THE CORRECTNESS OF THE ACCOUNTS DRAWN UP BY THE ASSESSE E IN RESPECT OF ALL THE THREE UNITS AND REDRAW THE PROFI T AND LOSS ACCOUNT OF ALL THE THREE UNITS BY DEBITING THE EXPE NSES IN PROPORTIONATE TO THEIR TURNOVER TO ALL THE UNITS AN D CALCULATE ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 4 THE PROFIT OF KATHUA UNIT AND GRANT EXEMPTION U/S. 8 0IB OF THE IT ACT. 4. THE ASSESSEE OPPOSED THE ABOVE PROPOSAL AND SUBMITTED THAT THE MATERIAL TRANSFERRED FROM KALLAK AL UNIT TO KATHUA UNIT ARE RAW MATERIALS/INTERMEDIARY WHICH IN TURN ARE USED FOR PRODUCING VARIOUS FINISHED PRODUCTS IN CON JUNCTION WITH AKD WAX, GUM ROSIN, STARCH, SODIUM & ALUMINIUM SALTS, RHEOLOGY MODIFIERS, SURFACTANTS, EMULSIFIERS , PRESERVATIVE CHEMICALS ETC., UNDER TEMPERATURE, PRE SSURE PH & MIXING CONDITIONS TO PRODUCE FINAL PRODUCTS. THE ASSESSEE FURTHER SUBMITTED THAT NONE OF THE MATERIAL DISPATC HED FROM KALLAKAL UNIT TO KATHUA UNIT WERE SOLD AS FINISHED PRODUCTS. THE ASSESSEE SUBMITTED FACTORY RECORDS OF KATHUA UN IT IN SUPPORT OF ITS CASE THAT END PRODUCTS ARE TOTALLY D IFFERENT FROM THE RAW MATERIALS WHICH ARE TRANSFERRED FROM K ALLAKAL UNIT. THE ASSESSEE SUBMITTED THAT RAW MATERIALS TRA NSFERRED FROM KALLAKAL UNIT TO KATHUA UNIT ARE CODED FOR MAI NTAINING SECRECY ON ACCOUNT OF COMPETITION IN THE MARKET. 5. THE ASSESSEE FURTHER SUBMITTED THAT THE HIGHER PROF IT AT KATHUA UNIT IS ON ACCOUNT OF THE FACT THAT IT IS A NEW UNIT AND ALSO ON ACCOUNT OF THE FACT THAT THE SAID UNIT ENJO YS POWER SUBSIDY AND OTHER BENEFITS LIKE SAVINGS IN TRANSPOR TATION COSTS, PACKAGING EXPENSES, REPAIR AND MAINTENANCE, ETC. IN ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 5 RESPONSE TO THE REPORT OF SPOT VERIFICATION AND THE PROPOSAL FOR REDRAWING PROFIT AND LOSS ACCOUNT OF ALL THE TH REE UNITS, THE ASSESSEE SUBMITTED THAT: (I) ALL THE UNITS ARE RUNNING INDEPENDENTLY WITH FULL MANUFACTURING FACILITIES OF THEIR OWN; (II) ALL THE UNITS HAVE NECESSARY PERMISSIONS, APPROVAL AS INDEPENDENT UNIT FROM OTHER GOVERNMENT DEPARTMENTS; (III) ALL THE UNITS ARE MAINTAINING SEPARATE BOOKS OF ACCOUNTS AND OTHER RECORDS LIKE EXCISE RECORDS AND SALES TAX RETURNS. THE BOOKS ARE AUDITED AND IN SPECIFIC SALES TAX AUDIT IS ALSO CONDUCTED FOR KATHUA UNIT; (IV) NO DISCREPANCIES WHATSOEVER WERE POINTED OUT IN PURCHASES OR SALES OF EACH UNIT; (V) EACH UNIT IS SELLING THEIR PRODUCT TO DIFFERENT PARTIES AND IN MOST OF THE CASES PRODUCT ALSO DIFFERS FROM ONE UNIT TO ANOTHER UNIT; (VI) THE MATERIAL SOLD BY KALLAKAL UNIT TO KATHUA UNIT IS NOT SOLD TO OUTSIDE PARTIES. THIS ITSELF PROVES THAT IT IS A RAW MATERIAL WHICH IS INTERMEDIATE CHEMICAL WHICH REQUIRE FURTHER PROCESS AT KATHUA UNIT; (VII) THE KALLAKAL UNIT HAS SOLD 3.29 CRORE WORTH OF MATERIAL OUT OF 33.89 CRORE TO KATHUA UNIT AT COST PLUS METHOD AND AT ARM'S LENGTH PRICE; (VIII) THE EXPENSES OF KALLAKAL UNIT FOR THE FYS. 2005- 06, 2006- 07 AND 2007-08 ARE IN PROPORTIONATE TO THE TURNOVER, AND KALLAKAL UNIT HAS NOT SPENT ANY ADDITIONAL EXPENDITURE FOR THE KATHUA UNIT; (IX) THE STATEMENT OF SRI DINESH BHARGAV (ANS: 17) SPECIFICALLY STATES THAT 'KATHUA UNIT WAS SET UP WITH A VIEW TO PROVIDE BETTER SERVICES TO THE PAPER INDUSTRY AS HYDERABAD UNIT IS FAR OFF FROM NORTH' ; ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 6 (X) THE KATHUA UNIT WAS ENTITLED FOR REIMBURSEMENT OF DUTY TO THE TUNE OF RS. 1.09 CRORES. 6. HOWEVER, THE ASSESSING OFFICER REJECTED THE CONTENT IONS RAISED BY THE ASSESSEE ON THE GROUND THAT THE ASSES SING OFFICER IS EMPOWERED TO DO SO UNDER THE PROVISIONS OF SECTION 80IA(10) OF THE INCOME-TAX ACT, 1961 AND HAS REDRAW N THE PROFIT AND LOSS ACCOUNT OF ALL THE THREE UNITS BY D ISTRIBUTING THE TOTAL EXPENDITURE OF THE THREE BUSINESS UNITS I N EQUAL PROPORTION TO ALL THE THREE UNITS AND DETERMINED TH E PROFITS OF THE KATHUA UNIT AT RS. 2,97,44,222/-. THE ASSESSING OFFICER IN THE PROCESS TREATED THE AMOUNT OF RS. 1.09 CRORES O F PLA REFUND UNDER THE HEAD INCOME FROM OTHER SOURCES AND DID NOT CONSIDER THE SAME FOR CALCULATING THE ELIGIBLE PROFITS UNDER SECTION 80IB OF KATHUA UNIT. THE ASSESSING OF FICER REJECTED THE CONTENTION OF THE ASSESSEE THAT PLA RE FUND IS BUSINESS INCOME ON THE GROUND THAT THE DEDUCTION TO BE ALLOWED UNDER SECTION 80IB IS IN RESPECT OF PROFITS AND GAINS DERIVED FROM BUSINESS. THE ASSESSING OFFICER FURTHE R HELD THAT THE PLA REFUND HAS NO BUSINESS CONNECTION AND THEREFORE CANNOT BE CONSIDERED AS BUSINESS INCOME FOR THE PUR POSE OF CALCULATING ENTITLEMENT UNDER SECTION 80IB OF THE A CT. 7. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A) AND CONT ESTED THE ADDITIONS MADE BY THE ASSESSING OFFICER. ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 7 8. ON APPEAL, THE CIT(A) HAS PARTIALLY ACCEPTED THE CONTENTION OF THE ASSESSEE AND DIRECTED THE ASSESSI NG OFFICER TO RECALCULATE THE 80IB DISALLOWANCE BY EXCLUDING T HE PURCHASE FROM THE EXPENDITURE PRORATE ADOPTED IN TH E ASSESSMENT ORDER. FURTHER, THE CIT(A) HAS DIRECTED THE A.O. TO TREAT EXCISE REFUND RS. 1,09,26,502/- AS CAPITAL RE CEIPT ON THE GROUND THAT DECISION OF THE TRIBUNAL ON WHICH AO HA S RELIED IS REVERSED BY THE HONBLE JURISDICTION HIGH COURT. 9. THE CIT(A) HAS RELIED ON THE DECISION OF THE TRIBUN AL IN THE CASE OF ACIT VS. ASIAN BROWN BOWERI LTD. 110 TT J (MUM) 502, WHEREIN HELD THAT THE PROFIT DRIVE FROM THE UN DERTAKING FOR THE PURPOSE OF DEDUCTION U/S 80IA/80IB ARE THE NE T PROFIT DERIVED FROM THE ELIGIBLE UNDERTAKING AND SUCH NET PROFIT HAS TO BE WORKED OUT AFTER DEDUCTING ALL EXPENSES DIREC T OR INDIRECT. AS HELD BY THE TRIBUNAL, HEAD OFFICE EXPE NSES OR EXPENSES WHICH ARE COMMON TO ALL THE UNITS WILL HAV E TO BE SPREAD OVER AND CHARGED AGAINST THE RECEIPT OF ALL THE UNITS. THE APPELLATE AUTHORITY EXCLUDED PURCHASE FROM PROR ATE BUT NOT CONSIDERED OTHER DIRECT EXPENSES FOR EXCLUDING FROM PRORATE PURPOSE. THE EXPENDITURE LIKE MANUFACTURING EXPENSES, PAYMENT AND PROVISION TO EMPLOYEES AND DEPRECIATION ARE DIRECT EXPENSES OF THE EACH UNIT A ND ARE NOT COMMON TO ALL UNITS AND HENCE SHOULD BE EXCLUDED FR OM THE ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 8 PRORATE DISTRIBUTION. NEITHER THE AO NOR THE CIT(A) HAS POINTED OUT ANY EXPENDITURE INCURRED BY HEAD OFFICE TOWARDS MANUFACTURING ACTIVITY OF KATHUA UNIT. AGAINST THIS , THE ASSESSEE IS IN APPEAL BEFORE US AND RAISED THE FOLL OWING GROUNDS: (1) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ORDER OF ASSESSM ENT BEING BASED ON SURMISES AND CONJUNCTURES AND FAR FR OM HARD FACTS OF THE ASSESSEE'S CASE IS ERRONEOUS AND IS LIABLE TO BE QUASHED. THE ASSESSING OFFICER THROUGHOUT THE ASSESSMENT PROCEEDINGS ENTERTAINED SUSPICION AND THEREFORE COULD NOT APPRECIATE THE FACTS SUBMITTED BEFORE HER IN PROPER PERSPECTIVE. (2) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THAT THE ASSESSING OFFICER ERRED IN ESTIMATING THE PROFITS BY REDRAWING THE ACCOUNTS BY DISTRIBUTING THE TOTAL EXPENDITURE OF THE BUSINESS OF THREE UNITS IN PROPORTION TO THEIR TURNOVER TO ALL THE TH REE UNITS. (3) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THAT THE ASSUMPTION OF THE JURIS DICTION BY THE ASSESSING OFFICER UNDER THE PROVISIONS OF SE CTION 80IA( 1 0) R.W.S. 80IB(4) OF THE ACT IS PER SE ILLE GAL AND UNSUSTAINABLE. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THE PROVISIONS OF SECTION 80IA( 1 0) OF THE ACT ARE APPLICABLE ONLY WHEN THE TRANSACTION IS BETWEEN AN ELIGIBLE BUSINESS AND A THIRD PERSON AND IS NOT APPLICABLE BETWEEN TWO DIFFERENT UNITS OF AN UNDERT AKING/ ENTERPRISE. (4) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THAT THE ASSESSING OFFICER FAILE D TO APPRECIATE THAT EVEN IF THE POWERS UNDER SECTION 80 IA(8) WERE TO BE INVOKED, EVEN THEN THE PROVOCATION FOR D OING SO WOULD BE ONLY WHEN GOODS / SERVICES HELD FOR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE/ASSESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS FOR A VALUE WHICH DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS/ SERVICES AS ON THE DATE OF TRANSFER. (5) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE ASSESSING OFFICER ERR ED IN ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 9 REJECTING THE EXPLANATION OF THE APPELLANT THAT THE RE IS NO INCREASE IN EXPENDITURE OF KALLAKAL UNIT FOR THE ASSESSMENT YEARS 2005-06, 2006-07 AND 2007-08. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT AS SESSEE WAS WELL WITHIN ITS RIGHT IN LAW TO INVEST RESEARCH & DEVELOPMENT EXPENSES (RS. 2.45 LAKHS) WHICH INCIDEN TALLY MAY BE USEFUL FOR OTHER UNITS AND BENEFIT AVAILABLE TO KATHUA UNIT CANNOT BE TAKEN AWAY ONLY FOR SUCH REAS ON. (6) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE FINDING OF THE ASSESS ING OFFICER THAT FREIGHT CHARGES FOR KATHUA BRANCH IS N IL IS FACTUALLY INCORRECT. THE ASSESSING OFFICER WITHOUT PUTTING THE ASSESSEE ON NOTICE HAS TAKEN ERRONEOUS VIEW THE REBY VIOLATING PRINCIPLES OF NATURAL JUSTICE. IT IS THE FACT THAT ASSESSEE DID INCUR FREIGHT CHARGES BUT THEY WERE INADVERTENTLY SHOWN UNDER 'PURCHASE OF RAW MATERIAL S' . (7) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE HON'BLE ITAT IN JUDGMENT REFERRED IN THE ORDER HAS HELD THAT THE IN DIRECT EXPENSES LIKE HEAD OFFICE EXPENSES OR EXPENSES WHIC H ARE COMMON TO ALL THE UNITS WILL HAVE TO BE SPREAD OVER AND CHARGED AGAINST THE RECEIPT OF ALL THE UNITS. HENCE , THE ASSESSEE AUTHORITY SHOULD HAVE EXCLUDED THE EXPENDI TURE FOR THE PRORATE WHICH ARE DIRECT ATTRIBUTED TO THE EACH UNIT. THE EXPENDITURE LIKE MANUFACTURING EXPENSES, PAYMENT AND PROVISION TO EMPLOYEES AND DEPRECIATION ARE DIRECT EXPENSES OF THE EACH UNIT AND ARE NOT COMMON TO ALL UNITS AND HENCE SHOULD BE EXCLUDED FROM THE PRO RATE DISTRIBUTION. (8) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE METHOD ADOPTED O F REDRAWING THE ACCOUNTS IS TOTALLY BASELESS AND DOES NOT STAND TO REASON AND LOGIC. IN THE ABSENCE OF A FIN DING THAT FINISHED GOODS WERE TRANSFERRED FROM KANCHIPURAM UN IT TO KATHUA UNIT, THE ENTIRE EXERCISE CARRIED OUT BY THE ASSESSING OFFICER IS FUTILE AND UNSUSTAINABLE. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE ASSESSEE PRAYS THAT THE APPEAL MAY BE ALLOWED. 10. THE REVENUE ALSO RAISED IN ITS APPEAL THE FOLLOWING GROUNDS: ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 10 (1) THE ORDER OF THE CIT(A) IS ERRONEOUS BOTH ON FACTS AND LAW. (2) THE CIT(A) ERRED IN OBSERVING THAT THE PURCHASES AN D SALES ARE DIRECTLY LINKED UNIT-WISE. THE CIT(A) SHO ULD HAVE APPRECIATED THE FACT THAT THE STOCK TRANSFER ADMITTED BY THE ASSESSEE ITSELF SHOWS THAT THE PURC HASES WERE NOT DONE UNIT-WISE. (3) THE CIT(A) HAS ERRED IN IGNORING THE PROVISION OF 8 0 IB(13) READ WITH 80 IA(10) WHICH WERE SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE AS I T HAD CONTRIVED TO SHIFT PROFITS FROM OTHER UNITS TO KATH UA UNIT TO SHOW INFLATED PROFITS FOR KATHUA UNIT IN ORDER T O REAP THE UNDUE BENEFIT OF HIGHER EXEMPTION U/S. 80 IB, THEREBY EVADING ACTUAL TAX. (4) THE CIT(A) ERRED IN OBSERVING THAT THE CENTRAL EXCI SE REFUND IS A CAPITAL RECEIPT. (5) THE CIT(A) SHOULD HAVE UPHELD THE DECISION OF THE ASSESSING OFFICER IN TREATING THE CENTRAL EXCISE RE FUND AS INCOME FROM OTHER SOURCES. 11. THE MAIN SUBMISSION OF THE AR WAS AS FOLLOWS: A) THE ASSUMPTION OF JURISDICTION BY THE ASSESSING OFFICER UNDER THE PROVISION OF SECTION 80IA(10) R.W.S. 80IB(4) OF THE ACT IS PER SE ILLEGAL AND UNSUSTAINABLE. THE PROVISION OF SECTION 80IA(10) OF THE ACT ARE APPLICABLE ONLY WHEN THE TRANSACTION IS BETWEEN ELIGIBLE BUSINESS AND A THIRD PERSON AND IS NOT APPLICABLE BETWEEN TWO DIFFERENT UNITS OF AN UNDERTAKING / ENTERPRISES. B) EVEN THE PROVISION U/S 80IA(8) GIVES THE POWER TO RE COMPUTE THE PROFIT IN CERTAIN CIRCUMSTANCES. ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 11 THE ABOVE PROVISION REQUIRE THAT WHAT IS RECORDED IN THE BOOKS CAN BE DISTURBED ONLY, IF IT DOES NOT ACCORD WITH THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON DATE OF TRANSFER. THE EXPLANATION CLEARLY SAYS THAT THE MARKET VALUE IS THE PRICE AT WHICH SUCH GOODS AND SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. C) THE ASSESSEE-COMPANY HAS PROVIDED AND PRODUCED TO AO PURCHASE BILLS OF THE RAW MATERIALS WITH QUANTITY AND PRICE DETAILS, ITEM WISE DETAILS OF INWARD AND OUTWARD VALUE, COST AND SALES PRICE OF THE EACH PRODUCT AND PARTY WISE, EXCISE RECORDS OF ALL THE THREE UNITS AND EVEN SALES TAX AUDIT REPORT OF KATHUA UNIT. SHE HAS NOT APPRECIATED THAT SURPRISE SPOT VERIFICATION DONE BY THE DEPARTMENT HAS NOT GIVEN ANY ADVERSE EVIDENCE RATHER CONFIRM THE CLAIM OF THE ASSESSEE. D) COPY OF THE ASSESSMENT ORDER FOR A.Y. 2007-08 WAS SUBMITTED. IT WAS BROUGHT TO THE NOTICE OF THE ASSESSEE AUTHORITY THAT IT WAS THE FIRST YEAR FOR THE CLAIM U/S 80IB FOR KATHUA UNIT AND SAME IS ALLOWED FULLY. ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 12 E) THE ASSESSEE COMPANY HAS PROVIDED IN ANNEXURE- A COMPARATIVE STATEMENT BETWEEN THE KALLAKAL UNIT AND KATHUA UNIT AND REASON FOR THE MORE PROFITABILITY IN KATHUA UNIT. IT SHOWS THE EACH ITEM WITH THE FIGURES DUE TO WHICH PROFITABILITY IS MORE THE KATHUA UNIT. IT IS TO BE NOTED THAT KATHUA UNIT IS SERVING TO THE CUSTOMERS IN THE AREA WHERE MANUFACTURE OF PAPER CHEMICALS ARE NOT MANY. FURTHER, THEY ARE SMALL IN COMPARED TO THE CUSTOMERS OF THE KALLAKAL UNIT. THEREFORE, THE BARGAINING POWER AND NEGOTIABLE CAPACITY IS LESS OF THE CUSTOMERS OF THE KATHUA UNIT IN COMPARED TO CUSTOMERS OF THE KALLAKAL UNIT. THE OTHER REASONS LIKE PACKAGE DEDUCTION, POWER AND FUEL, EXCISE REFUND AND OTHER EXPENDITURE IS GIVEN IN THE STATEMENT, THE LIST OF CUSTOMERS OF THE KATHUA UNIT AS WELL AS KALLAKAL UNIT WAS FURNISHED. IT SHOWS CLEARLY THAT CUSTOMERS OF THE KATHUA UNIT ARE SMALL PLAYER IN PAPER INDUSTRIES IN COMPARED TO CUSTOMERS OF THE KALLAKAL UNIT. F) THE STATEMENT OF MONTHLY PRODUCTION OF KATHUA UNIT WAS ALSO FURNISHED. ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 13 G) THE AR RELIED ON THE JUDGEMENT OF HONBLE SUPREME COURT IN LM CHHABDA & SONS VS. CIT 65 ITR 638 (SC) WHEREIN IT WAS HELD THAT 'THERE IS NO SUCH GENERAL PRINCIPLE THAT WHERE AN A SSESSEE CARRIED ON BUSINESS VENTURES OF THE SAME CHARACTER AT DIFFERENT PLACES, IT MUST BE HELD AS A MATTER OF LAW THAT THE DIFFERENT UNITS ARE PARTS OF A SINGLE BUSINESS.' H) THE AR ALSO RELIED THE JUDGMENT THE HON'BLE SUPREME COURT IN THE CASE OF WATERFALL ESTATE LTD. VS. CIT 219 ITR 563 (SC) WHEREIN IT WAS HELD THAT 'WHEN THE ASSESSEE CARRIES ON VARIOUS ACTIVITIES, E VEN THOUGH THERE MAY BE CENTRALIZED ACCOUNTS MAINTAINED, YET, SO LONG AS THERE IS NO INTERLACING, INTER-CONNECTION ON INTER- DEPENDENCE OF THE VARIOUS UNITS, THE VARIOUS ACTIVITIES CARRIE D ON BY THE ASSESSEE HAVE TO BE TREATED AS SEPARATE AND DISTINC T ACTIVITIES.' I) THE AR ALSO RELIED ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF CHAMUNDI TEXTILES (SILK MILLS) LTD. VS. CIT (341 ITR 488) WHERE IT WAS HELD THAT WHERE ASSESSEE HAS THE UNITS AT DIFFERENT PLACES AN D WERE INDEPENDENT HAVING SEPARATE WORK FORCE. EVEN THOUGH THERE WAS A CENTRALIZED MANAGEMENT, UNITS KEPT SEPARATE B OOKS OF ACCOUNTS AND HAD A SEPARATE BANK ACCOUNT. THERE WAS NO INTER- DEPENDENCE BETWEEN THESE UNITS. THE EXPORT MAKING U NIT IS ENTITLE FOR 100 % RELIEF U/S 80HHC(3)(A) OF THE INCOME TAX ACT. J) THE AR SUBMITTED THAT THERE IS A SPECIFIC PROVISION UNDER THE INCOME TAX ACT LIKE SECTION 40A(2)(A) WHERE THE ASSESSING OFFICER CAN DISALLOW THE EXPENDITURE IF IN HER OPINION SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 14 REGARD TO THE FAIR MARKET VALUE OF THE GOODS AND OTHERS. SIMILARLY THERE IS A SPECIFIC PROVISION IN SECTION 80IA(8) WHEN THERE IS A TRANSFER OF THE GOODS FROM THE ELIGIBLE UNITS TO OTHER UNITS OR VICE VERSA. 12. THE AR RELIED ON THE FOLLOWING JUDGEMENTS: (A) CHAMUNDI TEXTILES (SILK MILLS) LTD. VS. CIT, 341 IT R 488 (MAD.) (B) CIT VS. MEGHALAYA STEELS LTD., 332 ITR 91 (GAUHATI) . (C) CIT VS. PUNJAB CONCAST STEELS LTD., 336 ITR 248 (P& H) (D) M/S. RELIANCE ENERGY LTD. VS. DCIT IN ITA NO. 4629/ MUM/2009 & ORS ORDER DATED 14 TH MAY, 2010 WHEREIN HELD THAT: 10.1 ISSUE OF APPLICABILITY OF SECTION 80IA(10) THE PROVISION OF SECTION 80IA(10) RELIED UPON BY TH E ASSESSING OFFICER IS AS UNDER:- 10. WHERE IT APPEARS TO THE ASSESSING OFFICER THAT , OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSI NESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BE TWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PRO FITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINES S, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS A ND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDU CTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. 10.1.2 AS CAN BE SEEN FROM THE PROVISION, THE ASSES SING OFFICER CAN ONLY INVOKE THIS PROVISION ONLY WHEN THERE IS A CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELI GIBLE BUSINESS AND ANY OTHER PERSON OR FOR ANY OTHER REAS ON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE AS SESSEE MORE THAN THE ORDINARY PROFITS. THIS SUB-SECTION PO STULATES THAT THERE SHOULD BE CLOSE CONNECTION BETWEEN THE ASSESS EE AND ANY OTHER PERSON. IN THIS CASE, THE ASSESSEE IS GENERAT ING AND ALSO TRANSMITTING IN ITS BUSINESS ONLY. THERE ARE NO TRA NSACTIONS WITH ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 15 ANY OTHER PERSON. AS SUBMITTED BY THE LEARNED COUNS EL, SECTION 80IA(10) HAS NO RELEVANCE TO THE ASSESSEES BUSINES S TRANSACTIONS IN GENERATION AND TRANSMISSION OF POWE R. ACCORDINGLY, WE ARE OF THE VIEW THAT INVOKING THE P ROVISIONS OF SECTION 80IA(10) DOES NOT ARISE IN THIS CASE. AS AL READY STATED ELSEWHERE IN THE FACTS OF THE CASE, THE ASSESSING O FFICER ORIGINALLY HAS INVOKED SECTION 80IA(8) WHICH IS THE CORRECT PROVISION APPLICABLE TO THE TRANSACTIONS OF THE ASS ESSEE. SECTION 80IA(8) IS AS UNDER: 8. WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOS ES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSI NESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE AS SESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDE D IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THE DA TE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION U NDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUS INESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BE EN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON TH AT DATE : PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSIN G OFFICER, THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELI GIBLE BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEP TIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUC H PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. EXPLANATION.FOR THE PURPOSES OF THIS SUB-SECTION, MARKET VALUE, IN RELATION TO ANY GOODS OR SERVICES, MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. 10.1.3 IN VIEW OF THE CLEAR PROVISIONS OF SECTION 8 0IA(8) APPLICABLE TO THE ASSESSEES BUSINESS, WHERE THERE ARE TRANSACTIONS BETWEEN ELIGIBLE BUSINESS AND ANY OTHE R BUSINESS CARRIED ON BY THE ASSESSEE (GENERALLY CALLED NON-EL IGIBLE BUSINESS), THE ASSESSING OFFICER HAS TO DETERMINE T HE MARKET VALUE OF GOODS AND SERVICES IN ARRIVING AT THE PROF ITS. THIS ASPECT WAS TAKEN CARE BY THE ASSESSING OFFICER AT T HE TIME OF ORIGINAL ASSESSMENT FROM AY 2000-01 AND ONWARDS AND SO THE ASSESSING OFFICERS OPINION IN INVOKING THE PROVISI ONS OF 80IA(10) IS NOT ACCORDING TO THE LAW AND FACTS'. (E) RUPA & CO. LTD. VS. CIT, 11 TAXMANN.COM 263 (CAL.) (F) ASST. CIT VS. ASEA BROWN BOVERI LTD. 110 TTJ 502 ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 16 'WHEREIN HELD THAT FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S. 80IA THE HEAD OFFICE'S COMMON EXPENS ES WHETHER DIRECT OR INDIRECT HAVE TO BE ALLOCATED TO ALL THE UNITS/INDUSTRIAL UNDERTAKING/DIVISIONS AND IT COULD NOT BE HELD THAT THE COMMON EXPENSES OF HEAD OFFICE COULD NOT BE ALLOWED TO BE ALLOCATED AMONGST ALL UNITS OF THE ASSESSEE PRIOR TO CLAIMING DEDUCTION U/S. 80IA.' (G) HUNTSMAN ADVANCED MATERIALS (INDIA) (P.) LTD. VS. D CIT, 16 TAXMANN.COM 213 (MUM. TRIBUNAL.) (H) CIT VS. WIPRO LTD. (360 ITR 606) (KARN.) (I) DCW LTD. VS. ADDL. CIT, 132 TTJ 442 (MUM) WHEREIN H ELD AS UNDER: '18.2 1ST REASON FOR DISALLOWANCE OF DEDUCTION UNDE R SECTION 80-IA IS IN RESPECT OF ELECTRICITY TAX WHETHER PART OF MARKET PRICE OR NOT. THE CRUX OF THE MATTER TO BE EXAMINED HERE IS WHAT SHOULD BE THE MARKET PRICE OF THE ELECTRICITY WHILE TRANSFERRING THE MANUFACTURED ELECTRICITY FROM C.P.P. UNIT TO OT HER UNIT FOR THE PURPOSE OF CALCULATION OF DEDUCTION UNDER SECTI ON 80-IA(8) OF THE INCOME-TAX ACT. THE ASSESSEE, WHILE TRANSFER RING THE MANUFACTURED ELECTRICITY FROM C.P.P. UNIT TO OTHER UNIT, HAS TAKEN INTO ACCOUNT THE ELECTRICITY TAX LEVIED BY TH E STATE GOVERNMENT ON THE BILL AMOUNT AT THE RATE OF RE. 0. 18 PER UNIT CHARGED BY THE TAMIL NADU ELECTRICITY BOARD FROM TH E CONSUMERS ON THE BILL RAISED. THE CIT(A) WAS OF THE VIEW THAT THE ELECTRICITY TAX IS A STATUTORY AND EXTRANEOUS P AYMENT THE SAME CANNOT FORM PART OF THE MARKET PRICE. THE CIT( A) HEAVILY RELIED UPON THE DECISION OF MUMBAI BENCH IN THE CAS E OF WEST COAST PAPER MILLS LTD. (SUPRA). THE RELEVANT SECTIO N 80-IA(8) OF THE INCOME-TAX ACT READS AS UNDER:- '80-IA. DEDUCTIONS IN RESPECT OF PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKINGS OR ENTERPRISES ENGAGED IN INFRASTRUCTURE DEVELOPMENT, ETC.:- (1) TO (7) ....... (8) WHERE ANY GOODS [OR SERVICES] HELD FOR THE PURP OSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSI NESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS [OR SERVICES ] HELD FOR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY TH E ASSESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EI THER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDE D IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION U NDER THIS ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 17 SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUS INESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BE EN MADE AT THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THAT DATE:- PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSIN G OFFICER, THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELI GIBLE BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEP TIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUC H PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. [EXPLANATION:- FOR THE PURPOSES OF THIS SUB-SECTION , 'MARKET VALUE', IN RELATION TO ANY GOODS OR SERVICES, MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET.]' 18.3 THE ABOVE SECTION HAS BEEN EXAMINED BY THE ITA T DELHI BENCH IN THE CASE OF JINDAL STEEL AND POWER LTD. (S UPRA) WHEREIN IT WAS HELD THAT SECTION 80-IA(8) AUTHORIZE S THE ASSESSING OFFICER THAT WHERE THE TRANSFER AS RECORD ED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE, THE PROFITS DECLARED OF THE ELIGIBLE BUSINESS CAN BE ADJUSTED BY THE ASSESSING OFFICER ON SUCH BASIS SO AS TO ENSURE THAT GOODS OR SERVICES ARE TRANSFERRED TO IT S OWN UNIT AT THE MARKET VALUE OF SUCH GOODS OR SERVICES. IN THAT CASE, THE ASSESSING OFFICER DID NOT PERCEIVE RS. 3.72 PER UNI T AS THE MARKET VALUE OF THE POWER GENERATED BY THE ASSESSEE AND INSTEAD ADOPTED RS. 2.32 PER UNIT AS THE MARKET VAL UE, BEING THE PRICE AT WHICH THE ASSESSEE SOLD POWER TO THE BOARD . IN THE EXPLANATION TO SECTION 80-IA(8), IT IS PROVIDED THA T THE EXPRESSION 'MARKET VALUE' FOR THE PURPOSES OF SUB-S ECTION MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINAR ILY FETCH IN THE OPEN MARKET. THE MARKET VALUE IS AN EXPRESSION WHICH DENOTES A PRICE ARRIVED AT BETWEEN THE BUYER AND TH E SELLER IN THE OPEN MARKET WHEREIN THE TRANSACTIONS TAKE PLACE IN THE NORMAL COURSE OF TRADING AND COMPETITION IN CONTRAS T TO A SITUATION WHERE THE PRICE IS FIXED BETWEEN A BUYER AND A SELLER IN A NEGOTIATION DONE UNDER THE SHADOW OF LEGISLATI VELY MANDATED COMPULSION. IN THE CASE OF THE FORMER, THE PRICE FIXED BETWEEN THE BUYER AND SELLER CAN BE UNDERSTOOD AS D ENOTING 'MARKET PRICE' SINCE THE ELEMENTS OF TRADING AND CO MPETITION EXIST, WHEREAS IN THE CASE OF THE LATTER SITUATION, THE PRICE FIXED BETWEEN THE BUYER AND SELLER CANNOT BE UNDERSTOOD A S DENOTING THE MARKET PRICE SINCE THE ELEMENTS OF TRADE AND CO MPETITION ARE CONSPICUOUS BY THEIR ABSENCE. 18.4 THE FACTS OF WEST COAST PAPER MILLS LTD.'S CAS E (SUPRA) ARE THAT THE ASSESSEE WAS ENGAGED IN THE MANUFACTUR E AND SALE OF PAPER AND PAPER BOARDS, MULTILAYER BOARDS, ETC., AND IN THE BUSINESS OF POWER GENERATION. THE ASSESSEE HAD SET UP FOUR DG ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 18 UNITS TO FACILITATE ITS POWER REQUIREMENT IN THE PA PER PLANT AT DANDELI IN KARNATAKA. THE ASSESSEE CLAIMED DEDUCTIO N UNDER SECTION 80-IA ON THE GROUND THAT THESE DG UNITS WER E CATERING TO THE ASSESSEE'S CAPTIVE POWER REQUIREMENT. THE AS SESSING OFFICER WAS OF THE VIEW THAT IT WAS ONLY AN INTER-D IVISION TRANSFER AND THERE WAS NO REVENUE REALIZED BY IT AN D CONSEQUENTLY THERE WAS NO DERIVATION OF PROFIT OR I NCOME IN THE BUSINESS OF INDUSTRIAL UNDERTAKING. THE ASSESSEE AD OPTED THE RATE AT WHICH THE KARNATAKA ELECTRICITY BOARD SUPPL IED POWER TO INDUSTRIAL USERS. ACCORDING TO THE ASSESSING OFF ICER, THESE RATES WERE UNREALISTIC AS THE KARNATAKA ELECTRICITY BOARD WAS NOT EXPECTED TO PURCHASE POWER FROM THE ASSESSEE AN D IT WAS ALSO UNREALISTIC TO EXPECT THE KARNATAKA ELECTRICIT Y BOARD TO PURCHASE POWER FROM THE ASSESSEE AT A FUTURE DATE A T THE SAME RATE AT WHICH IT SUPPLIED POWER TO THE OTHER INDUST RIAL USERS AND IT WAS ALSO NOT THE FACT THAT THE ASSESSEE HAD SOLD ANY POWER TO KARNATAKA ELECTRICITY BOARD IN ANY LATER YEAR. THE CIT(A) ASKED THE ASSESSEE TO SUBMIT AN ALTERNATIVE CALCULA TION BASED ON THE AVERAGE ACTUAL PER UNIT COST OF POWER PURCHA SED FROM THE KARNATAKA ELECTRICITY BOARD BY THE PAPER DIVISI ON. THE ASSESSEE HAS GIVEN CALCULATION OF THE AVERAGE PRICE OF RS. 4.74 PER UNIT. THE CIT(A) ASKED THE ASSESSING OFFICER TO EXAMINE THE BILL AND VERIFY THE AVERAGE RATE CALCULATED BY THE ASSESSEE. THE ASSESSING OFFICER RECALCULATED THE PRICE TO BE ADOP TED AFTER EXCLUDING ELEMENT OF TAX. CIT(A) ACCEPTED THE ASSES SING OFFICER'S CALCULATION. ON APPEAL, THE ITAT HELD THA T THE ASSESSING OFFICER'S ADOPTION OF THE RATE AT WHICH T HE ASSESSEE SOLD THE POWER TO THE TAMIL NADU ELECTRICITY BOARD COULD NOT BE ACCEPTED SINCE THE UNITS ITSELF WERE WORKING AT DANDELI IN KARNATAKA WAS DIFFERENT. THE ASSESSEE HAD PAID TO T HE KARNATAKA ELECTRICITY BOARD FOR PURCHASE OF THE POW ER AND THE CIT(A) HAD COME TO A REASONABLE CONCLUSION THAT THE TRANSFER PRICE SHOULD BE ON THE BASIS OF AVERAGE PRICE PAID BY THE ASSESSEE DURING THE WHOLE YEAR TO THE KARNATAKA ELE CTRICITY BOARD MINUS CERTAIN EXTRANEOUS CHARGES SUCH AS ELEC TRICITY DUTY, ETC., WHICH WAS NOT CONNECTED WITH BUSINESS O F THE ASSESSEE. THEREFORE, THE DIRECTIONS OF THE CIT(A) W AS JUSTIFIED. ON CAREFUL READING OF THE DECISION OF THE ITAT IN T HE SAID CASE, WEST COAST PAPER MILLS LTD. (SUPRA), WE NOTICE THAT THE ISSUE BEFORE THE ITAT WAS WHETHER THE POWER SOLD TO TAMIL NADU ELECTRICITY BOARD IS TO BE ACCEPTED OR THE AVERAGE PRICE AFTER REDUCING THE AVERAGE RATE PAID TO KARNATAKA ELECTRI CITY BOARD MINUS CERTAIN EXTRANEOUS CHARGES AND ITS FAIR MARKE T VALUE WAS TO DETERMINE. THE ITAT WAS OF THE VIEW THAT THE AVE RAGE RATE MINUS CERTAIN EXTRANEOUS CHARGES WAS FAIR AND REASO NABLE RATE. WE FIND FORCE IN THE SUBMISSION OF THE LEARNED AR T HAT THE CASE DECIDED BY THE ITAT AS ABOVE IS NOT APPLICABLE TO T HE FACTS OF THE CASE UNDER CONSIDERATION AS THAT CASE DECIDED O N THE ISSUE THAT WHICH RATE IS TO BE ADOPTED OUT OF TWO RATES A VAILABLE ON ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 19 RECORD, I.E., ONE IS ADOPTED BY THE ASSESSEE AND TH E OTHER ADOPTED BY THE CIT(A). SINCE THERE WAS NO ISSUE TO DECIDE WHETHER MARKET VALUE OF THE ELECTRICITY UNIT MINUS CERTAIN EXTRANEOUS CHARGES, THEREFORE, THAT DECISION IS DIS TINGUISHABLE ON FACTS. 18.5 IN THE LIGHT OF ABOVE DISCUSSIONS IF WE CONSID ERED THE FACTS OF THE CASE UNDER CONSIDERATION WE NOTICED THAT THE ASSESSING OFFICER DID NOT DISPUTE THE PRICE TAKEN BY THE ASSE SSEE. THE CIT(A) HAS TAKEN ACTION UNDER SECTION 251(1)(C) OF THE ACT WHEREAS THE REQUIREMENT OF THE SECTION IS THAT WHER E ANY GOODS HELD FOR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE, OR W HERE ANY GOODS HELD FOR THE PURPOSES OF ANY OTHER BUSINESS C ARRIED ON BY THE ASSESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINE SS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TR ANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS D OES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTI ON UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUS INESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BE EN MADE AT THE MARKET VALUE OF SUCH GOODS AS ON THAT DATE. FOR THIS PURPOSE, THERE MUST BE OPINION OF THE ASSESSING OFF ICER, AS PROVISO CLEARLY PROVIDES THAT WHERE, IN THE OPINION OF THE ASSESSING OFFICER, THE COMPUTATION OF THE PROFITS A ND GAINS OF THE ELIGIBLE BUSINESS IN THE MANNER HEREINBEFORE SP ECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE ASSESSING OF FICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE B ASIS AS HE MAY DEEM FIT. IN THE CASE UNDER CONSIDERATION, THER E WAS NO SUCH OPINION OF ASSESSING OFFICER BUT ON THE BASIS OF OPINION OF CIT(A) WHETHER THE CIT(A) WAS HAVING JURISDICTION O R NOT, THIS ISSUE IS NOT BEFORE US. THE ISSUE BEFORE US IS WHET HER THE ASSESSEE WHILE TRANSFERRING THE MANUFACTURED ELECTR ICITY FROM C.P.P. UNIT TO OTHER UNIT THE ASSESSEE HAS TAKEN IN TO ACCOUNT THE ELECTRICITY TAX LEVIED BY THE STATE GOVERNMENT ON T HE BILL AMOUNT AT THE RATE OF RE. 0.18 PER UNIT CHARGED BY THE TAMIL NADU ELECTRICITY BOARD FROM THE CONSUMERS ON THE BI LL RAISED IS MARKET PRICE OR NOT. THE MARKET PRICE HAS BEEN DEFI NED BY WAY OF EXPLANATION TO SECTION 80-IA(8) OF THE ACT THAT 'MARKET VALUE', IN RELATION TO ANY GOODS OR SERVICES, MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. THIS CAN BE UNDERSTOOD BY THE SIMPLE FACT T HAT SUPPOSE THE ASSESSEE DID NOT PRODUCE THE ELECTRICITY BY HIM SELF AND IT WAS PURCHASED FROM ELECTRICITY BOARD; THE AMOUNT WH ICH THE ASSESSEE WAS TO PAY WAS INCLUDING THE TAX. WE, THER EFORE, DO NOT FIND ANY REASON FOR EXCLUSION OF PAISA 18 FOR T HE PURPOSE OF CALCULATION OF MARKET PRICE FOR CALCULATION OF DEDU CTION UNDER SECTION 80-IA OF THE ACT, WE FIND THAT THE PRICE CH ARGED BY THE ASSESSEE WHILE TRANSFERRING THE MANUFACTURED ELECTR ICITY FROM ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 20 C.P.P. UNIT TO OTHER UNIT OF THE ASSESSEE INCLUDING THE ELECTRICITY TAX LEVIED BY THE STATE GOVERNMENT ON THE BILL AMOU NT AT THE RATE OF RE. 0.18 PER UNIT CHARGED BY THE TAMIL NADU ELECTRICITY BOARD FROM THE CONSUMERS ON THE BILL RAISED WAS THE PRICE ORDINARILY FETCH IN THE OPEN MARKET, THEREFORE, THE CIT(A) WAS NOT CORRECT IN DISALLOWING CLAIM OF ASSESSEE UNDER SECTION 80- IA OF THE ACT ON THIS GROUND. 18.6 2ND REASON FOR DISALLOWANCE OF DEDUCTION UNDER SECTION 80-IA IS IN RESPECT OF ALLOCATION OF INDIRECT EXPEN SES. WE NOTICED THAT FOR THE PURPOSE OF DEDUCTION UNDER SEC TION 80-IA ONLY INCOME DERIVED FROM INDUSTRIAL UNDERTAKING THA T HAS TO BE RECKONED IN COMPUTATION AS SUCH THE INCOME AND EXPE NDITURES WHICH ARE NOT DIRECTLY RELATABLE TO THAT INDUSTRIAL UNIT CANNOT BUT BE IGNORED, IN OTHER WORDS, SUCH INCOME AND EXP ENDITURE NEED NOT TO BE CONSIDERED. IN VIEW OF THIS POSITION , THE CIT(A) IS NOT JUSTIFIED IN ALLOCATION 25 PER CENT OF SUCH IND IRECT EXPENSE WHICH ARE NOT DIRECTLY RELATABLE TO THAT INDUSTRIAL UNIT TO ELIGIBLE UNIT FOR THE PURPOSE OF COMPUTATION OF INC OME FOR DEDUCTION UNDER SECTION 80-IA OF THE ACT. THE ORDER OF CIT(A) ON THE ISSUE IS SET ASIDE.' 13. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT TH E PROVISIONS OF SECTION 80IA(8) ARE APPLICABLE AS THE ASSESSEE HAS TRANSFERRED THE FINISHED GOODS FROM KALLAKAL UN IT TO KATHUA UNIT AT LESSER THAN MARKET PRICE SO AS TO IN CREASE THE PROFIT OF KATHUA UNIT AND DECREASE PROFIT OF KALLAK AL UNIT. FURTHER HE DREW OUR ATTENTION TO THE FOLLOWING TABL E SO AS TO SUGGEST THAT THE EXPENDITURE CHARGED MORE TO THE KA LLAKAL UNIT AS COMPARED TO KATHUA UNIT: ITEM 2006-07 2007-08 KALLAKAL KATHUA KALLAKAL KATHUA RAW MATERIAL CONSUMED 75.18 64.10 73.48 54.07 MANUFACTURING EXPENSES 7.10 4.32 4.99 2.82 SALARIES 4.82 3.56 4.44 2.13 ADMINISTRATIVE AND SELLING EXPENSES 5.42 2.05 17.47 9.26 FINANCIAL CHARGES 0.79 3.56 0.55 0.07 ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 21 14. HE SUBMITTED THAT THE ASSESSEE ENHANCED PROFIT OF KATHUA UNIT TO CLAIM PROFIT AS EXEMPTED U/S. 80IA OF THE ACT BY INCREASING THE EXPENSES LIKE R&D KNOW-HOW, ADMINISTRATIVE AND SELLING EXPENSES, SALARIES AND W AGES, ETC. HE ALSO SUBMITTED THAT CERTAIN EXPENDITURE IS NO BO OKED TO THE KATHUA UNIT LIKE FREIGHT CHARGES. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE AR IS THAT THE PROVISIONS OF SECTION 80IA(10) ARE NOT APPLICABLE T O THE ASSESSEE'S CASE. IN OUR OPINION, THOUGH PROVISIONS OF SECTION 80IB(8) ARE APPLICABLE, THE AO MENTIONED IN HIS ORD ER THAT THE PROVISIONS OF SECTION 80IB(10) ARE APPLICABLE. MEN TIONING OF WRONG PROVISIONS OF SECTION IS NOT FATAL. WE HAVE TO SEE THE INTENTION OF THE AO. THE AO WANTED TO RECOMPUTE TH E PROFIT OF KATHUA AND KALLAKAL UNITS BY SUBSTITUTING THE MA RKET VALUE OF THE GOODS TRANSFERRED FROM KALLAKAL UNIT TO KATH UA UNIT. BEING SO, WE DO NOT FIND ANY FORCE IN THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE ON THIS ISSUE. TH IS PLEA OF THE AR IS REJECTED. 15.1 SECTION 80IA(8) PROVIDES THAT WHEREIN GOODS OR SERVICES HELD FOR THE PURPOSE OF ELIGIBLE BUSINESS OR TRANSF ERRED TO OTHER BUSINESS CARRIED ON BY THE ASSESSEE, THE PRIC E CHARGED FOR SUCH TRANSFER SHOULD CORRESPOND TO THE MARKET V ALUE OF ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 22 SUCH GOODS OR SERVICES ON THE DATE OF TRANSFER. IF THE PRICE OF THE GOODS TRANSFERRED IS UNDER/ OVER STATED IN COMPA RISON TO THE MARKET VALUE, THE AO HAS POWER TO RECOMPUTE THE PROFIT BY SUBSTITUTING MARKET VALUE OF SUCH GOODS OR SERVI CES. IN EXPLANATION BELOW SECTION 80IA(8), IT IS PROVIDED T HAT THE EXPRESSION 'MARKET VALUE' FOR THE PURPOSE OF SUBSEC TION (3) MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD O RDINARILY FETCH IN THE OPEN MARKET. MARKET VALUE IS AN EXPRE SSION WHICH DENOTES A PRICE ARRIVED AT BETWEEN THE BUYER AND THE SELLER IN THE OPEN MARKET WHEREIN THE TRANSACTION T AKES PLACE IN NORMAL COURSE OF TRADE. IN THE PRESENT CASE THE MATERIAL REQUIRED IN KATHUA UNIT OWNED BY THE ASSESSEE WAS G OT FROM THE KALLAKAL UNIT OF THE ASSESSEE. THE PRICE CHARG ED BY KALLAKAL UNIT ON THE MATERIAL TRANSFERRED TO THE KA THUA UNIT SHOULD BE AT MARKET PRICE. THE TRANSACTION BETWEEN THE KATHUA AND KALLAKAL UNITS CANNOT BE EQUATED IN THE SITUATION WHERE THE PRICE IS DETERMINED IN NORMAL COURSE OF T RADE AND COMPETITION. THE PRICE AT WHICH THE KATHUA UNIT PU RCHASED THE MATERIAL FROM KALLAKAL UNIT COULD BE CONSIDERED AT MARKET PRICE FOR THE PURPOSE OF SECTION 80IA(8) ONLY IF TH E PRICE CHARGED IS AS CHARGED BY KALLAKAL UNIT TO THE GOODS SOLD IN OPEN MARKET. THUS, THE PRICE AT WHICH THE KATHUA U NIT GOT IT FROM OPEN MARKET IS THE SAME TO BE PAID TO THE KALL AKAL UNIT. ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 23 16. IN THE PRESENT CASE, THE AO BROUGHT ON RECORD THE ANOMALY/VARIATION IN BOOKING VARIOUS EXPENDITURE BY KATHUA UNIT AS COMPARED KALLAKAL UNIT AS MENTIONED IN THE ARGUMENT OF THE DR. THE AO CLEARLY BROUGHT ON RECORD THE VA RIOUS METHODS ADOPTED BY THE ASSESSEE IN BOOKING VARIOUS EXPENDITURES BY INFLATING THE SAME AS SEEN FROM THE COMPARATIVE STATEMENT FURNISHED BY THE DR. THE ASS ESSEE FAILED TO GIVE PROPER EXPLANATION WITH REGARD TO HI GHER EXPENDITURE ON ACCOUNT OF MANUFACTURING, SALARY, ADMINISTRATIVE AND SELLING EXPENSES IN KALLAKAL UNI T AS COMPARED TO KATHUA UNIT AND IT IS NOT IN PROPORTION TO THE SALES. FURTHER, IT WAS ALSO BROUGHT ON RECORD BY T HE AO THAT NO FREIGHT CHARGES WAS CHARGED NIL IN KATHUA UNIT A S RECORDED IN PARA 2.9.5 OF THE ASSESSMENT ORDER FOR THE A.Y. 2007-08. THE NET PROFIT DECLARED BY THE ASSESSEE FOR KALLAKA L UNIT IS AT 9.08%, KATHUA UNIT AT 36.8% (100% TAX EXEMPTED UNIT ) AND KANCHIPURAM UNIT WHICH IS RUNNING IN LOSS. THE ASS ESSEE FAILED TO GIVE PROPER EXPLANATION FOR THIS PEAK VAR IATION. THE CONTENTION OF THE ASSESSEE COULD BE ACCEPTED THAT T HE PRICE CHARGED BY KALLAKAL UNIT IS MARKET VALUE FOR THE PU RPOSE OF SECTION 80IA(8) IF THE KALLAKAL UNIT CHARGES SAME P RICE FOR OTHER CUSTOMERS OF IT. IN OTHER WORDS, IF THE KATH UA UNIT PAID THE PRICE FOR THE SAME RAW MATERIAL TO OTHER PARTIE S FROM WHOM IT HAS PURCHASED AS IT HAS PAID TO THE KALLAKA L UNIT. THE ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 24 ASSESSEE HAVING FAILED TO OFFER ANY SATISFACTORY EX PLANATION FOR EXCEPTIONAL VARIATION IN PRICE CHARGED BY KALLA KAL UNIT TO KATHUA UNIT AS EVIDENCED BY EXCEPTIONALLY LOW PROFI T IN KALLAKAL UNIT IN THE RELEVANT YEAR AND THERE IS ALW AYS LESSER OF EXPENSES VIS-A-VIS SALES OF KATHUA UNIT IN COMPARIS ON TO THE KALLAKAL UNIT. 17. IN THESE CIRCUMSTANCES, WE HAVE TO HOLD THAT THE ASSESSEE ARRANGED THE TRANSACTION BETWEEN THESE UNI TS IN SUCH A MANNER TO INCREASE THE PROFIT OF KATHUA UNIT AND REDUCE THE PROFIT OF KALLAKAL UNIT. BEING SO, THE AO IS JUSTIFIED IN REDRAFTING OF PROFIT AND LOSS A/C. ASS ESSEE'S THREE UNITS SO AS TO BRING THE TRUE PROFIT FOR TAXATION. 18. THE ASSESSEE ALSO TAKEN A PLEA THAT INDIRECT EXPENS ES LIKE HEAD OFFICE EXPENSES ARE EXPENSES COMMON TO AL L UNITS SHOULD HAVE BEEN EXCLUDED THE EXPENDITURE ON PRO-RA TA APPORTIONMENT WHICH ARE DIRECTLY ATTRIBUTABLE TO EA CH UNIT AS THEY ARE NOT COMMON TO ALL UNITS AND SHOULD HAVE BE EN AVOIDED ON PRO-RATA DISTRIBUTION. FOR THIS PURPOSE , HE RELIED ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE O F HINDUSTAN LEVER LTD. (CHENNAI) 42 TAXMANN.COM 132 ( MAD). 19. WE HAVE CAREFULLY GONE THROUGH THE ABOVE JUDGEMENT WHEREIN THE HONBLE HIGH COURT DECIDED THE ISSUE IN FAVOUR OF ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 25 THE ASSESSEE SINCE IN THE PRECEDING YEAR THE DEPART MENT HAS NO GRIEVANCE AND THAT THE EXPENSES INCURRED WERE PU RE AND SIMPLE ADMINISTRATIVE EXPENSES, MONITORING THE REQU IREMENT OF FINANCE AND OTHER ACTION WHICH ARE NECESSARY FOR RUNNING OF THE BUSINESS. IN THE PRESENT CASE, IN THE ABSEN CE OF ANY DETAILS MADE AVAILABLE BY THE ASSESSEE TO ESTABLISH THAT PARTICULAR EXPENSES WERE INCURRED FOR ITS PARTICULA R UNIT OUT OF ITS THREE UNITS, THE EXPENSES HAVE TO BE TREATED ONE FOR ALL THE THREE UNITS WHICH HAS TO BE DIVIDED BASED ON TH E PROPORTION OF THE TURNOVER. 19.1 TO SUM UP, THE ASSESSEE HAVING FAILED TO FURNISH SATISFACTORY EXPLANATION TO THE DISCREPANCIES NOTIC ED BY THE AO, INCLUDING THE NOMENCLATURE OF VARIOUS COMMODITI ES MENTIONED IN THE SALE BILLS, WE ARE OF THE OPINION THAT THE ASSESSEE'S UNIT-WISE ACCOUNTS ARE NOT RELIABLE. BE ING SO, THE ASSESSING OFFICER IS JUSTIFIED IN REDRAWING THE PRO FIT AND LOSS A/C. BASED ON THE TURNOVER OF THE ASSESSEE'S UNITS S O AS TO GRANT DEDUCTION U/S. 80IB OF THE ACT. ACCORDINGLY, ALL THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEAL ARE DI SMISSED AND THE APPEAL OF THE ASSESSEE IS DISMISSED. 20. NOW WE WILL TAKE UP THE DEPARTMENT APPEAL IN ITA NO . 892/HYD/2012. THE FIRST EFFECTIVE GROUNDS I.E., GROU ND NOS. 2 AND 3 ARE AS FOLLOWS: ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 26 (2) THE CIT(A) ERRED IN OBSERVING THAT THE PURCHASE S AND SALES ARE DIRECTLY LINKED UNIT-WISE. THE CIT(A) SHOULD HA VE APPRECIATED THE FACT THAT THE STOCK TRANSFER ADMITT ED BY THE ASSESSEE ITSELF SHOWS THAT THE PURCHASES WERE NOT D ONE UNIT- WISE. (3) THE CIT(A) HAS ERRED IN IGNORING THE PROVISION OF 80 IB(13) READ WITH 80 IA(10) WHICH WERE SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE AS IT HAD CONTRIVED TO SHIFT PROFITS FROM OTHER UNITS TO KATHUA UNIT TO SHOW INFLATED PROFITS FOR KATHUA UNIT IN ORDER TO REAP THE UNDUE BENEFIT OF HIGHER E XEMPTION U/S. 80IB, THEREBY EVADING ACTUAL TAX. 21. THE CIT(A) APPEAL IN HER ORDER AT PARA 4.7 OBSERVED THAT THE AO IS RIGHT IN ADOPTING THE CONCEPT OF PRO-RATA BASIS BUT THE PURCHASES WERE TO BE EXCLUDED SINCE THERE ARE R ELATED SALES AND EACH UNIT HAS SPECIFIC PURCHASES AS PER T HEIR BILLS AND ACCOUNT. THEREFORE, THE AO WAS DIRECTED TO REC ALCULATE ALLOWANCES U/S. 80IB BY EXCLUDING THE PURCHASES FRO M THE EXPENDITURE PRO-RATA ADOPTED IN THE ASSESSMENT ORDE R. THE CIT(A) WHILE OBSERVING AS ABOVE, FOLLOWED THE ORDER OF THE TRIBUNAL IN THE CASE OF SEALEXCEL (I) PVT. LTD. VS. ITO IN ITA NO. 3111/MUM/2007 & ANR., DATED 20.5.2011 WHEREIN HELD AS FOLLOWS: 'THESE TWO APPEALS FILED BY THE ASSESSEE AGAINST TW O SEPARATE ORDERS PASSED BY THE LEARNED CIT(APPEALS)XXIX, MUMB AI DATED 08-01-2007 AND 23-11-2007 FOR ASSESSMENT YEAR S 2003- 04 AND 2004-05 RESPECTIVELY INVOLVE SOME COMMON ISS UES AND THE SAME, THEREFORE, HAVE BEEN HEARD TOGETHER AND A RE BEING DISPOSED OF BY THIS SINGLE CONSOLIDATED ORDER. 2. FIRST WE SHALL TAKE UP THE APPEAL OF THE ASSESSE E FOR ASSESSMENT YEAR 2003-04 BEING ITA NO. 3111/MUM/2007 . GROUND NO. 1 IS GENERAL SEEKING NO SPECIFIC DECISIO N FROM US. 3. IN GROUND NO. 2 OF THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LEARNED CIT(APPEALS) IN UPHOLDING THE ORDER ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 27 OF THE AO ALLOCATING THE EXPENSES AMOUNTING TO RS. 3,89,818/- PERTAINING TO MUMBAI UNIT TO BANASKATHA UNIT AT GUJ ARAT FOR THE PURPOSE OF COMPUTING DEDUCTIONS U/S 80IB. 4. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH HAS TWO MANUFACTURING UNITS ONE AT MUMBAI AND OTHER AT BANA SKATHA, GUJARAT. THE UNIT AT BANASKATHA, GUJARAT IS ELIGIBL E FOR DEDUCTION U/S 80IB AND WHILE COMPUTING THE PROFIT O F THE SAID UNIT FOR THE PURPOSE OF ALLOWING DEDUCTION U/S 80IB , THE AO DEDUCTED A SUM OF RS. 3,89,818/- BEING ALLOCATION O F EXPENSES PERTAINING TO MUMBAI UNIT TO BANASKATHA UNIT ON THE GROUND THAT THE EXPENSES CLAIMED IN MUMBAI UNIT INCLUDED E XPENSES RELATING TO HEAD OFFICE AND REGISTERED OFFICE SITUA TED AT MUMBAI. BEFORE THE LEARNED CIT(APPEALS), IT WAS SUB MITTED ON BEHALF OF THE ASSESSEE THAT THE EXPENSES INCURRED I N RELATION TO HEAD OFFICE AND REGISTERED OFFICE AT MUMBAI WERE NO T TOWARDS THE MANUFACTURING ACTIVITY OF BANASKATHA UNIT AND T HE SAME BEING IN THE NATURE OF INDIRECT EXPENSES, THERE WAS NO REASON TO CONSIDER THE SAME WHILE DETERMINING THE PROFIT DERI VED FROM THE MANUFACTURING UNIT AT BANASKATHA FOR THE PURPOSE OF ALLOWING DEDUCTION U/S 80IB. THE LEARNED CIT(APPEALS) DID NO T FIND MERIT IN THE STAND TAKEN BY THE ASSESSEE. ACCORDING TO HIM, THE EXPENSES INCURRED IN RELATION TO HEAD OFFICE AND RE GISTERED OFFICE AT MUMBAI WERE PARTLY ATTRIBUTABLE TO BANASK ATHA UNIT AND WHILE COMPUTING THE PROFIT OF THE SAID UNIT ELI GIBLE FOR DEDUCTION U/S 80IB, THE SAME SHOULD HAVE BEEN TAKEN INTO ACCOUNT. HE, THEREFORE, UPHELD THE ACTION OF THE AO IN DEDUCTING THE HEAD OFFICE EXPENSES WHILE COMPUTING THE PROFIT OF BANASKATHA UNIT ON PRORATE BASIS FOR THE PURPOSE OF COMPUTING PROFIT OF THE SAID UNIT ELIGIBLE FOR DEDU CTION U/S 80IB. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NO D OUBT TRUE THAT DEDUCTION U/S 80IA/80IB IS ALLOWABLE IN RESPECT OF PROFIT DERIVED FROM THE ELIGIBLE UNDERTAKING AS HELD BY TH E COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCW LTD. VS. ADDL. CIT 37 SOT 322 RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE. HOWEVER, AS HELD BY ANOTHER COORDINATE BENCH OF THI S TRIBUNAL IN THE CASE OF ACIT VS. ASEA BROWN BOVERI LTD. 110 TTJ (MUM.) 502, THE PROFIT DERIVED FROM THE ELIGIBLE UN DERTAKING FOR THE PURPOSE OF DEDUCTION U/S 80IA/80IB ARE THE NET PROFITS DERIVED FROM THE ELIGIBLE UNDERTAKINGS AND SUCH NET PROFIT HAS TO BE WORKED OUT AFTER DEDUCTING ALL EXPENSES, DIRE CT OR INDIRECT. AS FURTHER HELD BY THE TRIBUNAL IN THE CA SE OF ASEA BROWN BOVERI LTD., HEAD OFFICE EXPENSES OR EXPENSES WHICH ARE COMMON TO ALL THE UNITS WILL HAVE TO BE SPREAD OVER AND CHARGED AGAINST THE RECEIPTS OF ALL THE UNITS. RESP ECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF ASEA ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 28 BROWN BOVERI LTD. B(SUPRA), WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) UPHOLDIN G THE ACTION OF THE AO IN ALLOCATING THE HEAD OFFICE EXPE NSES TO BANASKATHA UNIT IN THE RATIO OF TURNOVER TO WORK OU T THE PROFIT OF THE SAID UNIT ELIGIBLE FOR DEDUCTION U/S 80IB AN D UPHOLDING THE SAME ON THIS ISSUE, WE DISMISS GROUND NO. 2 OF THE ASSESSEES APPEAL.' 22. BEING SO, WE DO NOT FIND ANY INFIRMITY IN THIS PART OF CIT(A)'S ORDER AND THE SAME IS CONFIRMED. GROUND N OS. 2 AND 3 ARE OF THE REVENUE ARE REJECTED. 23. GROUND NOS. 3 AND 4 OF THE REVENUE APPEAL ARE AS UNDER: (4) THE CIT(A) ERRED IN OBSERVING THAT THE CENTRAL EXCISE REFUND IS A CAPITAL RECEIPT. (5) THE CIT(A) SHOULD HAVE UPHELD THE DECISION OF T HE ASSESSING OFFICER IN TREATING THE CENTRAL EXCISE RE FUND AS INCOME FROM OTHER SOURCES. 24. THE CIT(A) OBSERVED IN HER ORDER THAT THE CENTRAL E XCISE DUTY REFUND IS A CAPITAL RECEIPT AND NOT DERIVED FR OM INDUSTRIAL UNDERTAKING. THE CIT(A) HAD OBSERVED T HAT ON A SIMILAR ISSUE THE TRIBUNAL AMRITSAR BENCH IN ITS OR DER DATED 26 TH NOVEMBER, 2009 IN THE CASE OF SHREE BALAJI ALLOYS VS. ITO IN ITA NO. 255(ASR)/2009 HAS HELD CENTRAL EXCISE DUT Y REFUND TO BE A REVENUE RECEIPT AND 'NOT DERIVED' FROM INDU STRIAL UNDER TAKING. WHILE DELIVERING THE SAID DECISION, THE TRIBUNAL HAS HELD THAT THE EXPRESSION 'DERIVED FROM' HAS BEE N JUDICIALLY DEFINED BY THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA, HAVING REGARD TO THE TEXT AND CON TEXT OF THE ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 29 STATUTORY PROVISIONS OF SECTION 80IB OF THE IT ACT, 1961. THE TRIBUNAL HAS FURTHER OBSERVED THAT THE EXPRESSION ' DERIVED FROM' CANNOT EMBRACE INCIDENTAL INCOME SUCH AS EXCI SE DUTY REFUND AND INTEREST SUBSIDY, AS THE SAME DON'T HAVE FIRST DEGREE NEXUS WITH THE 'OPERATIONAL PROFITS' DERIVED FROM THE INDUSTRIAL UNDERTAKING. 25. SHE HAD ALSO OBSERVED THAT THE INCOME OF RS. 1,09,26,502 ATTRIBUTABLE TO THE RECEIPT OF EXCISE D UTY REFUND RECEIVED BY THE ASSESSEE CANNOT BE CONSIDERED FOR T HE COMPUTATION OF DEDUCTION U/S. 80IB OF THE IT ACT, 19 61. THEREFORE, THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTI ON U/S. 80IB(4) OF THE IT ACT, 1961 ON PROFIT ATTRIBUTABLE TO CENTRAL EXCISE DUTY REFUND. ACCORDINGLY, SHE HAD DISALLOWE D THE DEDUCTION TO THE EXTENT OF RS. 1,09,26,502 AND DIRE CTED TO ADD TO THE RETURNED INCOME OF THE ASSESSEE AS 'INCO ME FROM OTHER SOURCES'. AGAINST THIS, THE REVENUE IS IN A PPEAL BEFORE US. 26. THE LEARNED DR RELIED ON THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT (317 ITR 218) WHEREIN THE APEX COURT HELD THAT DEPB/DUTY DRAW BACK ARE INCENTIVES WHICH FLOW FROM THE SCHEME FRAMED BY THE CENTRAL GOVERNMENT OR FROM SECTION 75 OF THE CUSTOM S ACT, 1962. HENCE, INCENTIVES ARE FOR PROFITS DERIVED FR OM THE ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 30 ELIGIBLE BUSINESS AND, THEREFORE, DEPB BENEFITS/DUTY DRAWBACK RECEIPT DO NOT FORM PART OF NET PROFIT OF THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF SECTION 8 0IA/80IB OF THE ACT. 27. ON THE OTHER HAND, THE LEARNED AR RELIED ON THE ORD ER OF THE BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF TOT AL PACKAGING SERVICES (SUPRA) WHEREIN HELD THAT INCOME FROM MODVAT CREDIT IS DERIVED FROM INDUSTRIAL UNDERTAKIN G AS CONTEMPLATED IN SECTION 80IB(1) OF THE ACT. HE ALS O RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF JK ALUMINI UM CO., IN ITA NO. 3303/DEL/2010 FOR A.Y. 2007-08 ORDER DATED 29.4.2011 WHEREIN THE TRIBUNAL HELD THAT REFUND OF EXCISE DUTY IS TO BE CONSIDERED FOR DEDUCTION U/S. 80IB OF THE ACT AS IT IS DERIVED FROM INDUSTRIAL UNDERTAKING AND THE J UDGEMENT SUPREME COURT IN THE CASE OF LIBERTY INDIA (CITED S UPRA) WAS ON THE ISSUE OF DEPB/DUTY DRAWBACK WHICH WAS ON INCE NTIVE ISSUE AND WAS NOT CONCERNED WITH THE REFUND OF AMOU NT PAID. THE AR RELIED ON THE FOLLOWING CASE-LAW: 1. NOORUL ISLAM EDUCATIONAL TRUST VS. CIT & OTHERS, 33 2 ITR 97 (MAD) 2. M/S. JK ALUMINIUM CO. VS. ITO, IN ITA NO. 3303/DEL/ 2010 ORDER DATED 29 TH APRIL, 2011. 3. WATERFALL ESTATES LTD. VS. CIT, 132 CTR 495 (SC) 4. CIT VS. RASOI LTD., 11 TAXMANN.COM 220 (CAL.) ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 31 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED BY THE JUDGEMENT OF DELHI COURT IN THE CASE OF CIT VS. DHARAM PAL PREM CHAND LTD. (317 ITR 353) WHEREI N IT WAS HELD THAT THE ASSESSEE BEING ENTITLED TO EXEMPTION OF EXCISE DUTY, EXCISE DUTY PAID FROM CURRENT ACCOUNT AND REF UNDED IN THE NEXT MONTH WOULD NOT MAKE IT ANY THE LESS INCOM E DERIVED FROM THE INDUSTRIAL UNDERTAKING ELIGIBLE FO R DEDUCTION U/S. 80IB OF THE ACT. BEING SO, WE ARE COMPLETELY I N AGREEMENT WITH THE ORDER OF THE CIT(A) ON THIS ISSU E. GROUND NOS. 4 AND 5 OF THE REVENUE ARE REJECTED. 6. IN THE RESULT, ASSESSEE'S APPEAL AS WELL AS REVENUE APPEAL ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH, 2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 21 ST MARCH, 2014 TPRAO COPY FORWARDED TO: 1. M/S. IVAZ PAPER CHEMICALS LTD., C/O. M/S. R. KA NKARIA & UTTAM SINGHI, CHARTERED ACCOUNTANTS, 6-3-1090/C-4, RAJ BHAVAN ROAD, ABOVE ANDHRA BANK, HYDERABAD-500 082. 2. THE ADDL. CIT, RANGE-8, IT TOWERS, AC GUARDS, HY DERABAD. 3. THE ASST. CIT, CIRCLE-8(1), 8 TH FLOOR, C-BLOCK, IT TOWERS, HYDERABAD. ITA NOS. 708 & 892/HYD/2012 M/S. IVAX PAPER CHEMICALS LTD. ============================= 32 4. THE CIT(A)-III, HYDERABAD. 5. THE CIT-II, HYDERABAD. 6. THE DR BENCH 'B', ITAT, HYDERABAD