M/s V S T Industries Limited, Hyderabad V. Additional Commissioner of Income Tax, Hyderabad

ITA 758/HYD/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7670 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 28-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: H SRINIVASULU
• Keywords: Revision of order; Benefit of exemption; Commercial expediency
• Section: 43B; 143(3); 37(1); 194C; 263; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICAL MEMBER ITA.NO.758/HYD/2011 ASSESSMENT YEAR 2006-2007 M/S. VST INDUSTRIES LIMITED, HYDERABAD. PAN AAICS-6799C VS. ADDL. CIT, RANGE-3 HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. H. SRINIVASULU FOR REVENUE : MR. P. SOMASEKHAR REDDY DATE OF HEARING : 07.08.2014 DATE OF PRONOUNCEMENT : 16.09.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE O RDER OF LD. CIT-III, HYDERABAD DATED 31.03.2011 FOR THE A.Y. 2006- 2007. 2. BRIEFLY STATED, ASSESSEE VST INDUSTRIES LIMITE D IS A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTE D AND IS CARRYING ON THE BUSINESS OF MANUFACTURE AND SALE OF CIGARETTES. FOR THE ASSESSMENT YEAR 2006-07, ASSESSEE FILED ITS RETURN OF INCOME ON 27.11.2006 DISCLOSING ITS TOTAL INCOME AT RS.63,48,24,855. THE ASSESSMENT WAS COMPLETED U/S 1 43(3) ON 27.11.2008 DETERMINING THE INCOME AT RS.63,49,26,60 5/-. 3. SUBSEQUENTLY, THE COMMISSIONER OF INCOME TAX-IL L, VIDE NOTICE U/S 263 DATED 03.09.2010 OBSERVED THAT ON AN EXAMINATION OF THE RECORD, IT IS NOTICED THAT ASSES SEE HAS PAID TO ITS OUTSIDE CONTRACT MANUFACTURERS (OCM) IN NORTH E ASTERN 2 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. STATES, AN AGGREGATE AMOUNT OF RS.43,88,73,031 CONS ISTING OF EXCISE DUTY DEMAND OF RS.31,19,52,341 AND INTEREST THEREON OF RS.12,69,19,426. THE CIT FURTHER OBSERVED THAT ASSE SSEE COMPANY HAS NOT DEDUCTED TAX ON THESE PAYMENTS/LIAB ILITY AS PER THE PROVISIONS U/S 194C. AS THERE WAS FAILURE TO DE DUCT TAX U/S 194C ON PAYMENTS AMOUNTING TO RS.43,88,73,031, THE SAID AMOUNT SHOULD HAVE BEEN DISALLOWED U/S 40(A)(IA) AN D ADDED TO THE TOTAL INCOME OF ASSESSEE. THE CIT THEREFORE CON SIDERED THAT THE ASSESSMENT ORDER PASSED U/S 143(3) DATED 27.11.2008 WAS ERRONEOUS IN SO FAR AS IT RELATES TO THE ABOVE ISSU E AND AS SUCH PREJUDICIAL TO THE INTEREST OF REVENUE. THE CIT THE REFORE ASKED ASSESSEE TO SHOW CAUSE AS TO WHY THE ASSESSMENT FOR THE ASST YEAR 2006-07 SHOULD NOT BE REVISED SUITABLY AFTER T AKING INTO CONSIDERATION THE ABOVE POINT. 4. IN RESPONSE TO THE NOTICE ISSUED U/S 263 AS ABO VE, ASSESSEE COMPANY APPEARED BEFORE THE CIT-III ON VAR IOUS DATES AND SUBMITTED DETAILED WRITTEN SUBMISSIONS EXPLAINI NG THE NATURE AND DETAILS OF THE TRANSACTIONS WITH THE FOUR OCM'S IN NORTH EASTERN STATES AND THE FACTS AND CIRCUMSTANCES LEAD ING TO THE IMPUGNED PAYMENT/LIABILITY OF EXCISE DUTY AND INTER EST TO AN EXTENT OF RS.43,88,73,031. ASSESSEE COMPANY ALSO FU RNISHED ALL THE DOCUMENTARY EVIDENCE IN RESPECT OF THE ABOVE TR ANSACTIONS AND PAYMENTS MADE. ASSESSEE COMPANY ALSO FURNISHED INFO RMATION/ CLARIFICATIONS AS REQUIRED BY THE CIT DURING THE PR OCEEDINGS U/S 263. ASSESSEE COMPANY ALSO SUBMITTED THAT IT HAD FI LED ALL THE RELEVANT INFORMATION EVIDENCE/CLARIFICATIONS IN RES PECT OF THE IMPUGNED PAYMENTS, AS REQUIRED BY THE ASSESSING OFF ICER DURING THE ASSESSMENT PROCEEDINGS AND THAT THE ASSESSING O FFICER HAS CONSIDERED THE CLAIM FOR DEDUCTION IN THE ASSESSMEN T PROCEEDINGS AND ACCEPTED IN THE ASSESSMENT. 3 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. 4.1. ASSESSEE COMPANY SUBMITTED THAT IT HAD DEDUCT ED TAX AT SOURCE U/S 194C ON ALL THE JOB WORK CHARGES PAID TO THE OCM'S DURING THE PERIOD FEBRUARY 2000 TO OCTOBER 2000, WH EN THEIR SERVICES WERE UTILIZED FOR MANUFACTURE CIGARETTES I N THEIR FACTORIES SITUATED IN NORTHERN EASTERN STATES. THE OCM'S HAD CLAIMED THE BENEFIT OF EXCISE DUTY EXEMPTION AS IT WAS THEN AVA ILABLE, FOR THE PERIOD FEBRUARY 2000 TO OCTOBER 2000. THEREAFTER, A SSESSEE COMPANY DISCONTINUED THE MANUFACTURING CONTRACT WIT H THE OCM'S AND HAD NO BUSINESS RELATIONSHIP WITH THEM. S UBSEQUENTLY, THE GOVERNMENT OF INDIA WITHDREW, RETROSPECTIVELY, THE BENEFIT OF EXCISE DUTY EXEMPTION TO THE UNITS IN NORTH EASTERN STATES VIDE SEC.154 OF THE FINANCE ACT, 2003. THE SAID RETROSPE CTIVE WITHDRAWAL OF EXCISE DUTY EXEMPTION AND RETROSPECTI VE AMENDMENT OF THE LAW, WAS UPHELD, AFTER A PROLONGED LEGAL BATTLE, BY THE HONOURABLE SUPREME COURT VIDE ORDER DATED 19 TH SEPTEMBER,2005. AS A RESULT DEMANDS WERE RAISED ON THE OCM'S FOR PAYMENT OF THE EXCISE DUTY OF RS. 31,19,52,341, IN RESPECT OF WHICH THEY HAD EARLIER AVAILED EXEMPTION (THE BENEF IT OF WHICH WAS PASSED ON TO ASSESSEE) AND FURTHER INTEREST OF RS.1 2,69,19,426 ON THE EXCISE DUTY DEMAND. THESE DEMANDS PERTAIN TO TH E MANUFACTURING CARRIED OUT BY THE OCM'S DURING THE P ERIOD OF FEBRUARY 2000 TO OCTOBER 2000, UNDER THE CONTRACT MANUFACTURING AGREEMENT WITH ASSESSEE COMPANY. HOWE VER, THE SAID MANUFACTURING COMPANIES HAVE NO MEANS AND HAVE BENEFITTED ONLY TO THE EXTENT OF MANUFACTURING CHARGES. AS FAR AS ASSESSEE COMPANY IS CONCERNED IT HAD SOLD THE CIGARETTES MAN UFACTURED THROUGH THE OCM'S IN NORTH EASTERN STATES AT THE SA ME PRICE AS CIGARETTES MANUFACTURED ELSEWHERE, AND HAD INDIRECT LY GOT THE BENEFIT OF EXCISE DUTY EXEMPTION. IN THESE CIRCUMST ANCES THE OCM'S APPROACHED ASSESSEE COMPANY WITH A REQUEST TO PAY THE EXCISE DUTY AND INTEREST LIABILITY DEMANDED FROM TH EM. IN VIEW OF 4 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. THE EXTREME HARDSHIP FACED BY THE CONTRACT MANUFACT URERS IN PAYING THE EXCISE DEMANDS AND IN LINE WITH WHAT THE OTHER MAJOR CIGARETTE MANUFACTURERS HAD DONE, ASSESSEE COMPANY AGREED TO PAY BEAR THE ENTIRE PRINCIPAL AMOUNT OF EXCISE DUTY OF RS.31,19,52,342 AND PAID THE SAME DIRECTLY TO THE E XCISE DEPARTMENT DURING THE YEAR ENDING 31.03.2006. ASSES SEE COMPANY ALSO MADE A PROVISION FOR THE INTEREST OF RS.12,69,19,426, IN ITS BOOKS OF ACCOUNTS FOR THE Y EAR ENDING 31 ST MARCH,2006. 4.2. ASSESSEE COMPANY EXPLAINED ALL THE ABOVE FACT S AND CIRCUMSTANCES OF THE CASE TO THE COMMISSIONER OF IN COME TAX-ILL, HYDERABAD AND SUBMITTED AS FOLLOWS : I) THAT THE IMPUGNED EXTRAORDINARY LIABILITY TOWAR DS EXCISE DUTY AND INTEREST ACCEPTED BY ASSESSEE COMPANY IS N OT IN CONSIDERATION OF 'JOB WORK CHARGES' OR 'OTHER PAYME NTS' DUE UNDER THE CONTRACT FOR MANUFACTURE OF CIGARETTE S ENTERED INTO WITH THE FOUR OCM'S. II) THAT THE IMPUGNED LIABILITY IS NOT IN CONSIDERA TION OF ANY WORK DONE BY THE OCM'S. III) THE IMPUGNED LIABILITY FOR EXCISE DUTY AND INT EREST AGREED TO BY THE COMPANY IS DISCHARGE OF A NEW CLAIM ACCEP TED BY THE COMPANY AND IS IN THE NATURE OF A COMPENSATION. IV) THE COMPENSATION WAS AGREED TO BE PAID BY THE C OMPANY IN VIEW OF THE HARDSHIP FACED BY THE OCM'S AND IN L INE WITH WHAT OTHER CIGARETTE COMPANIES HAVE DONE. THUS , IT IS A FRESH COMPENSATION LIABILITY ACCEPTED BY THE COMP ANY, KEEPING IN VIEW ALL THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE COMMERCIAL EXPEDIENCY. V) THE COMPANY HAD ACCOUNTED THE LIABILITY AS AN EXTRAORDINARY ITEM. THE OTHER CIGARETTE COMPANIES H AVE ALSO ACCOUNTED THE LIABILITY AS A 'ONCE OF PAYMENT' . VI) THERE IS NO PROFIT ELEMENT TO THE OCM'S AND THE ENTIRE PAYMENT IS BEING MADE DIRECTLY TO THE EXCISE DEPART MENT IN DISCHARGING OF THE EXCISE DUTY DEMANDS. 5 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. 4.3. IT IS THEREFORE, SUBMITTED BY ASSESSEE THAT T HE IMPUGNED PAYMENTS ARE NOT LIABLE TO DEDUCTION OF TA X AT SOURCE UNDER SECTION 194C OF THE ACT AND CONSEQUENTLY, NO DISALLOWANCE IS REQUIRED TO BE MADE UNDER SECTION 40(A)(IA) OF THE ACT. 4.4. IT WAS ALSO SUBMITTED THAT IN VIEW OF THE ABO VE FACTS AND CIRCUMSTANCES OF THE CASES, THE ASSESSMENT IS N OT ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IT WAS ALSO SUBMITTED THAT THE SAID FOUR OCM'S HAVE NOT MADE AN Y PROFIT OUT OF THE PAYMENT OF EXCISE DUTY AND INTEREST, AND HEN CE, THERE IS NO LOSS OF REVENUE AND HENCE REVISION OF THE ASSESSMEN T U/S.263 IS NOT PERMISSIBLE. 5. THE CIT PASSED AN ORDER U/S 263 DATED 31.03.201 1 AND IN PARA 4 OF THE ORDER, GAVE A FACTUAL FINDING THAT THE CONTRACT MANUFACTURING WORK ENDED BY OCTOBER,2000 AND THERE WAS NO BUSINESS RELATIONSHIP OF ASSESSEE WITH THESE COMPAN IES AFTER THE EXPIRY OF THE CONTRACT PERIOD MENTIONED ABOVE AND B Y APRIL 2001. 5.1. HOWEVER, THE CIT IN THE IMPUGNED ORDER U/S 26 3 WENT ON TO CONSIDER THE ALLOWABILITY OF THE PAYMENTS TO THE OCM'S U/S 37(1) AND THE 'COMMERCIAL EXPEDIENCY' OF THE PAYMEN TS. THE CIT HELD THAT ASSESSEE HAS FAILED TO DISCHARGE ITS ONUS OF PROOF IN MEETING ALL THE CONDITIONS IN ALLOWING IT CLAIM OF RS.43,88,73,031 U/S 37(1) AND ACCORDINGLY, REJECTED THE CLAIM OF EX PENDITURE. THE CIT, WITHOUT CONCEDING BUT ALSO, HELD THAT THE INTE REST AMOUNTING TO RS.12,69,19,426 HAS NOT BEEN PAID DURI NG THE YEAR AND HAS NOT BECOME ITS LIABILITY FOR THIS ASSESSMEN T YEAR. 5.2. THE CIT-III, REJECTED ALL THE CONTENTIONS RA ISED BY ASSESSEE AND HELD AS FOLLOWS; 6 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. A) THE CLAIM OF EXPENDITURE U/S 37(1) HAS MADE BY ASSESSEE IS NOT ALLOWABLE SINCE THE IMPUGNED EXCISE DUTY IS IN RESPECT OF BUSINESS OF MANUFACTURING CARRIED ON BY THE CONTRACT MANUFACTURERS AND NOT TH AT OF ASSESSEE COMPANY. FURTHER THE BUSINESS UNDER REFERENCE WAS NOT CARRIED ON BY THE CONTRACT MANUFACTURERS DURING THE PREVIOUS YEAR UNDER CONSIDERATION WHICH IS ONE OF THE CONDITION U/S 37( 1) OF THE ACT; B) NO DEDUCTION IS ALLOWABLE IN RESPECT OF DISCONTI NUED BUSINESS AND THE ONUS OF PROVING THE ALLOWABILITY O F DEDUCTION U/S. 37(1) IS ON ASSESSEE; C) THE DEDUCTION IS NOT ALLOWABLE IN VIEW OF THE DE CISION LAID DOWN BY THE GUJARAT HIGH COURT IN THE CASE OF CIT VS. NAVSARI COTTON & SILK MILLS LIMITED (1982) (135 ITR 546); D) THE EXPENDITURE INCURRED BY WAY OF PAYMENT OF EX CISE DUTY HAS NOT RESULTED IN ANY BENEFIT OR ADVANTAGE T O THE COMPANY AND EVEN AFTER A DECADE IN 2011, ASSESSEE HAS FAILED TO SHOW ANY BUSINESS ADVANTAGE DERIVED FROM THIS COMPANY BY HELPING THEM IN HUGE PAYMENTS. IN OTHER WORDS, IT HAS NOT DERIVED ANY BUSINESS AFTER THE PAYMENT. 5.3. ALTERNATIVELY, THE CIT HELD THAT THE IMPUGNED CLAIM OF EXCISE DUTY AND INTEREST IS IN THE NATURE OF MANUFA CTURING CHARGES LIABLE FOR DEDUCTION OF TAX AT SOURCE U/S.194 C. TH E CIT HELD THAT AS THE ASSESEE HAS NOT DEDUCTED TAX AT SOURCE, IN A CCORDANCE WITH THE PROVISIONS OF SEC.40(A)(IA), THE PAYMENT OF RS. 31,19,52,605 AND CREDIT, IF ANY, GIVEN TO THOSE COMPANIES TOWARD S INTEREST AMOUNT OF RS.12,69,19,426 ARE LIABLE TO BE DISALLOW ED. 5.4. IN VIEW OF THE ABOVE, THE COMMISSIONER OF I NCOME TAX- ILL, HYDERABAD CONCLUDED THAT THE ASSESSMENT ORDER PASSED U/S. 143(3) ON 27.11.2008 BY THE ASSESSING OFFICER IS ER RONEOUS AND PREJUDICIAL TO THE REVENUE AND ACCORDINGLY REVISED THE SAME BY DISALLOWING AN AMOUNT OF RS.43,88,73,031/- BEING TH E AMOUNT NOT ALLOWABLE U/S. 37(1) AND ALSO U/S.40(A)(IA). 7 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. 6. AGGRIEVED BY THE ORDER OF THE LD. CIT, ASSESSE E IS IN APPEAL BEFORE US AND HAS RAISED AS MANY AS 15 GROUN DS ON THE ABOVE ISSUE WHICH ARE NOTHING BUT VARIOUS SUBMISSIO NS ON THE ISSUE. THE SUMMARY OF THE GROUNDS ARE IN FACT CAN B E REPRESENTED IN GROUNDS NO. 14 AND 15 WHICH ARE AS UNDER : 14. THE LEARNED CLT-LLL OUGHT TO HAVE APPRECIATED THAT (A) THE IMPUGNED PAYMENTS ARE GENUINE (B) THE MANUFACTU RING COMPANIES HAVE NOT MADE ANY PROFIT ON ACCOUNT OF IM PUGNED PAYMENTS AND (C) THE IMPUGNED PAYMENTS ARE TO DISCH ARGE OF A STATUTORY LIABILITY, AND CONSEQUENTLY OUGHT TO HAVE UPHELD THE EXPENDITURE CLAIM BY THE APPELLANT INSTEAD OF RESOR TING TO TECHNICAL CONSIDERATIONS TO REVISE THE ASSESSMENT W HICH HAS REACHED FINALITY. 15 FOR THESE AND ANY OTHER GROUND OR GROUNDS OF A PPEAL THAT MAY BE URGED AT THE TIME OF HEARING. A) IT IS PRAYED THAT THE IMPUGNED ORDER U/S 263 D ATED 31.03.2011 BE QUASHED AND THE ASSESSMENT ORDER DATE D 27.11.2008 BE RESTORED. B) THAT THE ASSESSING OFFICER BE DIRECTED TO KEEP IN ABEYANCE AND NOT TO PROCEED TO GIVE EFFECT THE IMPU GNED ORDER U/S 263 AND NOT TO RISE ANY ADDITIONAL TAX, INTERES T OR OTHER DEMANDS IN PURSUANCE OF THE IMPUGNED ORDER U/S 263, TILL THE DISPOSAL OF THIS APPEAL BY THE HON'BLE ITAT, HYDERA BAD. 7. LEARNED A.R. REITERATED THE SUBMISSIONS AND REF ERRED TO THE PAPER BOOK PLACED ON RECORD INCLUDING THE ST ATEMENT OF EXCISE DUTY PAYMENTS AND REFUNDS MADE TO VARIOUS OC MS TO SUBMIT THAT ASSESSEE HAS DISCHARGED THE ENTIRE TAX LIABILITY IN TWO INSTALMENTS IN THE MONTH OF FEBRUARY, 2006 AND MARC H, 2006 TO AN EXTENT OF RS.31,19,52,341. IT WAS THE SUBMISSION THAT THE AMOUNT WAS COMPENSATION IN NATURE AS THE ORIGINAL C ONTRACT WORK ENDED BY OCTOBER, 2001 AND THERE WAS NO RELATIONSHI P OF ASSESSEE WITH THESE COMPANIES AFTER THE EXPIRY OF CONTRACT P ERIOD, AS STATED BY THE LD. CIT IN THE ORDER ITSELF. IT WAS ALSO SUB MISSION THAT ASSESSEE HAS AGREED TO PAY THE AMOUNT FOR COMMERCIA L EXPEDIENCY 8 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. IN ORDER TO PROTECT THE BRAND VALUE OF ASSESSEE PRO DUCTS SINCE S MANUFACTURED ASSESSEES BRANDED PRODUCTS. IT WAS FU RTHER SUBMITTED THAT AMOUNTS ARE PAID DIRECTLY TO THE EXC ISE DEPARTMENT ON THE NOTICE RECEIVED FROM THEM AND THE REFORE, QUESTION OF TDS DOES NOT ARISE AS THE AMOUNTS ARE P AID TO THE GOVERNMENT. HE COUNTERED THE ARGUMENTS RAISED BY TH E LD. CIT AND PLEADED FOR RESTORATION OF A.O. ORDER. 8. LEARNED D.R. HOWEVER, SUPPORTED THE ORDERS OF L D. CIT AND STATED THAT A.O. HAS NOT MADE ANY ENQUIRY WITH REFERENCE TO THIS PARTICULAR LIABILITY AND REFERRED TO THE NOTES TO THE ACCOUNTS TO SUBMIT THAT IT IS NOT ASSESSEES LIABILITY BUT OCMS LIABILITY. THEREFORE, AMOUNT IS NOT ALLOWABLE. HE ALSO SUBMITT ED THAT PROVISIONS OF TDS ARE APPLICABLE. THEREFORE, LD. CI T DIRECTION IS TO BE UPHELD. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE ORDER OF LD. CIT. EVEN THOUGH A.O. MADE AN ENQU IRY ABOUT THE AMOUNT CLAIMED IN THE COURSE OF ASSESSMENT, WE ARE OF THE OPINION THAT THIS ISSUE IS NOT EXAMINED IN ITS CORRECT PERS PECTIVE BY THE A.O. FIRST OF ALL, WHETHER THE ENTIRE AMOUNT IS ASS ESSEES LIABILITY OR NOT IS REQUIRED TO BE EXAMINED AND FURTHER IF IT IS CONSIDERED AS LIABILITY TO BE DISCHARGED BY ASSESSEE, WHETHER THE ENTIRE AMOUNT OF RS.43,88,73,031 REQUIRES TO BE CLAIMED IN THE YE AR UNDER CONSIDERATION ALSO WAS NOT EXAMINED. AS SEEN FROM T HE FACTS AVAILABLE ON RECORD, ASSESSEE PAID AN AMOUNT OF RS. 31,19,52,341 TO THE EXCISE AUTHORITIES DIRECTLY BY WAY OF CHEQUE S/DDS DURING THE YEAR AND THE BALANCE INTEREST OF RS.12,69,19,42 6 HAS BEEN PAID SUBSEQUENTLY, BUT NOT IN THE YEAR UNDER CONSID ERATION. THEREFORE, TO THE EXTENT OF INTEREST PAYABLE PROVID ED IN THE BOOKS OF ACCOUNTS ARE TO BE EXAMINED UNDER PROVISIONS OF SEC TION 43B. THERE SEEMS TO BE NO ENQUIRY ON THIS ASPECT. IN THI S REGARD, TO THE 9 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. EXTENT OF INVOKING JURISDICTION BY LD. CIT UNDER SE CTION 263, WE AGREE WITH THE ORDERS OF LD. CIT THAT A.O. HAS NOT EXAMINED THE ISSUE IN CORRECT PERSPECTIVE, THEREFORE, THESE PROC EEDINGS UNDER SECTION 263 TO THAT EXTENT ARE UPHELD. 10. COMING TO THE MERITS OF THE ISSUE, HOWEVER, IN THE OPINION OF LD. CIT THE AMOUNT SHOULD HAVE BEEN DISA LLOWED UNDER SECTION 40(A)(IA) AS PER THE NOTICE ISSUED. HOWEVER , IN THE FINAL ORDER PASSED BY HIM UNDER SECTION 263 IN ADDITION T O THE PROVISIONS OF SECTION 40(A)(IA), HE ALSO INVOKED PR OVISIONS OF SECTION 37(1). AS RIGHTLY SUBMITTED BY LEARNED A.R. THESE T WO PROVISIONS ARE MUTUALLY EXCLUSIVE. UNLESS THE AMOUNT IS ALLOWA BLE UNDER SECTION 37(1), PROVISIONS OF SECTION 40(A)(IA) CANN OT BE INVOKED. THEREFORE, THERE IS A CONTRADICTION IN THE STAND TA KEN BY THE LD. CIT. BE THAT AS IT MAY, WE EXAMINE THE ISSUE ON MER ITS IN ORDER TO ARRIVE AT A CONCLUSION WHETHER DIRECTION OF LD. CI T CAN BE UPHELD. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT ASSESSEE HAS ENTERED INTO AGREEMENTS WITH FOUR COMPANIES BY WAY OF CONTRACT MANUFACTURING AGREEMENTS ON THE BASIS OF BENEFIT PR OVIDED TO THE MANUFACTURING UNITS IN NORTH-EAST BY WAY OF NOTIFIC ATION OF EXCISE DEPARTMENT. THIS NOTIFICATION AS SEEN FROM THE RECO RDS WAS ISSUED IN GAZETTE NOTIFICATION NOS. 32/99 AND 33/99 DATED 8 TH JULY, 1999 BY WHICH DIVERSE BENEFITS WERE GIVEN, ONE AMONG THE M BEING BENEFIT GIVEN FOR A PERIOD OF 10 YEARS FROM THE PRO VISIONS OF EXCISE DUTY LEVY. THIS NOTIFICATION WAS ALSO WITHDRAWN BY NOTIFICATION NO.45/99 BUT WAS RE-INTRODUCED ON 17 TH JANUARY, 2000 BY NOTIFICATION NO.1/2000. ASSESSEE HAS ENTERED INTO C ONTRACT MANUFACTURING AGREEMENTS AFTER THIS DATE. AS SEEN F ROM THE AGREEMENTS PLACED ON RECORD, ASSESSEE HAS IN FACT G AVE ITS MACHINERY ALSO ON LEASE TO THE SAID COMPANY. PRIMA FACIE, IT SEEMS THAT ASSESSEE GOT THE CIGARETTES D UNDER THE GUISE OF THOSE FOUR COMPANIES. CONSEQUENT TO WITHDRAWAL OF THE BENEFITS 10 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. RETROSPECTIVELY, THERE WAS A CHALLENGE TO THE SAID NOTIFICATIONS AND HONBLE SUPREME COURT IN THE CASE OF RC TOBACCO P. LTD., AND ANOTHER ETC., VS. UNION OF INDIA AND OTHERS IN TRAN SFER CASE (CIVIL) 27 OF 2004 DATED 19.09.2005 UPHELD THE RETROSPECTIV E WITHDRAWAL OF THE BENEFITS BY WAY NOTIFICATIONS AND AMENDMENT TO THE PROVISIONS. CONSEQUENTLY, THE OCMS WHO WERE SUPPOSE D TO HAVE ENJOYED THE EXCISE DUTY BENEFITS HAVE BECOME LIABLE TO PAY THE EXCISE DUTY. HOWEVER, THE TRANSACTIONS ARE SO ARRAN GED THAT EXCISE DUTY WAS PAID FIRST AND THEN CLAIM AS REFUND LATER. THERE IS EVIDENCE ON RECORD THAT ASSESSEE WAS PROVIDING FUND S TO THE OCMS FOR PAYMENT OF EXCISE DUTY WHICH AS AND WHEN REFUND ED WERE PASSED TO ASSESSEE COMPANY/ OR TO THE BANK WHO PROV IDED LOANS AS PER ARRANGEMENT. CONSEQUENT TO THE WITHDRAWAL OF THE NOTIFICATION, THOSE ASSESSEES HAVE BECOME LIABLE T O PAY THE EXCISE DUTY AND SINCE THEY WERE ONLY GETTING SERVICE COST FOR MANUFACTURING CIGARETTE, THE LIABILITY IN A WAY IS PASSED-ON TO ASSESSEE COMPANY. THE HONBLE SUPREME COURT HAS ANA LYSED VARIOUS TYPES OF MANUFACTURING OF CIGARETTES INDULG ED BY LARGE CIGARETTE COMPANIES AND AS OBSERVED AS FOLLOWS IN T HE ABOVE JUDGEMENT : THE FINAL QUESTION IS THAT OF THE RELIEF TO BE GRA NTED. THE PETITIONERS CAN BE BROADLY CLASSIFIED INTO THREE GR OUPS: A. JOB WORKERS FOR LARGE CIGARETTE COMPANIES WHICH HAVE CLOSED DOWN THE UNITS WITH THE WITHDRAWAL OF THE EXEMPTION AND LEFT THE STATE OF ASSAM. B. JOB WORKERS FOR LARGE CIGARETTE COMPANIES WHICH HAVE CLOSED DOWN THEIR CIGARETTE MANUFACTURING UNITS BUT STARTE D NEW BUSINESS IN OTHER PRODUCTS. C. INDUSTRIAL UNITS WHICH HAVE SET UP THEIR OWN UNI TS AND HAVE REINVESTED THEIR EARNINGS IN THEIR BUSINESSES IN TH E STATE AFTER CLOSING DOWN THE MANUFACTURE OF CIGARETTES. 11 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. SOME UNITS HAVE ADMITTEDLY NOT PASSED ON THE EXCISE DUTY BENEFITS TO THEIR CUSTOMERS. ON THE OTHER HAND THE LARGE CIGARETTE COMPANIES HAVE RECOVERED THE EXCISE DUTY FROM THE C USTOMERS. OTHER UNITS CLAIM TO HAVE PASSED ON THE BENEFIT OF THE ENTIRE EXEMPTION TO THEIR CUSTOMERS. ALL THE PETITIONERS HOWEVER CLAIM THAT THEY WOULD B E FINANCIALLY CRIPPLED IF THEY WERE CALLED UPON TO REPAY THE REFU ND OF THE EXCISE DUTIES OR PAY THE EXCISE DUTY ON THE CIGARET TES MANUFACTURED BY THEM. ACCORDING TO THEM THE QUANTUM OF EXCISE DUTIES WOULD FAR EXCEED THEIR PROFITS FROM THE MANU FACTURE OF CIGARETTES. THE RESPONDENTS ON THE OTHER HAND HAVE URGED THAT T HE PETITIONERS WERE MERELY FRONTS FOR THE LARGE CIGARE TTE COMPANIES WHICH HAD MISUSED THE NOTIFICATION TO AVOID THE EXC ISE DUTY OTHERWISE PAYABLE BY THEM. THIS WAS CLEAR FROM THE AGREEMENTS ENTERED INTO BETWEEN THEM AND THE VARIOUS INDUSTRIA L UNITS THROUGH WHICH THEY CLAIMED THE BENEFITS. THE AGREEM ENTS SHOWED INTER ALIA THAT THE ENTIRE SET UP WAS FINANC ED BY THE LARGE COMPANIES. THE ARRANGEMENT WAS BACK TO BACK S O THAT WITH THE WITHDRAWAL OF THE EXEMPTION, THE UNITS WOU LD BE CLOSED DOWN. THE PROMPTNESS WITH WHICH A UNIT WENT INTO CO MMERCIAL PRODUCTION AFTER IT WAS SET UP IN A FEW DAYS SHOWED THAT THERE WAS NO REAL INVESTMENT BY THE PETITIONERS. MANY OF THE UNITS HAD NOT EVEN GOT PERMANENT REGISTRATION BEFORE THEY WEN T INTO PRODUCTION AND CLAIMED REFUND OF LARGE AMOUNTS OF E XCISE DUTY. ADMITTEDLY THE LARGE CIGARETTE COMPANIES HAD NOT ON LY NOT PASSED ON THE BENEFIT OF EXEMPTION BUT HAD LEVIED A ND RETAINED THE EXCISE DUTY ON THE CIGARETTES MANUFACTURED BY T HE PETITIONERS FOR THE CUSTOMERS OF THE LARGE COMPANIE S. THE PETITIONERS WHO WERE ADMITTEDLY IN GROUP A HAVE REFUTED THIS AND CONTEND THAT THEIR RELATIONSHIP WITH THE L ARGE CIGARETTE COMPANIES WAS ON A PRINCIPAL TO PRINCIPAL BASIS AND THAT UNDER THEIR AGREEMENTS THEY ALONE WOULD BE LIABLE TO PAY THE EXCISE DUTY NOW DEMANDED BY THE RESPONDENTS UNDER SECTION 154. WE ARE NOT IN A POSITION TO DETERMINE THE DISPUTES RAISED. HOWEVER WE CANNOT LOSE SIGHT OF THE FACT THAT ALTHO UGH EXCISE DUTY LIKE OTHER INDIRECT TAXES MAY BE PASSED ON TO THE CUSTOMER OF THE GOODS UNDER THE LAW AS IT NOW STANDS, IT IS THE MANUFACTURER OF THE EXCISABLE GOODS TO WHOM THE EXC ISE AUTHORITIES WILL LOOK FOR PAYMENT. HOW THE MANUFACT URER WILL ADJUST ITS LIABILITY WITH ITS CUSTOMERS DOES NOT CO NCERN THE RESPONDENTS NOR CAN THEY BE ASKED TO RECOVER THEIR DUES FROM PERSONS WHO MAY HAVE ULTIMATELY TAKEN ON THE RESPON SIBILITY TO 12 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. PAY THE EXCISE DUTY AS A RESULT OF AN AGREEMENT WIT H THE MANUFACTURER. (SEE IN THIS CONNECTION STATE OF RAJA STHAN VS. J.K. UDAIPUR UDYOG LTD. (2004) 7 SCC 673, 692). FURTHERM ORE HAVING UPHELD THE CONSTITUTIONAL VALIDITY OF SECTION 154 I T WOULD BE A PYRRHIC VICTORY FOR THE UNION OF INDIA IF THEY COUL D NOT IN FACT RECOVER THE TAX. IT IS NOT A CASE WHERE THE LEGISLA TION HAS MERELY WITHDRAWN THE EXEMPTIONS. THE CONSEQUENCES OF THE W ITHDRAWAL HAVE BEEN STATUTORILY PROVIDED FOR INCLUDING THE RE COVERY OF THE EXCISE DUTIES REFUNDED OR NOT PAID. THE EFFECTIVE P ERIOD OF SUCH IMPOSITION IS ABOUT EIGHT MONTHS. THE STATE HAS BEE N DEPRIVED OF REVENUE WITHOUT ANY CORRESPONDING BENEFIT. IT MAY B E THAT THE RETROSPECTIVE OPERATION MAY OPERATE HARSHLY IN SOME CASES, BUT THAT WOULD NOT BY ITSELF INVALIDATE THE DEMAND. [SE E: EPARI CHINNA KRISHNA MOORTHY VS. STATE OF ORISSA (SUPRA)] IT NEEDS TO BE EMPHASIZED THAT IN EFFECT THE RETROSPECTIVE OPER ATION EXTENDED OVER A VERY SHORT PERIOD AND PRINCIPLES OF EQUITY MUST GIVE WAY TO EXPRESS STATUTORY PROVISION. AS WAS SAI D IN STORY ON EQUITY (3RD ENG.ED.1920)P.34:- ' WHERE A RULE, EITHER OF THE COMMON OR THE STATUTE LAW, IS DIRECT, AND GOVERNS THE CASE WITH ALL ITS CIRCUMSTANCES, OR THE PARTICULAR POINT, A COURT OF EQUITY IS AS MUCH BOUND BY IT AS A COURT OF LAW, AND CAN AS LITTLE JUSTIFY A DEPARTURE FROM IT' . NO DOUBT IN BRITISH PHYSICAL LAB INDIA LTD VS. STAT E OF KARNATAKA & ORS. (1999) 1 SCC 170 RELIED UPON BY TH E PETITIONERS THE SALES TAX AUTHORITIES PROPOSED TO R ECOVER THE DIFFERENCE IN DUTY FROM MANUFACTURERS WITHIN THE ST ATE HAVING REGARD TO THE FACT THAT THE NOTIFICATIONS GIVING TH EM THE BENEFIT OF A LOWER RATE OF TAX HAD BEEN STRUCK DOWN. THIS COUR T HELD THAT THEY SHOULD NOT DO SO. THE RATIONALE BEHIND THE DEC ISION HAS BEEN EXPLICITLY STATED IN TEXMACO LTD VS. STATE OF ANDHRA PRADESH (2000) 1 SCC 763. IN DIRECTING THAT THE STA TE SHALL NOT COLLECT THE AMOUNT OF SALES TAX THAT HAD BECOME PAY ABLE BY REASON OF THE QUASHING OF THE NOTIFICATIONS, THIS C OURT NOTED THAT THE NOTIFICATIONS HAD BEEN INTENDED TO PROTECT THE LOCAL CEMENT INDUSTRIES. THE QUASHING OF THE NOTIFICATIONS SHOUL D HAVE THE EFFECT OF PUTTING THE LOCAL CEMENT INDUSTRY AND THE SAME INDUSTRY OUTSIDE THE STATE ON PAR. IT COULD NOT PLACE THE FO RMER IN A DISADVANTAGEOUS POSITION QUA THE LATER. APART FROM THIS, THE RESPONDENT-STATE HAD ALSO NOT CONTESTED THE FACTUAL POSITION. THE CIRCUMSTANCES IN WHICH THIS COURT DIRECTED THE STATE NOT TO COLLECT AMOUNT OF SALES TAX WHICH HAD BECOME PAYABL E ONLY BY REASON OF THE ORDER QUASHING THE NOTIFICATIONS ISSU ED UNDER THE STATE SALES TAX ACT DO NOT EXIST HERE. WHAT WE ARE CONSIDERING IN THIS CASE IS A POSITIVE STATUTORY MANDATE DIRECT ING THE CONSEQUENCES OF THE WITHDRAWAL OF THE EXEMPTION NOT IFICATIONS. 13 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. FOR THE REASONS STATED WE DISMISS THE TRANSFERRED W RIT PETITIONS WITHOUT ANY ORDER AS TO COSTS 10.1. AS CAN BE SEEN FROM THE ABOVE FINDINGS OF HO NOURABLE SUPREME COURT, ASSESSEE COMPANY IS ONE SUCH COMPANY WHO ENTERED INTO AGREEMENTS WITH THOSE FOUR COMPANIES W HICH MERELY FRONTS FOR ASSESSEE COMPANY. THE MAIN INTENTION IS TO ENJOY THE EXCISE DUTY BENEFIT WHICH WAS NOT PASSED-ON TO THE CUSTOMERS. ADMITTEDLY, SINCE THE BENEFIT WAS NOT PASSED-ON TO THE CUSTOMERS, IN A WAY, THERE IS AN UNDUE ENRICHMENT OCCURRED IN THE HANDS OF ASSESSEE. CONSIDERING THESE ASPECTS, WHETHER THE AM OUNTS WERE PAID AS COMPENSATION OR WHETHER AMOUNTS ARE PAID FO R BUSINESS EXPEDIENCY OR AGAINST THE NOTICE ISSUED BY EXCISE D EPARTMENT TO ASSESSEE, THE FACT IS THAT ULTIMATE LIABILITY IS TH AT OF ASSESSEE COMPANY. IN THAT VIEW, ASSESSEES CLAIM OF ENTIRE A MOUNT BEING PAID DIRECTLY TO THE EXCISE DEPARTMENT IS TO BE ACC EPTED. THERE IS NO DISPUTE, CONSIDERING THE JUDGEMENT OF HONBLE S UPREME COURT IN ITS CORRECT PERSPECTIVE, THAT ULTIMATE LIABILITY IS THAT OF ASSESSEE COMPANY AS THE CIGARETTES WERE MANUFACTURED AT THE INSTANCE OF ASSESSEE COMPANY AND ANY EXCISE DUTY LIABILITY IS O N ASSESSEE COMPANY. IN VIEW OF THIS, WE ARE OF THE OPINION THA T ASSESSEE HAS CLAIMED THE EXCISE DUTY LIABILITY CORRECTLY AS A BU SINESS EXPENDITURE IN THE YEAR UNDER CONSIDERATION. 11. AS SEEN FROM THE DOCUMENTS PLACED ON RECORD, O FFICERS OF THE EXCISE DEPARTMENT HAS ISSUED NOTICES TO ASSE SSEE COMPANY FOR PAYMENT OF TAXES AND ASSESSEE HAS DIRECTLY DISC HARGED BY PAYING IT TO THE RESPECTIVE AUTHORITIES AT DIBRUGAD H. IN VIEW OF THIS, SINCE THE AMOUNTS ARE PAID TO THE GOVERNMENT DIRECT LY BY ASSESSEE COMPANY, WE ARE OF THE OPINION THAT QUESTION OF COV ERING THE AMOUNTS UNDER 194C DOES NOT ARISE. MOREOVER, AS SUB MITTED BY ASSESSEE THE AMOUNTS PAID TO THE CONTRACT MANUFACTU RERS FOR MANUFACTURING THE CIGARETTE WERE ALREADY SUBJECTED TO TDS. THESE 14 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. AMOUNTS PAID ARE NOT TO BE PAID TO THE OCMS AS PART OF MANUFACTURING CHARGES, BUT IT IS A LIABILITY ARISIN G BECAUSE OF STATUTORY LEVY BY THE GOVERNMENT AND ULTIMATELY BOR NE BY ASSESSEE COMPANY, WHICH ON FACTS OF THE CASE WAS DI SCHARGED BY ASSESSEE COMPANY BY DIRECT PAYMENT AND NOT ROUTED THROUGH THE FOUR OCMS. IN VIEW OF THIS, WE ARE OF THE OPINION T HAT AMOUNTS CANNOT BE CONSIDERED AS A LIABILITY AS PER PROVISIO NS UNDER SECTION 194C. THEREFORE, PROVISIONS OF SECTION 40(A)(IA) DO ES NOT ARISE. TO THAT EXTENT, FINDINGS OF LD. CIT CANNOT BE UPHELD. 12. HOWEVER, ONE ASPECT WHICH REQUIRED TO BE EXAMI NED ON WHICH WE COULD NOT GIVE ANY FINDING IS WHETHER A SSESSEE HAS DISCHARGED THE BALANCE OF THE INTEREST PROVIDED AT THE END OF THE YEAR ALSO, AS PER THE PROVISIONS OF SECTION 43B. TH ERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT EXCISE DUTY LIABILI TY IS TO BE CONSIDERED UNDER PROVISIONS OF SECTION 43B. EVEN TH OUGH ASSESSEE CONTENDED THAT THIS AMOUNT IS A COMPENSATION PAID T O THE FOUR CONTRACT MANUFACTURERS, THAT ARGUMENTS CAN BE NEGAT IVED, IN VIEW OF THE CLEAR OBSERVATIONS OF HONBLE SUPREME COURT, THAT THESE FOUR COMPANIES ARE FRONT COMPANIES AND THEY HAVE IM MEDIATELY CLOSED DOWN THE OPERATIONS WITHIN FEW DAYS ON WITHD RAWAL OF BENEFITS. THE PROMPTNESS WITH WHICH THE UNITS WENT INTO COMMERCIAL PRODUCTION AND THE FACT THAT MOST OF THE MACHINERY WAS ALSO PROVIDED ON HIRE BY ASSESSEE COMPANY AND A LSO ASSESSEE COMPANY PROVIDED FINANCE FOR PAYMENT OF TAX WHICH W ERE REFUNDED AS ADMITTED BY ASSESSEE ITSELF INDICATE THAT THOSE COMPANIES ARE ONLY FRONT COMPANIES FOR ASSESSEE COMPANY FOR MANUF ACTURING CIGARETTE AT A LOW COST AVAILING THE BENEFIT GIVEN BY THE GOVERNMENT OF INDIA AT THAT POINT OF TIME TO THE COMPANIES IN NORTH-EAST. SINCE THE LIABILITY HAS COME ON TO ASSESSEE BY VIRTUE OF WITHDRAWAL OF NOTIFICATIONS AND AS PART OF THE AGREEMENT, THE AMO UNTS ARE TO BE CONSIDERED AS DIRECT LIABILITY OF ASSESSEE COMPANY. ASSESSEE ALSO 15 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. RECEIVED NOTICES FROM EXCISE DEPARTMENT FOR DISCHAR GE OF LIABILITY. THEREFORE, WE ARE OF THE VIEW THAT PROVISIONS OF SE CTION 43B ARE APPLICABLE, SINCE EXCISE DUTY LIABILITY WAS BEING D ISCHARGED BY ASSESSEE COMPANY. INTEREST AMOUNT ON SUCH LEVY ALSO IS TO BE EXAMINED IN THE LIGHT OF PROVISIONS OF SECTION 43B. TO THAT EXTENT, SINCE THE PAYMENT DETAILS OF INTEREST LIABILITY IS NOT AVAILABLE ON RECORD, WE RESTORE THE ISSUE TO THE FILE OF A.O. TO EXAMINE WHETHER ANY DISALLOWANCE IS REQUIRED TO THE EXTENT OF INTER EST AMOUNT PROVIDED AT THE END OF YEAR, IF PAID IMMEDIATELY AS PROVIDED UNDER SECTION 43B. SINCE THE AMOUNT OF RS.31,19,52,341 HA S BEEN PAID DURING THE YEAR, THE AMOUNT IS CORRECTLY ALLOWED BY THE A.O. EVEN THOUGH HE DID NOT EXAMINE IT COMPLETELY. FOR THESE REASONS, WE MODIFY THE DIRECTIONS OF LD. CIT GIVEN IN THE ORDER UNDER SECTION 263 AND DIRECT THE A.O. TO EXAMINE THE AMOUNT OF IN TEREST PROVIDED OF RS.12,69,19,426 UNDER THE PROVISIONS OF SECTION 43B. IF THE SAME IS NOT DISCHARGED UNDER THE SAID PROVIS IONS, THE SAME MAY REQUIRE DISALLOWANCE U/S 43B. AO SHOULD GIVE DU E OPPORTUNITY TO SUBMIT THE NECESSARY DETAILS IN THIS REGARD. ACCORDINGLY, ASSESSEES GROUNDS ARE CONSIDERED AS P ARTLY ALLOWED. 13. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16.09.2014. SD/- SD/- (SMT. ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH ) JUDICIAL MEMBER ACCOUNTANT MEMB ER HYDERABAD, DATED 16 TH SEPTEMBER, 2014 VBP/- 16 ITA.NO.758/HYD/2011 M/S. VST INDUSTRIES LTD., HYDERABAD. COPY TO 1. M/S. VST INDUSTRIES LTD., 1-7-1063/1065, AZAMABA D, HYDERABAD. 2. ADDL. CIT, RANGE-3, 7 TH FLOOR, A BLOCK, I.T. TOWERS, A.C. GUARDS, HYDERABAD 3. COMMISSIONER OF INCOME TAX-III, HYDERABAD 4. D.R. A BENCH, ITAT, HYDERABAD.