ABRAHAM P. GEORGE AND V. DURGA RAO , JJ. For the Appellant R. Vijayaraghavan. For the Respondent Pragati Kumar. ORDER - PER Abraham P. George These are appeals filed by the assessee and Revenue against an order dated 21.11.2011 of Commissioner of Income Tax (Appeals)-IV, Chennai. 2. Appeal of the Revenue is taken up first for disposal. Revenue has raised nine grounds, of which, ground Nos.1 and 9 are general needing no adjudication. 3. Vide its ground No.2, Revenue is aggrieved that CIT(Appeals) reduced a disallowance made by the A.O. under Section 14A of Income-tax Act, 1961 (in short the Act ), to 2 of the income claimed as exempt by the assessee. 4. Facts apropos are that Assessing Officer had disallowed Rs. 21,65 lakh applying Rule 8D of Income-tax Rules, 1962, against a claim of tax free interest and dividend of Rs. 7.05 crore. Though the assessee had argued that it had not incurred any expenditure for earning the exempt income, it was not accepted by the Assessing Officer. 5. Appeal of the assessee before CIT(Appeals) was successful. According to him, decision of Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd v. Dy. CIT (328 ITR 81) was in assessee s favour. As per ld. CIT (Appeals), Rule 8D could not be applied for impugned assessment year. Nevertheless, he held that Section 14A enabled the Assessing Officer to make a reasonable disallowance. He sustained disallowance to 2 of the exempt income claimed by the assessee. 6. Now before us, learned D.R., strongly assailing the order of CIT (Appeals), submitted that Assessing Officer was justified in invoking Rule 8D for working out disallowance under Section 14A of the Act. 7. Per contra, learned A.R., in support of the order of CIT (Appeals), submitted that Hon ble jurisdictional High Court in the case of Simpson and Co. Ltd. v. Dy. CIT TC(A) No.2621 of 2006, dated 15.10.2012 had held 2 to be a reasonable estimation for disallowance to be made under Section 14A of the Act. 8. We have perused the orders and heard the rival submissions. Without doubt, Rule 8D was not applicable for impugned assessment year in view of the decision of Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra). However, Section 14A enabled the Assessing Officer to make a disallowance as warranted by the facts and circumstances in years prior to assessment year 2008-09. Ld. CIT(Appeals) held that disallowance of 2 of the exempt income was a fair estimation of expenses incurred for earning such income, relying on the decision of co-ordinate Bench of this Tribunal in the case of ABI Showatech (India) Ltd. in I.T.A. No. 246/Mds/2011 dated 18.11.2010. We do find that Hon ble jurisdictional High Court in the case of Simpson and Co. Ltd. (supra) had upheld estimation made for expenditure attributable to dividend income at 2 of managerial expenses was justified. Relevant para 2 of the order of Hon ble jurisdictional High Court is reproduced hereunder - nbsp nbsp 2. Learned counsel appearing for the assessee as well as learned standing counsel appearing for Revenue submits that the issue involved in this Tax Case (Appeal) is covered by a decision of this Court dated 08.08.2012 in T.C. (A) No.2287 of 2006 in the case of M/s EID Parry (India) Limited v. The Joint Commissioner of Income Tax, wherein this Court pointed out that in the absence of any materials regarding incurring of expenditure, the Tribunal was justified in confirming the order of the Commissioner of Income Tax (Appeals) that the deduction of 2 managerial expenses had to be made while calculating deduction under Section 80M. Thus being pure question of fact, there being no other material in support of the claim made, the order of the Tribunal was confirmed. However, the above decision was rendered in the context of Section 80M which is a section allowing deduction against gross total income. However, in the instant case, the income was claimed exempt under one or other of various sub-sections of Section 10 of the Act. Hence, in our opinion, decision in Simpson and Co. Ltd. s case (supra) may not help the assessee. Therefore, in the interest of justice, we set aside the orders of the authorities below and remit the issue of disallowance of expenditure against income claimed as exempt, back to the file of the A.O. for consideration afresh in accordance with law. 9. Ground No.2 is thus allowed for statistical purposes. 10. Vide its ground No.3, Revenue is aggrieved on the deletion of disallowance of power charges of Rs. 4.63 crore. 11. Assessee had entered into a Tripartite Agreement with UTI Bank and Wescare India Ltd., under which it held an operating lease for wind electric generators. M/s UTI Bank was the lessor. M/s Wescare India Ltd. was generating power out of such wind generators, and the electricity was to be fed in the grids of Tamil Nadu Electricity Board. Assessee was to get credit against the supply of electricity, from M/s Tamil Nadu Electricity Board. Assessee was to pay M/s Wescare India Ltd. an agreed amount based on number of units supplied by it to TNEB. Such payments were made through account payee cheques. As per the Assessing Officer, assessee was the owner of the windmills, and therefore, payment to M/s Wescare India Ltd. could not be allowed. He disallowed such a claim, as was done in the earlier assessment years. 12. Assessee s appeal before CIT(Appeals) was successful. CIT(Appeals), following his own earlier order for assessment years 2002-03 to 2006-07, deleted the addition made by the Assessing Officer. 13. Now before us, learned D.R., strongly assailing the order of CIT(Appeals), submitted that Revenue had gone on appeal against the order of CIT(Appeals) for earlier assessment years. Therefore, according to him, CIT(Appeals) ought not have placed reliance on his earlier orders, while allowing the claim. 14. Per contra, learned A.R. submitted that Revenue s appeal on this issue before this Tribunal, already stood decided. As per learned A.R., the matter had been remitted by this Tribunal in Revenue s appeal for assessment years 2005-06 and 2006-07 in I.T.A. Nos. 249 and 1166/Mds/2010. Placing a copy of the order dated 6.1.2012, learned A.R. submitted that the matter required a fresh look by the Assessing Officer. 15. We have perused the orders and heard the rival submissions. On a similar issue raised by the Revenue in an appeal filed by it for assessment years 2005-06 and 2006-07, this Tribunal held as under in its order dated 6th January, 2012 - nbsp nbsp 6. In ground No.3 in the Revenue s appeal it was the submission that the issue was against the decision of the disallowance of power charges. It was the submission that in the course of assessment the Assessing Officer had disallowed the claim of power charges by relying upon the assessment order for the assessment years 2003-04 and 2004-05. It was the submission that the learned CIT(A) had deleted the same by following his predecessor s order for the assessment years 2003-04 and 2004-05. However, it was fairly conceded by both the sides that the issue had been restored to the file of the Assessing Officer by the Tribunal for the assessment years 2002-03, 2003-04 and 2004-05 in ITA Nos.1635/Mds/2007, 2510/Mds/2007 and 1565/Mds/2008 dated 10.06.2011. It was fairly agreed by both the sides that they had no objection if the issue is restored to the file of the Assessing Officer for re-adjudication. Consequently, respectfully following the decision of the co-ordinate Bench of this Tribunal in the assessee s own case for the assessment years 2002-03, 2003-04 and 2004-05, this issue is restored to the file of the Assessing Officer with similar directions as given in the said earlier order of this Tribunal. It was also agreed that this issue was the ground No.1 in the Revenue s appeal in ITA No. 1166/Mds/2010 also. Consequently, the same finding applies to ground No.1 of the Revenue s appeal in ITA No. 1166/Mds/2010. Accordingly, for impugned assessment year also, the matter is remitted back to Assessing Officer for consideration afresh, in accordance with directions given in the orders of this Tribunal in I.T.A. No. 1635/Mds/2007, I.T.A. No. 2510/Mds/2007 and I.T.A. No. 1565/Mds/2008 dated 10.6.2011. 16. Ground No.3 is allowed for statistical purposes. 17. Vide its ground No.4, Revenue is aggrieved regarding deletion of disallowance of additional depreciation on plant and machinery. As per Revenue, items on which depreciation was claimed, were in the nature of office assets and not used in any manufacturing purpose. 18. Facts apropos are that Assessing Officer had disallowed a claim of additional depreciation of Rs. 9.58 lakh for a reason that plant and machinery on which such claim was preferred, was used for non-manufacturing purposes. 19. Assessee in its appeal before CIT(Appeals), argued that the machinery were used only for manufacturing purposes and nothing was kept in the corporate office. As per the assessee, even the software purchased was used for ordering material, which was used in the manufacturing process. 20. Ld. CIT(Appeals) was appreciative of assessee s contentions. According to him, assessee was a manufacturer of automobile spare parts and machinery purchased was utilized in its manufacturing activity. Therefore, he held assessee as eligible for claiming additional depreciation. 21. Now before us, learned D.R., assailing the order of CIT(Appeals), submitted that the assets on which additional depreciation was disallowed by the A.O. comprised the following items - Plant and Machinery regular category nbsp - Rs. 34,56,058/- Plant and Machinery 80 Category nbsp nbsp - Rs. 3,11,352/- Data Processing Equipments nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 74,469/- Computer Software nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 74,25,000/- The software on which assessee had claimed such depreciation was SAP R/3. According to him, the assets on which additional depreciation could be allowed, was restricted to assets used in manufacturing activity. None of the above assets were so used. 22. Per contra, learned A.R., in support of the order of CIT(Appeals), submitted that it was not necessary that plant and machinery should be used in manufacturing activity to claim additional depreciation. There was no requirement to have any operational connectivity. Reliance was placed on the decision of Hon ble jurisdictional High Court in the case of CIT v. VTM Limited (319 ITR 366). 23. We have perused the orders and heard the rival submissions. There is no dispute that the additional depreciation claimed by the assessee was on plant and machinery. Only qualm of the Revenue is that such plant and machinery was used in office and not in the manufacturing activity of the assessee. However, it is an admitted position that assessee was already engaged in manufacturing activity. Hon ble jurisdictional High Court in the case of VTM Ltd. (supra) had held that a condition for claiming additional depreciation was that acquisition or installation had to be after 31.3.2002. Their Lordship held that it was not necessary for a new plant and machinery to have operational connectivity to products already being manufactured. We are of the opinion that the above decision comes to the aid of the assessee. Further, computer software was SAP R/3 generally used in managing inventory as well. We are therefore of the opinion that CIT(Appeals) was justified in allowing such claim. 24. Ground No.4 of the Revenue is dismissed. 25. Vide its ground No.5, grievance raised by the Revenue is that CIT(Appeals) deleted apportionment of expenditure on Research and Development to the units on which assessee had claimed deduction under Section 10B of the Act. 26. Assessee had claimed deduction under Section 10B on two units, viz. Apache Exports and Roll Tec Engineering. Assessing Officer found that the assessee had claimed scientific research expenditure, but no part thereof was allocated to these units. Assessing Officer, therefore, indulged in an apportionment of such expenditure over these two units. Though assessee claimed that products manufactured by it from such units, were time tested ones, and no R and D efforts were required for it, this was not accepted by the Assessing Officer. Result was that the claim of deduction under Section 10B was reduced by an amount of Rs. 27,37,344/- for Apache Exports and the loss claimed on Rolltec Engineering increased by Rs. 54,12,000/-. 27. In its appeal before CIT(Appeals), argument of the assessee was that the scientific research expenses were incurred for developing new products and not in relation to any of the items manufactured from the units for which deduction under Section 10B was available. As per the assessee, Assessing Officer had made a pro rata allocation of a deduction claimed under Section 35(AC) on donation paid to Swami Vivekananda Rural Society Development and Sundaram Medical Foundation. This had nothing to do with any scientific research. Even capital expenditure relating to scientific research was also allocated. 28. Ld. CIT(Appeals) was appreciative of assessee s contentions made before him. According to him, allocation of scientific research expenditure to 10B units were not correct. Just because of the probability that units on which deduction under Section 10B was available might have also benefitted out of research would not be a reason, according to him, to make such apportionment. In this view of the matter, he deleted the allocation of scientific research expenditure to the units on which assessee had claimed deduction under Section 10B of the Act. 29. Now before us, learned D.R., assailing the order of CIT(Appeals), submitted that scientific research expenditure had relevance to all the units of the assessee including the units on which deduction under Section 10B was claimed. If such expenditure was not correctly allocated, the profit claimed on such units will be higher the profits of the other units. Therefore, according to him, apportion was correctly done by the Assessing Officer. CIT(Appeals) fell in error in disturbing such apportionment. 30. Per contra, learned A.R., strongly assailing the order of CIT(Appeals), submitted that Hon ble jurisdictional High Court in assessee s own case in TC(A) No.738, 739 of 2005 held this issue in favour of assessee. 31. We have perused the orders and heard the rival submissions. The dispute is regarding scientific research expenditure of the assessee, which was allocated by the Assessing Officer to the units on which deduction under Section 10B was claimed. As per assessee, the research was not related to any of the products manufactured by such units, but was for development of new products. Assessee had claimed weighted deduction under Section 35(2AB) on expenditure of Rs. 5,83,66,790/- incurred on acquiring capital assets for its Research and Development. Weighted deduction was also claimed on revenue expenditure of Rs. 12,38,76,337/- incurred in its Research and Development facilities. Weighted deduction was claimed at 150 . Assessee also claimed a sum of Rs. 5,84,49,176/- as expenditure incurred in relation to R and D under Section 35(1)(iv) of the Act. Though the assessee mentioned that the products manufactured in the units for which 10B was available, were time tested products, A.O. was of the opinion that assessee was manufacturing Pad Assembly from its Apache Export Unit and DIH Brakes, Adaptor Casting Machine, Air, Calliper Assembly and Piston Assembly from its Rolltec Engineering Unit. As per A.O., the new products developed could be used extensively for export purposes. However, we find nothing is available on record to show what tangible benefit, if any, assessee had derived on account of the research work. Whether any such earlier research had helped the assessee with regard to its activities in the units on which it had claimed deduction under Section 10B of the Act, is also not on record. CIT(Appeals) had given relief to the assessee accepting its claim that it had not incurred any such expenditure with reference to the units on which 10B deduction was claimed. We are of the opinion that the matter requires a fresh look by the Assessing Officer. Assessing Officer has to verify whether the research done by the assessee had any tangible benefit vis- agrave -vis the activities carried on by it from the units on which deduction under Section 10B was claimed. Assessing Officer has to compute such data with regard to research expenditure incurred in earlier years and come to a conclusion in this regard. Assessee has to co-operate with the Assessing Officer and give necessary information. We, therefore, set aside the orders of authorities below and remit this issue back to Assessing Officer for consideration afresh. 32. Vis- agrave -vis the decision of Hon ble jurisdictional High Court in assessee s own case in TC(A) No.738 and 739 of 2005 (supra), the question there was regarding distribution of expenses for R and D to its Sholinghur Unit for the purpose of computing deduction under Section 80HHC and 80-I of the Act. Since, for the impugned assessment year, the claim is under Section 10B of the Act, and Research and Development expenditure which has been allocated, is not relatable to Sholinghur unit, we are of the opinion that judgment of Hon ble jurisdictional High Court, relied on by the assessee, would not help its case. 33. Ground No.5 of the Revenue is allowed for statistical purposes. 34. Vide its ground No.6, Revenue is aggrieved that the CIT(Appeals) allowed setting off of loss in 10B units against profits of non-10B units. 35. While computing the income of the assessee, Assessing Officer disallowed assessee s claim for set off of loss incurred in its 10B units against profits of non-10B units. 36. Appeal of the assessee before CIT(Appeals) was successful. According to him, Section 10B only exempted profits, but it did not mean that loss, if suffered, could not be set off. Reliance was placed on the decision of co-ordinate Bench of this Tribunal in the case of Lason India (P.) Ltd. v. ITO 2008 301 ITR (AT) 306 (Chennai). According to him, assessee was entitled to such claim. 37. Now before us, learned D.R., strongly assailing the order of CIT(Appeals), submitted that for computing total income, units on which deduction under Section 10B was claimed had to be considered independently. Loss incurred in such an unit could be allowed carried forward, but could not be set off against the income for non-STP or non-10B units. Reliance was placed on the Hon ble Karnataka High Court in CIT v. Yokogawa India Ltd. 341 ITR 385. 38. Per contra, learned A.R., supporting the order of CIT(Appeals), placed reliance on the decision of Hon ble Bombay High Court in the case of Hindustan Unilever Ltd. v. DCIT (325 ITR 102). 39. We have perused the orders and heard the rival submissions. No doubt, Hon ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) had held that exemption under Section 10A was to be allowed without set off of brought forward unabsorbed loss and depreciation from earlier assessment year or current assessment year from a non-STP unit. Special Bench of this Tribunal in the case of Scientific Atlanta India Technology (P.) Ltd. v. Asstt. CIT 2010 38 SOT 252 (Chennai) had also held that deduction under Section 10A was undertaking specific. The analogy will clearly apply in the case of units on which deduction is claimed under Section 10B as well, since Section 10A and Section 10B are similarly worded. Nevertheless, issue before Hon ble Karnataka High Court, was regarding claim of deduction under Section 10A, on profits of an EOU, without setting off of brought forward loss of earlier years. In our opinion, the issue before Hon ble Karnataka High Court was entirely different from the issue raised by the Revenue before us. Here it is a claim for set off loss of a unit on which claim under Section 10B could be preferred with the profits of a unit on which deduction under Section 10B was not available. This issue, in our opinion, has already been resolved in favour of assessee by Hon ble Bombay High Court in the case of Hindustan Unilever Ltd. (supra). In the said case, assessee had four units which were eligible for deduction under Section 10B, of which, three units had returned profits, whereas, the fourth unit returned a loss. Deduction was independently claimed for the profits of the 10B units. Loss of the fourth unit was allowed to be set off against profits of the units on which there was no deduction available under Section 10B. Later the assessment was sought to be reopened. Their Lordship held the reopening done for disallowing set off of the loss of the fourth unit to be invalid. Their Lordship observed that assessee was entitled to claim deduction in respect of the profits of three eligible units, and also entitled to claim set off of loss arising in the fourth unit against other business income. We are of the opinion that this decision clearly goes in favour of assessee. Ld. CIT(Appeals) was justified in directing the Assessing Officer to allow set off of loss in the 10B units with profits in other non-10B units. 40. Ground No.6 of the Revenue stands dismissed. 41. Vide its grounds 7 and 8, grievance raised by the Revenue is that CIT(Appeals) deleted disallowances made under Section 40(a)(i) of the Act in respect of payments of export sales commission and payments towards logistic services, made to non-residents, for non-deduction of tax at source. 42. Facts apropos are that assessee had effected following payments, during the relevant previous year, to parties outside India, without deducting tax at source - 1. Agency Commission nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 120.16 lakh 2. Professional and Consultancy Charges nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 74.08 lakh 3. Clearing charges to Showatech Inc. nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 1,19,71,578/- 4. Warehousing charges to Showatech Inc. nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 75,81,230/- 5. Freight charges to Showatech Inc. nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp - Rs. 41,73,843/- 6. Freight and Warehousing charges to Volvo Logistics nbsp nbsp nbsp nbsp nbsp - Rs. 1,12,82,138/- Assessing Officer disallowed the above claim under Section 40(a)(i) of the Act. 43. In its appeal before CIT(Appeals), argument of the assessee was that export commission, and professional and consultancy charges were paid for rendering services outside India and the agents concerned had no permanent establishment in India. The amounts paid were the business income of the concerned non-residents. Therefore, according to the assessee, Section 195 was not attracted and it was not bound to deduct any tax at source. Insofar as logistics support services were concerned, assessee argued that concerned non-residents also had no permanent establishment in India and TDS provisions also did not apply. Ld. CIT(Appeals) accepted these contentions of the assessee and held that disallowance under Section 40(a)(i) was not warranted. He deleted the disallowance. 44. Now before us, learned D.R., strongly assailing the order of CIT(Appeals), submitted that payments were made by the assessee for managing its sales outside India. As per learned D.R., these payments were made for managerial services and such managerial services fell under the head fees for technical services . The persons who had received the payments provided assessee facilities of warehousing and helped it in distributing the consignments, and delivery to its customers. According to him, it fell under Explanation 2 to Section 9(1)(vii) of the Act. Similarly, logistics services also were intrinsically connected to the sales outside India and this, inter alia, included warehousing facility provided by the Non-resident. This also, as per learned D.R., comes within the realms of managerial services. Ld. CIT(Appeals) fell in error in holding that assessee was not liable to deduct tax for payments effected to non-residents for these services. 45. Per contra, learned A.R. submitted that similar issues had already come before this Tribunal in Revenue s appeal for assessment year 2005-06 in I.T.A. No. 250/Mds/2010 and this Tribunal had held in favour of the assessee. 46. We have perused the orders and heard the rival submissions. Purposes for which assessee had made payments to non-residents have already been given by us in the table at para 42 above. Assessee had not deducted tax at source while effecting such payments. As per the A.O., these expenditure were nothing but for managerial services rendered by the non-residents outside India. Further, as per the Revenue, explanation inserted by Finance Act, 2010 under Section 9(2) of the Act with retrospective effect from 1.6.1976, had dispensed with the condition regarding residence or place of business or business connection in India, for attracting rigours of Section 9(1)(vii). Therefore, according to them, CIT(Appeals) fell in error in holding that assessee was not liable to deduct tax at source. In this regard it is important to have a look at the explanations given by the assessee on the payments effected by it to the Non-residents. With regard to commission, assessee had before Assessing Officer, given a copy of the letter issued to the non-resident party which read as follows - nbsp nbsp Assistance nbsp nbsp You will render full assistance and co-operation with regard to the follow up of schedules and other correspondence that emanate from customers from time to time regarding the agreed products. nbsp nbsp You will also be required to ensure the consignments are cleared, warehoused and distributed by nominated agents for onward delivery to customers. Expenses incurred on account of the above will be reimbursed by Brakes India and shall be supported by relevant basic documents. All other expenses related to the specific products including ASN (Advance Shipment Note) submission, sample certification, training and other direct expenses related to subject merchandise will be reimbursed. Supporting documents will have to be provided with the invoices. A copy of the agreement entered with nominated agent is to be forwarded to us for our approval/records. nbsp nbsp You will have to arrange for monthly Stock Statement - part number wise for us to cover insurance and for monitoring the Stock levels. With regard to warehousing charges including logistics charges, explanation given by the assessee to the A.O. was as under - nbsp nbsp Freight and warehousing charges - The entire expenditure were wholly incurred outside India in terms of transportation, delivery and logistics costs. Those expenditure being incurred outside India are not liable for deduction of tax at source and those income are not liable for tax in India. Further all those agents do not have any PE s in India. Separate sheet detailing the break-up along with remarks is attached for your perusal. Also we enclose sample copies for distribution and logistics costs to substantiate that the expenditure were wholly incurred outside India. Assessing Officer had also extracted the pertinent parts of the agreement assessee entered with M/s Volvo, which read as under - nbsp nbsp Services means sea freight of the container from the port of departure, India to the port of Gothenburg, Sweden custom clearance, haulage of the container to VLCs warehouse at Arendal, Gothenburg, storage of the Products for an average period o................Income Tax - Case Law
More...