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Income Tax Appellate Tribunal, DELHI ‘I-1’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI YOGESH KUMAR U.S
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
These two separate appeals by the assessee are preferred against the order dated 17.10.2012 pertaining u/s 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] for Assessment Years 2008-09 and 2009-10.
2. Both the appeals were heard together and involve common issues. Therefore, they are being disposed of by this common order for the sake of convenience and brevity.
3. We will first address to appeal for Assessment Year 2008-09 in
4. The grievances of the assessee read as under:
“1. That reference to special audit under section 142(2A) is illegal and bad in law and the report submitted by the special auditor is illegal, bad in law and without jurisdiction.
2. That the special auditor has erred on facts and in law in scrutinizing and auditing those issues which are not part of the terms of reference and has exceeded his jurisdiction in making observations about those issues in the audit report submitted.
3. That in view of the facts and circumstances of the case and in law the A.O. has erred in completing the assessment U/s 143(3)/l44C at Rs. 10,04,09,220/- as against returned income of Rs. 2,45,71,610/- (after disallowing deduction under chapter VIA). The additions made are unjust, unlawful, bad in law, without jurisdiction and are also highly excessive.
On Transfer Pricing
4. That the reference made to the TPO is illegal and bad in law and the order passed u/s 92CA(3) is illegal, bad in law and without jurisdiction.
4.1 That in view' of the facts and circumstances of the case and in law the AO /TPO has erred on facts and in law in making addition of R.s. 64,48,052/- (Rs.9,23.713/- + Rs. 32,86,303/- + 22,38.036/-) on account of adjustment in international transactions carried out with associate enterprises in view of order u/s 92CA(3) of the Transfer Pricing Officer I (3) and DRP has erred in not directing to deleting the said adjustment.
4.2 That the addition of Rs. 9,23.713/- on account of export of goods is illegal, bad in law, unjust and highly excessive.
4.3 That the addition of Rs. 32,86,303/- on account of arm’s length interest on loans to AE's is illegal, bad in law, unjust and highly excessive.
4.4 That the addition of Rs. 22,38.036/- on account or 1I11C1&OL receivables from AE’s is illegal, bad in law, unjust and highly excessive.
4.5 That without prejudice and in the alternative the AO/TPO and subsequently D.R.P. has erred in law and on facts in not allowing/directing the deduction / adjustment to the arm’s length price of 5% range as the assessee has the right to exercise this option u/s 92C.
4.6 That without prejudice the interest on loans to AE’s already charged in the books of accounts and in its return of income has not been considered by the A.O. / T.P.O. and the same has not been reduced while making the addition / adjustment.
Disallowance of Deduction U/s 80IB(11A)
5. That in view of the facts and circumstances of the case and in law the A.O. has erred in holding that the assessee is not entitled to deduction under section 80IB(11A) of Rs. 2,15,30,363/-.
5.1 That in the absence of any incriminating material found during the search the AO has erred on facts and in law and has exceeded his jurisdiction in making disallowance of deduction u/s 80IB(11 A).
5.2. That in view of the facts and circumstances of the case and in law the A.O. has erred in law and on facts in not following Ld. D.R.P. directions to verify the issue afresh.
Addition U/s 14A r/w Rule 8D
6. That in view of the facts and circumstances of the case and in law the A.O./DRP has erred in making disallowance to the tune of Rs. 1,71,16,266/- u/s 14A read with Rule 8D. The disallowance made is unjust, unlawful and is also highly excessive.
Addition on Account of Personal Expenses
7. That in view of the facts and circumstances of the case and in law the A.O./DRP has erred in holding that an amount of Rs. 23,38,945/- (Rs. 8,02,575/- + 4,63,232/- + Rs. 10,73,138/-) is in nature of personal expense.
7.1 That in view of the facts and circumstances of the case and in law the erred in law and on facts in taking wrong, figure of. addition under the head personal expenses.
Disallowance of Deduction of Bad Debts
8 That in view of the facts and circumstances of the case and in law the A.O./D.R.P has erred in not allowing the deduction of 17,82,951/- claimed as bad debts by the appellant while computing the income under the Income Tax Act, 1961.
Disallowance U/s 40a(ia) on Account of Non/Short Deduction of TDS
9. That in view of the facts and circumstances of the case and in law the A.O./DRP has erred in holding that the assessee has not deducted TDS or there is a shortfall in deduction of TDS while making payment to various concerns and further held that the same is to be disallowed under section 40a(ia) to the tune of Rs 2,66,21,033/- (Rs.7,26,890/- + Rs. 2,58,94,143/-) and the addition of Rs. 3,15,46,346/- has been made.
9.1 That the DRP has in view of the facts and circumstances of the case has erred in law and on facts in holding that identical issues has come up for their consideration in appellant’s case for A.Y. 2008-09.
9.2 That the addition of Rs. 7,26,890/- on account of short deduction of TDS is illegal, bad in law, unjust and highly excessive.
9.3 That the addition of Rs. 2,58,94,143/- on account of non deduction of TDS is illegal, bad in law, unjust and highly excessive.
10. That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do not justify the addition made.
11. That the addition/disallowance made is based on mere surmises and conjunctures and the same cannot be justified by any material on record.
12. That the interest u/s 234A, 234B. 234C and 234D has been wrongly and illegally charged as there is no delay in filling of return and there is no default of payment of Advance tax as the receipt / income is liable to TDS.
13. That all the above grounds are independent to each other and mutually exclusive.”
The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of the ITAT Rules, 1963.
At the very outset, the ld. counsel for the assessee stated that he is not pressing ground No. s 1 to 7. Therefore, the same are dismissed as not pressed.
7. Ground No. 8 and 8.1 are general in nature and need no separate adjudication. Ground No 8.2 relates to the addition of Rs. 23,857/– on account of export of goods.
Briefly stated, the underlying facts of this issue are that during the year under consideration, the assessee has exported rice to its Associated Enterprise [AE] namely Kusha Inc. USA and NICE International, aggregating to Rs. 2588.15 lakhs. For the purpose of benchmarking the said transaction, the assessee has applied CUP/TNMM method as the most appropriate method. For application of CUP method, the average price per unit of international transaction of export of various grades of rice was compared with average price per unit of exports of same grade of rice to un-related party in export and domestic market.
Bench-marking analysis is provided at pages 30 to 33 of the paper book and the same is as under:
A perusal of the afore-stated details show that the price charged on sale of rice to AE is higher/within range +/- 5% of the price charged from un-related third parties. Therefore, transaction of export of rice to AE was considered to be at arm’s length price by the assessee.
In the alternative, the assessee has also benchmarked the said transaction applying TNMM. For application of TNMM profit over sales earned by the assessee from sales made to AE is computed with profit over sales earned from sales made to unrelated third parties in export and domestic market and the same is available at page 59 of the paper book which can be summarized as under:
AE/ Non-AE Brands OP/ Sales AE - KUSHA (USA) ROYAL BRAND 16.88% OTHER BRAND 13.51% AE - NICE ALL BRAND 9.24% Average 16.08% NON-AE BASMATI (EXPORT) 10.76% NON-BASMATI (EXPORT) 4.44% DOMESTIC RICE (ALL BRANDS) 2.23% AVERAGE 6.26%
On the basis of the above analysis, under TNMM, the said transaction was considered to be at arm’s length price by the assessee.
We find that during the course of TP assessment proceedings, the TPO required the assessee to provide comparison of price of goods sold to its AE vis-a-vis sales made to unrelated third parties on daily basis.
Details were submitted. From the details submitted by the assessee, the TPO picked up three transactions wherein the price charged by the assessee from the AE was lower than the price charged in the sales made to non-AEs. We find that though the benefit of range of +/- 5% was available to the assessee, but the same was denied by the TPO who proceeded to make TP adjustment of Rs.23,857/– as under:
Date Wei Uncont Count date fob Com Par ght rolled ry Valu pari fob Av. Av. Diffe ty party E (IN Rs.) son Val Rat E Rate rence UE (IN (IN IN (IN RS/ rs/ amou Rs.) MT) mt) NT NICE 08.03. 4 1552 3880 Palm JAMAIC 17.07. 16076 40191 5550 INT. 2007 14 3 Rose A 2007 4 1387 NICE 08.03. 8854 4427 DashMe SINGAP 278111 44497 -227 455 Int. 20017 1 0 sh ORE 2 08.08. 2007 62 3962 4750 NETHER 0303. 57352 47793 -286 17852 606 7 LANDS 2008 00 28.02. KHUS Van 2008 HA SILLEVEO CORP LDT Total 23857
While making the above adjustment, the TPO observed that the effect of 5% allowance is not applicable in the CUP method where the prices are compared on daily basis from transaction to transaction.
16. Objections of the assessee were dismissed by the DRP.
We are of the considered view that post-amendment to section 92C(2) by Finance Act No. 2 Act, 2009 with effect from 1.10.2009, the action of the TPO is against the provisions of the amended section. In our understanding of the law, prior to amendment made to section 92C of the Act, benefit of range of +/- 5% was available only where the arm’s length price Is determined by considering the arithmetical mean of a number of such uncontrolled prices. But post amendment, second Proviso to section 92C reads as under:
“Provided further that if the variation between the ALP for determining the price at which international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage of the latter as may be notified by the central government in official gazette in this behalf, the price at which international transaction or specified domestic transaction has actually been undertaken shall be deemed to be ALP.”
In the explanation, it has been mentioned that provisions of second proviso shall also be applicable to all assessments or reassessment proceedings pending before the Assessing Officer as on the first day of October 2009. The order of the TPO is dated 30.10.2011, which means that the amended second proviso was very much applicable on the facts of the case.
In our understanding of the amended proviso, the arm’s length range of 5% is required to be computed qua arithmetical mean of the ALP determined by the TPO was changed to arm’s length range of 5% required to be computed qua transaction price.
Similar view was taken by the coordinate bench in the case of DDIT Vs. Development Bank of Singapore 155 TTJ 265 wherein the coordinate bench has held that benefit of range of +/- 5% is available not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP.
In light of the amended provision, let us now consider the transaction of export of rice undertaken by the assessee with its AE and the same is as under:
Party Date Uncontr date FOB Com Differ % OF FOB Av. Av. OLLED Value paris Ence in differ Val Rate Rate party (In on amoun ence UE (In (in RS.) T (IN RS/ RS/ RS.) MT) MT) 160764 401 -1387 5550 -3.58% 91 Nice 38803 Palm 08.03. 1552 17.07. int. 2007 14 Rose 2007 278111 444 -227 455 -0.51% 44270 97 Nice 08.03. 8854 08.08. DashMes Int. 20017 1 h 2007 3962 0303. 573520 477 -286 17852 -0.60% Van khus 606 47507 2 0 93 SILLEVEO HA 28.02. 008 ldt CORP 2008
It can be seen from the above chart that the transaction of export of rice undertaken by the assessee with its AE is within range of +/- 5% of the ALP. It has been brought to our notice that in subsequent assessment years, i.e. 2012–13, 2013–14 and 2014–15, the TPO himself has accepted TNMM analysis undertaken by the assessee in bench-marking such transaction of export of rice.
In fact, in A.Y. 2011–12, the ld. CIT(A), vide order dated 08.03.2019, has deleted the adjustment made by the TPO by upholding the TNMM analysis. Bench-marking under TNMM done by the assessee, mentioned elsewhere, shows that the impugned transaction is at ALP and needs no adjustment. We, accordingly, direct the Assessing Officer to delete the TP adjustment. Ground No. 8.2 is allowed.
Ground No. 8.3 relates to addition of Rs. 5,48,065/– on account of arm’s length interest on loans to AEs.
The underlying facts in this issue are that the assessee granted a loan amounting to US dollars 2.50 lakhs to its AE Sona Global Ltd at an agreed rate of interest of 12% per annum and, accordingly, charged interest. For the purpose of bench-marking this transaction, the assessee applied CUP method and on the basis of bank sanction letter issued by Oriental Bank of Commerce and ICICI Bank, held that since the interest paid by the assessee to bank in India is lower than the interest charged by the AE at 12% per annum, transaction was reported to be ALP.
During the course of TP assessment proceedings, the TPO asked the assessee to furnish ledger accounts of all AEs. The same was furnished by the assessee and from such ledger account, the TPO picked up transactions of receivables outstanding against the routine expenses incurred by the assessee on behalf of its AE and re- characterized them as unsecured loan.
Basis this, the TPO determined the arm’s length rate of interest at 17.26% on the basis of information sought from Crisil Ltd under section 133(6) of the Act which provided yield from BBB rated Bond at 14.39%.
Since the credit rating of the AE was not available, the TPO assumed credit rating of AE to be D and formed a belief that the arm’s length rate of interest charged by the assessee ought to be 20% over yield of triple BBB rated bonds, i.e 120% of 14.39% and adopted interest rate of 17.26% and made adjustment.
Adjustment proposed by the TPO was sustained by the DRP.
Before us, the learned counsel vehemently stated that the transaction of issue of loan to the AE is undertaken by the assessee in foreign currency i.e US dollars. Therefore, the rate of interest on such loan for the purpose of application of CUP should be considered to be foreign currency lending by unrelated parties which is LIBOR rate of interest.
Strong reliance was placed on the decision of the Hon’ble Delhi High Court in the case of Cotton Naturals (I) Pvt Ltd ITA No. 233/2014.
Per contra, the ld. DR strongly supported the findings of the TPO and vehemently stated that since the loan was given by an Indian company, SBI PLR should be adopted.
We have carefully considered the rival submissions. The Hon’ble Delhi High Court in the case of Cotton Naturals [supra], while discarding the application of PLR of SBI on foreign currency denominate loan, observed as under:
“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/ assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re- paid normally determines the rate of return on the money lent, i.e. the rate of interest……
40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply.”
34. The Hon’ble coordinate bench in the case of Everest Kanto Cylinder Limited for Assessment Year 2008- 09 has also held that rate to be used for undertaking an adjustment should be LIBOR and not the average yield rates.
35. In light of the decision of the Hon'ble Delhi High Court [supra] we find that the LIBOR rate of interest was 5.124% whereas the interest charged by the assessee was 12% per annum. Therefore, we are of the considered opinion that no TP adjustment is required on this transaction. Ground No. 8.3 is allowed.
36. Second part relates to receivables against expenses incurred on behalf of Nice International Inc and LT Overseas Inc. While imputing interest rate of 17.26%, the TPO has also applied the same on the receivables outstanding against routine expenses incurred by the assessee on behalf of its AE.
Facts on record show that the assessee has given advance to employees/directors travelling abroad and also facilitated payment of certain expenses on behalf of the AE. The said payment of expenses by the assessee were for a very short period of time and were adjusted against similar expenditure incurred by AE on behalf of the assessee.
We are of the considered view that such payment of expenses are done under normal business circumstances during regular course of business and should not be considered as loan. Our view is fortified by the OECD guidelines, wherein at para 1.648 has mentioned as under:
“1.64 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured."
It is not in disputed that shares have been allotted and share certificates have duly been issued, in respect of the aforesaid share application money on various dates in the succeeding year.
The allotment of shares, it would be appreciated, has happened within a reasonable period of time of 12 to 18 months, with approval of shareholders of the respective companies and satisfaction of necessary regulatory compliance. Considering that the bonafides of the said transaction is not in dispute and further considering that there were no extra ordinary / exceptional circumstances warranting re-characterization of share application money into loan, the action of the TPO in re- charactering the share application money, against which shares have been allotted in the subsequent year would amount to disregarding the legitimate act of increase in share capital by the companies. The TPO, in our respectful submission, therefore, clearly erred in treating the transaction of payment by way of share application money as loan and imputing notional interest thereon.”
39. The Hon’ble Supreme Court in the case of Bombay Steam Navigation Co. 56 ITR 52 has held that every indebtness cannot be construed to have arisen out of loan transaction and interest is involved only in relation to a debt created out of loan transaction.
40. There is no dispute that the routine expenses incurred by the assessee in regular course of if its business are considered as loan and in light of ratio of laid down by the Hon’ble Supreme Court [supra] read alongwith OECD guidelines [supra] we do not find any merit in such adjustments and the same are directed to be deleted.
41. Ground No. 8.4 relates to interest on outstanding receivables.
During the course of TP assessment proceedings, it was noticed from the invoice-wise details of rice sold to AE that the assessee has received sale consideration after some time lag, beyond the period agreed to between the parties that is 25 days to 120 days. Such details are at pages 24 to 30 of the TPO order.
42. The TPO recharacterised the delay in receipt of receivables as unsecured loans advanced to the AE and imputed notional interest @ 7.26% and, accordingly, proposed adjustment of Rs.28.57 lakhs which was upheld by the DRP. However, the DRP directed the TPO to consider the rate of interest at 12.72% being PLR of interest by SBI.
Pursuant to the directions of the DRP, final adjustment was made at Rs. 21,05,962/–. Before us, the learned counsel placed strong reliance on the decision of the Hon’ble jurisdictional High Court of Delhi in the case of Kusum Healthcare Limited and also relied upon the decision in the case of Avenue Asia Advisors 398 ITR 120.
44. The learned counsel further pointed out that interest cost has also been suitably factored in sale price as operating profit margin of the assessee is much higher than operating margin of the comparable companies.
45. The ld. counsel for the assessee further stated that the assessee is also in receipt of remittances against sale of rice from unrelated 3rd parties wherein also, on similar delay, no interest has been charged by the assessee.
Per contra, the ld. DR strongly supported the findings of the TPO and read the relevant observation of the Assessing Officer/DRP.
We have carefully considered the rival submissions. The Hon’ble Jurisdictional High Court of Delhi in the case of Kusum Healthcare Pvt Ltd [Supra] has held as under:
“10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression “receivables'' does not mean that de hors the context every item of “receivables'' appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Appellant will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.
11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself.”
48. In light of the aforementioned findings of the Hon’ble High Court, the contention of the assessee that no interest has been charged from non-AEs on similar delay cannot be brushed aside lightly. In fact, in the case of Aura OI SAS, delay was of 81 days and in the case of Sabi Foods, delay was of 52 days and no interest was charged by the assessee.
We have elsewhere mentioned the operating profit margin of the assessee vis a vis comparable companies from where it can be seen that the operating profit margin of the assessee is much higher than that of the comparable companies.
Considering the facts in totality in light of the ratio laid down by the Hon’ble Jurisdictional High Court [supra[ and keeping in mind that no interest was charged from receivables from non-AES, we are of the considered view that this adjustment is unwarranted and, accordingly, direct the Assessing Officer to delete the addition of Rs. 21,05,962/–. Ground No. 8.4 is, accordingly, allowed.
Ground Nos. 8.5 and 8.6 become otiose.
Ground No. 9 relates to denial of deduction u/s 80IB(11A) of the Act amounting to Rs.12,34,19,871/–.
53. Facts on record show that this is not the first year of claim, but, in fact, is the fifth year of claim, which means that this claim was allowed/ considered in the earlier Assessment Years.
We find that for the first time, claim was made in Assessment Year 2004-05 which was allowed by the Assessing Officer. Thereafter, in the reassessment proceedings, claim was reduced by the Assessing Officer.
Similar fate was in Assessment Years 2005-06 and 2006-07. The said assessments were completed u/s 153A of the Act. Assessment orders for Assessment Years 2004-05 to 2006-07 were quashed by the Tribunal as the same were based de hors any incriminating material.
56. However, in Assessment Year 2007-08, this issue has been decided on merits by this Tribunal in in the case of L.T. Foods Ltd wherein, on identical facts, the Tribunal allowed deduction claimed u/s 80IB(11A) of the Act. The relevant findings read as under:
On a careful understanding of the above, we also have no hesitation to hold that the beneficial provisions of section 80IB(11A) of the Act was introduced to encourage the development of infrastructure facilities in the private sector in the direction of integrated transaction of transportation, handling and storage aiming at the enhanced food security by way of acquiring greater efficiency in the grain management system and minimizing the post-harvest food grain losses. There is a purpose of providing incentive to the private operators to create and enhance the infrastructural facilities in handling, storage and transportation in respect of food grains is stretching the financial food security through acquiring greater efficiency in the grain management system and minimize the postharvest food grain losses.
As a matter of fact, after referring to the provisions under section 24 80IB(11A) of the Act, the speech of the Finance Minister, CBD to circular number 14 of 2001 and also the discussion made in the Sampat Iyengar’s law of income tax 10th edition, learned Assessing Officer observed that the purpose behind the enactment of section 80IB(11A) of the Act was enhanced food security, because a large quantity of food grains was rotting in the country every year because of inadequate storage facility, and that to enhance food security and agricultural development, upgradation and modernisation of infrastructure for storage, handling and transportation of food grains in order to minimise the post-
harvest food grain losses by creating infrastructure, therefor.
In this context, it is not out of place to note the observations of the Mumbai Bench of the Tribunal in the case of ITO vs. Shankar K. Bhanage: 25 taxmann.com 310, to the effect that the literal interpretation of words "integrated business of handling, storage and transportation of food grains" will not lead to any absurdity or produce any manifestly unjust result; that the Legislative intent is not to encourage transportation or handling of food grains but the Legislative intent is to encourage construction of godowns and warehouses with a view to providing storage of food grains. If we consider the entire combat of the scheme relating to the tax holiday provided by the Legislature, we find that the deductions are available under various provisions when the assessee has contributed something towards the infrastructure development of the country, but the main purpose of bringing this provision is construction of godowns specifically for stocking food grains for greater efficiency in the grain management system and minimize post-harvest food grain losses.
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In this context, it is necessary to look at the activities conducted by the assessee in their integrated business of handling, storage and transportation of the food grains in furtherance of the above object of enhancing the food security by achieving the greater efficiency in the grain management system and minimizing the post-harvest food grain losses. If the unit of the assessee at Bahalgarh strives to achieve these objectives, it would certainly be entitled to the benefit of deduction under section 80IB(11A) of the Act. We are of the considered opinion that for this 27 purpose we will have to keep it in mind that the incentive is provided for the integrated business of handling, storage and transportation of food grains with this particular avowed object and, therefore, there shall not be any compartmentalization of these activities for the purpose of allowing the deduction.
It could be seen from the record that the activities of the assessee include purchasing and transporting paddy, storing paddy, processing the Paddy into rice, handling the Paddy during these processes and thereafter selling the rice in the domestic and overseas markets; that the assessee had set up an undertaking for handling and storage of the food grains and that apart from dehusking of the paddy for the purpose of rice, such processing/handling/ storage/ transportation involves the cleaning, steaming, soaking, drying, polishing, grinding and thereafter packing and marketing; that such processes done by the assessee on the paddy and enhance the life of the food grain , significantly reduces loss of food grain and significantly contributes to agricultural development of this product; and that all these
activities are part of the treatment of paddy which is in essence dehusking the rice and treatment carried out by the assessee are part of the agricultural operations and both the rice and ask continue to remain food grain and continue to remain agricultural products.
Orders of the authorities below made reference to and extracted the legal opinion given by Shri PorusFerrack Kaka. The activities of the assessee with reference to which the legal opinion was given clearly establishes /corroborate the said fact only. According to assessee, they are conducting all the necessary activities from collection of the Paddy from the fields/mandi till they are made ready for human consumption by 28 placing them in the markets, and more particularly, avoiding the losses in threshing and winnowing by better mechanical methods, following sanitation during drying, milling and after milling to avoid contamination of grains and protect from insects, rodents and birds, using proper technique of processing i.e. cleaning, parboiling and milling, adopting the grading practices to get more profit and to avoid the economic losses, and using efficient and good packaging for storage, as well as in transportation, by investing more than Rs.30 crores for setting up of the eligible unit and for this purpose advanced machinery with improved technology was installed for efficiently handling food grains and to avoid any post-harvest losses, developed huge storage capacity to handle paddy stock of more than 1,50,000 Metric Ton (MT) and 70,000 MT of rice in order to bring efficiency in the grain management system and incurring significant expenditure to facilitate transportation of food grains by way of acquiring trucks, tractors and trolleys and has also hired trucks for the purposes of carrying food grains from the farmers and mandis to its storage blocks and thereafter to the markets, followed by upgradation and modernization of infrastructure for handling of food grains in order to bring greater efficiency in the storage and grain management system and minimize post- harvest food grain losses. Assessee also brought it to the notice of the learned Assessing Officer that the special auditors in the report at pages number is 30 and 31 part II volume 5 observed that the condition that the assessee should be engaged in the business of handling, storage and transportation of food grains was fulfilled.
Revenue does not dispute any of the activities carried by the assessee or installing the machinery Per treatment and processing of the 29 Paddy, setting up of storage facilities or hiring of trucks for transportation of the Paddy from the fields/Mandi to the storage and treatment facility and, rice from there to the markets. In fact, the Assessing Officer made a remark in the assessment order that simply because some part of the assessee’s business coincides with the part of the provision, he cannot be allowed to take benefit of something which was never the intention of the legislature. It goes without saying that the activities like collection of the paddy from the fields/mandi till they are made ready for human consumption by placing them in the markets, and more particularly, avoiding the losses in threshing and winnowing by better mechanical methods, following sanitation during drying, milling and after milling to avoid contamination of grains and protect from insects, rodents and birds, using proper technique of processing i.e. cleaning, parboiling and milling, adopting the grading practices to get more profit and to avoid the economic losses, and using efficient and good packaging for storage, as well as in transportation, by investing more than Rs.30 crores for setting up of the eligible unit and for this purpose advanced machinery with improved technology would coincide with the provision.
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While there is no problem in understanding the expressions like storage and transport, the expression “handling” has to be understood in the context of the integrated business of handling, storage and transportation of food grains. According to the Ld. DR handling answers certain description were according to the assessee their activities fitting the description of handling. In the absence of any legislative clarification as to precisely which activities would amount to handling, and when the meaning of handling is a lefty to be interpreted context surely, it is necessary to meet some concreteness on this aspect as against imagination. No doubt the activities enumerated by the Ld. DR too answer the description of handling in the context of food grains under section 80IB(11A) of the Act, is necessary
that in order to be eligible to claim the benefits under section 80IB(11A) of the Act, whether the assessee is required to install all such facilities or such facilities at suit the convenience of the assessee while meeting the avowed object of 80IB(11A) of the Act would entitle the assessee to claim such benefit is the mute question.
In plain English handling includes any process not amounting to manufacture of the treatment of the product with a view to deal with the 31 same to achieve a desired purpose. In a sense it includes all the activities preparatory and axillary in nature. Merely because the word processing is occurring in 80IB(11A) of the Act in respect of the fruits or vegetables, it does not exclude all the processes from meaning of “handling”. As stated supra, there are various steps involved in minimizing the post-harvest losses as per the recommendations of the Agricultural Marketing Information Network. If we exclude the specific activities like storage and transport, all other activities which are preparatory, axillary and sundry in nature, but in furtherance of the avowed object of better grain management and minimizing the post-harvest losses to achieve food security would naturally fall within the category of handling otherwise, such an expression will remain redundant. It cannot be said that the intermediary processes undertaken by the assessee in clearing, steaming, soaking, drying, polishing and grinding besides de-husking the paddy would
significantly enhance the life of the food grain , reduces the loss of food grain and contributes to the preservation of food grains. If those activities do not answer the description of handling, we wonder what would be handling. The word has to be understood in its contextual sense and merely because the learned Assessing Officer does not agree with the assessee to include the milling of the paddy is covered by “handling”, it does not take away the other activities from the meaning of handling, so long as such activities keep nexus with the objective for which the benefit is intended. Whether or not the de-husking of paddy would form part of the handling, we shall deal with it a little later. In our opinion, the activities carried out by the assessee certainly form part of the expression “handling.”.
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The Tribunal wondered that if the facilities created by the assessee are not in the nature of handling and storage then which activities would fall in that category and answered that these activities have to be classified as handling and storage etc. because if the meaning was restricted only to creating of stores then legislature would have made the deduction available in case of warehousing facilities then instead of using the expression 'the integrated business of handling, storage and transportation of food grains' the deduction would have been provided 'for
the business of modern warehouses' which has not been done. In such circumstances, while reaching the conclusion that the assessee is entitled to deduction under section 80IB(11A) of the Act, the Tribunal made a reference to the case of L.T. Overseas (P.) Ltd for the assessment year 2004- 05 and 2005-06 in which case the deduction under section 80IB(11A) of the Act was allowed to the assessee who was conducting the activities which were identical to the activities conducted by the assessee in the case of Laxmi Energy (supra) and the assessee before us.
49. For that matter, Ld. DR admitted during the course of arguments 39 while dealing with this alternative prayer for remand of the matter to the file of learned Assessing Officer that the facts involved in Laxmi energy (supra) are identical to the facts involved in the case on hand, in respect of the activities of the assessee. It is therefore, clear that the assessees who were conducting the business similar to the one done by the assessee in this case, were found entitled to the benefit under section 80IB(11A) of the Act and such a view is consistent so far. Without mincing many words, while following the ratio of those cases, we are of the considered opinion that the activities involving the cleaning, steaming, soaking, drying, polishing, grinding etc.are covered by the expression “handling” and the assessee is certainly conducting such activities which would entitle to the benefit of deduction under section 80IB(11A) of the Act.
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As we have stated above, we will have to test the expression “handling”, occurring in section 80IB(11A) of the Acton the touchstone of the object sought to be achieved through such incentive, namely, achieving the enhanced food security by way of greater efficiency in the grain management system by minimizing the post-harvest food grain losses. It is an undeniable fact that traditionally pounding was the way in which the paddy was converted to the form of rice by separating the husk and brawn. It is also common knowledge that that in that process there used to be quantitative and qualitative losses, caused by the breaking of the grains etc. By dehusking the paddy and converting it into rice, no new article is brought into existence which is qualitatively different from the inputs, but is the simple process of de-husking the paddy to obtain the rice. This conversion meets the objective of minimizing the post- harvest losses which would lead to the greater efficiency of the food grain management system and consequently to the enhanced food security. In Commissioner of Customs(Import) vs. Dilip Kumar and Company &Othrs CA No. 3327 of 2007 (SC), the Hon’ble Supreme Court held that while interpreting the taxing statutes, the applicability of the section has to be seen in strict sense, and once the section is found to be applicable, then it has to be constructed liberally. Since undoubtedly the provisions of section 80IB(11A) of the Act
are applicable to the activities of the assessee like clearing, steaming, soaking, drying, polishing and grinding it can also be not denied that de-husking the paddy would significantly enhance the life of the food grain, thereby reduces the loss of food grain and contributes to the preservation of food grains. In such an event, we are unable to understand how this particular process does not fit in the expression “handling”. For these reasons, we are of the considered opinion that the de-husking of the paddy to convert it into rice is also an integral part of reducing the post-harvest food grain loss.
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Learned Assessing Officer , however, did not refer to any of these contentions raised by the assessee in his order, but straightaway proceeded to observe that the machinery put to use by the assessee prior to 1/4/2001 in Bahalgarh unit constitutes more than 20%, which according to him means that more than 20% of the machinery had become old prior to 1/4/2001. As a matter of fact, the Assessing Officer could have referred to the schedule of fixed assets or the stock registers or the financials of the assessee to say that none of the missionary that was put to use at Bahalgarh unit for the purpose of the integrated business of handling, storage and transportation of food grains was new and was transferred from the old unit. No such exercise to return a finding the fact was undertaken by the learned Assessing Officer before reaching the conclusion that more than 20% of the machinery at Bahalgarh unit had become old prior to 1/4/2001.
57. Ld. CIT(A), however, made a reference to the quantitative details and considered the contention of the assessee that the entire machinery used the as eligible unit at Bahalgarh was new one and not old machinery was used and observed that the learned Assessing Officer , without mentioning the instances of old plant and machinery being used by Bahalgarh unit, presumed that the plant and machinery for Bahalgarh unit used prior to 1/4/2001 and was transferred such old machinery for the new unit. Ld. CIT(A) also referred to the special audit report wherein it was observed that for the purpose of examining the question whether the unit at Bahalgarh had started with effect from October 2002, examination of the stock registers, unit-wise books of accounts and sales tax 45 registration certificate in respect of Bahalgarh unit took place, and it was only after examination of all these things the special auditors concluded that the assessee was engaged in the business of handling, storage and transportation of food grains and such business was eligible for a deduction under section 80IB(11A) of the Act.
58. It is, therefore, clear that there is no material was either examined by the Learned Assessing Officer before reaching the conclusion as to the uses of old machinery nor the same is produced before us, in support of such conclusion. In the absence of any reasons to show the contrary, we find it difficult to take a different view from the view taken by the Ld. CIT(A) that without undertaking any exercise to ascertain the instances of old plant and machinery being used at Bahalgarh, the learned Assessing Officer presumed that plant and machinery for Bahalgarh unit was used prior to 1/4/2001 and was transferred to Bahalgarh unit subsequently. Such unfounded observations of the learned Assessing Officer cannot be one of the bases to deny the deduction under section 80IB(11A) of the Act.
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We, accordingly find that the assessee cannot be denied the 49 deduction under section 80IB(11A) of the Act either in respect of the activities conducted by the assessee to meet the demand of the section, namely, deriving income from the integrated business of handling, storage and transportation of food grains or for non-compliance with the conditions depleted under section 80IB (2) of the Act. We do not find anything illegality are regularity either in the reasoning or the conclusions reached by the Ld. CIT(A) on this aspect, and while confirming the same find the grounds number1 to 3 of Revenue’s appeal devoid of merits and reliable to be dismissed.”
The aforementioned order of the co-ordinate bench was also followed by this Tribunal in the case of Group company M/s Daawat Foods Ltd for Assessment Year 2009-10 in and for Assessment Years 2011-12 to 2014-15 in ITA Nos. 5345 to 5348/DEL/2018.
As no distinguishing decision has been brought to our notice by the Revenue, respectfully following the decision of the co-ordinate bench [supra], we direct the Assessing Officer to allow claim of deduction u/s 80IB(11A) of the Act. Ground No. 9, alongwith sub grounds is allowed.
Ground No. 10 relates to disallowance made u/s 14A r.w.r 8D of the Rules.
During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has received income of Rs. 69,40,799/- in respect of which exemption was claimed u/s 10 of the Act. This exempt income comprises of:
i) Share of profit in partnership firm M/s Raghunath Agro Industries, Amritsar - Rs. 68,76,452/- ii) Dividend income from investment in mutual funds - Rs. 64,347/- Invoking the provisions of section 14A of the Act r.w.r 8D of the Rules, the Assessing Officer disallowed Rs. 53,26,986/- after deducting suo moto disallowance of Rs. 16,13,813/- by the assessee.
In so far as the share of profit from partnership firm is concerned, in Assessment Year 2007-08, this Tribunal in vide order dated 30.09.2020 has deleted the disallowance. The relevant findings read as under:
“95. We have gone through the record, in the light of the submissions made on either side. It could be seen from the assessment order, vide paragraph number 11, there were made the report of the special auditor as the basis for the disallowance, special auditor worked out the total disallowance under section 14A of the Act read with Rule 8D of the Rules at rupees, 41, 80, 208/-, but in view of the provisions of section 14A of the Act, he restricted the disallowance to the exempt income and determined the same at Rs.18,18,915/-. Nowhere in the order, assessing officer had considered the accounts of the assessee as to what could have been the expenditure, that has to be allocated for earning the exempt income.
Even otherwise, we find strength in the ornament of the Ld. AR that in order to avoid the double taxation once in the hands of the firm and secondly in the hands of the partner, the share in the profits of the partnership form is not taxable in the hands of the partner as has been held by the Mumbai bench of the Tribunal in the case of Sudhir Kapadia VS.ITO in of 2013, which was followed in the case of Hamid A Moochhala VS. ACIT in ITA No. 2218/Mum/2010.
Further, there is no denial of the fact that as on 31/3/2006 and 31/3/2007, the capital and free reserves of the assessee were Rs.60, 92, 50, 784/- and Rs.1,19,99,27,510/- respectively as against the investment in the partnership form on 31/3/2006 and 31/3/2007 stood at Rs.3,49,55,937/-and 3,67,57,562/- only and therefore, it cannot be said that any borrowed funds could have been utilised to make such investment incurring any interest expenditure.
98. Viewing from any angle, we did not find any ground to sustain addition made under 14A of the Act read with Rule 8D
of the Rules. Such an addition is, therefore, is directed to be deleted. Ground number 17 is accordingly allowed.”
On finding parity of facts, we direct the Assessing Officer to delete the disallowance made u/s 14A of the Act qua the share of profit from partnership firm amounting to Rs. 68,76,452/-.
63. In so far as the dividend income from investment in mutual fund is concerned, suo moto disallowance of Rs. 16,13,813/- by the assessee should cover the same. Therefore, no further disallowance is required. Ground No. 10 is, accordingly, allowed.
Ground No. 11 relates to addition of Rs. 5,73,775/- made by the Assessing Officer without following the directions of the DRP.
Facts before us show that total addition by the assessee has been made to the tune of Rs. 11,86,947/- which comprises of the following: a) Foreign travelling of wives of the directors Rs. 5,73,775/- b) Payment made to Sundari Apparels I. P. Ltd Rs. 50,000/- c) Payment made to Shadi Online Pvt Ltd Rs. 1,25,000/- d) Payment made for taxi bills Rs. 95,948/- e) Payment made to Sycoriam Matrimonial Services Ltd Rs. 1,00,000/- f) Payment made to Health Resort Rs. 1,79,584/-
Before us, the ld. counsel for the assessee did not press disallowances/additions referred in (b) to (f) above. Therefore, the same additions referred to in (b) to (f) are confirmed.
In so far as the foreign travelling expenses of wives of directors is concerned, we find that the DRP has made the following observations:
“We have carefully considered the issue, the reasoning of the AO for making the disallowance and the submissions of the ARs. The expenditure on travel of the wives and the directors abroad when they have accompanied the directors in business towards is an allowable expenditure. The AO is directed to allow the expenditure on the travel of the wives of the directors when they have accompanied the directors on foreign visits after verification……..”
The Assessing Officer is bound to follow the directions of the DRP. We, accordingly direct the Assessing Officer to follow the directions of the DRP and decide the issue accordingly. The Assessing Officer is further directed to consider the decision of this Tribunal in assessee’s own case in for AY 2007 – 08. Ground No. 11 is partly allowed.
69. Ground No. 12 relates to the disallowance of expenditure holding same as capital expenditure and not allowing deduction of Rs. 1,96,66,561/-
70. The underlying facts relating to this issue are that during the year under consideration, the assessee incurred expenditure aggregating to Rs.2.87 crores in connection with identification of opportunities outside India to explore the possibility of expansion of distribution of network to boost the exports. Of the total expenditure so incurred, an amount of Rs. 1,71,61,328/– was expenditure for exploring business opportunities which was incurred prior to acquisition of Kusha Inc. USA. The same was claimed as revenue expenditure and the balance amount was capitalized and not claimed as deduction.
The Assessing Officer disallowed the expenditure on the ground that the same was capital in nature.
Disallowance was confirmed by the DRP. Reason for this allowance given by the Assessing Officer/DRP is that the said expenditure was incurred towards acquisition of the company Kusha Inc. USA.
Before us, the learned counsel for the assessee vehemently stated that the expenditure was incurred much prior to acquisition of Kusha Inc and loss incurred in order to undertake market analysis helps to increase export sales of the assessee in USA.
It is the say of the ld. counsel for the assessee that the assessee wanted to increase its foothold in USA by increasing its export sales but it did not have its own distribution network in USA. The assessee had availed professional services in the form of due diligence and advisory from various consultants. The break up of the expenses is as under:
Sl. No. Particulars Amount Remarks 1. Avendus Capital (P) Ltd. Rs.1,05,19,549 Finance advisory for identifying Target Company 2. Price WaterHouse Rs.12,29,106 Tax and regulatory advise prior to acquisition 3. The Chug Firm Rs.17,62,541 Legal and financial due diligence prior to acquisition 4. Trademark Rs.10,100 Trade mark registration expenses 5. Ernst & Young Rs.15,19,669 Brand valuation expenses 6. Lakshmi Kumaran & Sridharan Rs.19,20,364 Legal advisory on feasibility of acquisition 7. Safron Capital Advisory (P) Rs.2,00,000 Valuation reports Ltd. Revenue Expenditure Total Rs.1,71,61,328
The ld. DR strongly supported the findings of the AO/DRP.
We have carefully considered the orders of the authorities below. A perusal of the aforementioned bifurcation of expenses shows that the expenses have been incurred on due diligence and advisory report conducted by the professional firms and on the basis of such report/analysis the assessee identified the target company Kusha Inc for acquisition to help expand export sales of the assessee in USA.
Facts on record show that the assessee made total export sales of Rs. 48,94,90,338/– to USA out of which substantial sales to the tune of Rs. 28,56,81, 443/– was made to Kusha Inc.
We find from the record the export sales of the assessee company increased threefold as under:
Sl. No. F.Y Total Sales in USA Total; Sales to Kush Qty (MT) Amt(Rs.) Qty (MT) Amt (Rs.)
2005-06 6,045 22,14,30,118 - - 2. 2006-07 8,660 23,31,44,515 - - 3. 2007-08 10,517 48,94,90,337 5,382 28,56,81,443 4. 2008-09 30,302 214,15,16,554 30,043 212,27,95,268 5. 2009-10 34,712 197,97,79,599 34,672 197,65,64,872 6. 2010-11 28,392 145,17,32,209 28,372 145,01,47,997
In our considered opinion, the impugned expenditure was incurred by the assessee for the purpose of running business more efficiently with a view to enhance profit in regular course of business.
It would be pertinent to mention here that the impugned expenditure was not incurred by the assessee for acquisition of Kusha Inc. But, the expenses were incurred prior to acquisition of the said company. We find that expenditure of Rs. 1,15,36,451, incurred towards acquisition of Kusha Inc has been capitalized by the assessee.
Hon'ble Supreme Court in the case of Delhi Safe Deposit Co Ltd 133 ITR 756 has held that commercial expediency and direct and immediate benefit to trade are relevant factors. A sum of money expanded, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order to indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purpose of trade.
Considering the fact that export sales of the assessee increased as per the chart mentioned elsewhere, we are of the considered view that the expenditure was incurred to increase profitability and efficiency of the assessee‘s business overseas which was incurred in the normal course of business. Keeping in mind that the expenditure incurred for acquisition of Kusha Inc USA has been capitalized, the Hon'ble Karnataka High Court in the case of United Breweries Ltd321 ITR 546, inter-alia, held as under:
“68. That leaves us with the other question, namely, as to whether the Tribunal was right in allowing the legal expenses of Rs. 15 lakhs incurred towards obtaining advice and by way of consultation fees paid to the auditors of the assessee-company as to the feasibility of acquiring a brewery unit in South Africa
As the revenue has not disputed that the assessee had in fact incurred this expenditure and though Sri Seshachala, learned senior standing counsel appearing for the appellant- revenue would bring to our notice the relevant statutory provision, namely, section 35D of the Act as it prevailed at the relevant point of time and submits that any expenditure incurred by way of expansion of business undertaking or in connection with the setting up of new industrial unit etc., is to be amortized as part of the investments, we are not impressed either by the submissions that it is in the nature of 'capital expenditure' or that section 35D of the Act is attracted to the facts of the instant case.
We say so for the reason that an expenditure incurred even in connection with acquiring a capital asset which is in the nature of a fee paid towards consultation for the business expansion, as the expenditure incurred may or may not result in the acquisition of the capital asset itself, it is for the very purpose of finding out the prudence or feasibility of acquiring the asset, the assessee seeks an expert opinion on that and an expenditure incurred for such purpose and, therefore, in our considered view, this expenditure can never partake the character of 'capital expenditure' but is only a 'revenue expenditure' and the Tribunal has rightly allowed this amount as 'deductible expenditure' though has not spelt out the reason either elaborately or succinctly in its order. Be that as it may, we answer question No. 9 relatable to paragraph No. 37 of the memorandum of appeal in of 2001 in favour of the assessee and against the revenue” (emphasis supplied).
From the above mentioned judgement, it can be seen that any expenditure incurred on obtaining professional advice/consultancy which is inherently nature in nature, is allowable, as business deduction, even if such professional services have been obtained in connection with acquisition of a capital asset.
The Hon’ble Karnataka High Court in the case of Senapati Whitely Ltd 198 ITR 753 had the occasion to consider the following facts:
“The assessee-company, carrying on the business of manufacture and sale of electrical insulating press boards, etc., was authorised under its articles and memorandum of association to carry on the business of promoting other companies In pursuance of that object, the assessee obtained on 14-8-1973 a licence from the Government of India for the establishment of a new' industrial undertaking for the manufacture of mica paper with the intention of transferring it to a new company to be called L. This new company L was incorporated on 28-6-1976. The import licence to import the requisite certain materials, which stood earlier in the assessee's name, was amended on 23-11-1977 to transfer it in the name of company L.
During the process of setting of the industrial undertaking, the assessee incurred expenditure totalling Rs. 24,83,743 on construction of building and purchase of machinery, etc. After the setting up of undertaking and incorporation of new company the assessee had to get approval from the Reserve Bank of India which was given in December 1977 before it could transfer the factory building and other assets to the new company. A certain number of shares of the new company were allotted to the asses- see in consideration of the transfer of these assets. During the years 1975-76 and 1976-77, interest on borrowings which were made for the purpose of these assets was allowed as business expenditure but a similar claim for deduction during the assessment years 1977-78 and 1978-79 was rejected by the 1TO on the ground that the borrowings were made to create assets which were diverted as the capital of new company L.
The Tribunal, however, allowed the claim of the assessee for deduction of interest on the borrowings.”
The Hon'ble Karnataka High Court held as under:
“The Appellate Tribunal was justified in concluding, from the facts and circumstances, that there was no trusteeship in respect of the setting up of the new company by the assessee, and that the expenditure incurred on the setting up of the undertaking (or the unit) to manufacture mica paper was a expenditure incurred by the assessee as part of its existing busies operation. If, for any reason, the Government of India or any statutory authority refused to permit the new company to have the import licence or have the share allotted to the petitioner in lieu of the transfer of assets, these assets would have continued with the assessee as the business assets of the assessee. Therefore, the answer to the question referred to us has to be necessarily in the affirmative.
It is also clear that mica paper is a product consumable by the assessee or could be marked along with other articles produced by the assessee and mica paper belonged to the broad group of those other articles manufactured by the assessee. The test of interconnection between the two businesses is satisfied here.”
Considering the facts in totality, we are of the considered view that the expenditure amounting to Rs. 1,71,61,328/– incurred on due diligence and advisory reports prior to acquisition of Kusha Inc deserves to be allowed as revenue expenditure. We, accordingly, direct the Assessing Officer to allow the same.
Second part of the disallowance is of Rs. 25,05,323/– which is ground 12.2.
The underlying facts are that the assessee had business relations with M/s Lucky House, Hyderabad and Lucky House Hyderabad started using ‘Daawat’ trademark which resulted in dispute between the assessee and the said party.
The said dispute was tried to be settled out of court and in pursuance of negotiations undertaken, an MOU was signed with M/s Lucky House and it was mutually agreed that Lucky House shall not use the trademark and in pursuance of the said agreement, the assessee made advance payment of Rs. 25,05,233/– in Assessment Year 2006-07 and 2007–8.
However, in spite of the agreement, M/s Lucky House continued to use the Daawat trademark and once again an understanding was arrived wherein it was mutually agreed that advance of Rs. 25,05,233/– paid to M/s Lucky House would be treated as full and final settlement of the dispute and, accordingly, the same was debited to the Profit and Loss Account claimed as business deduction.
The Assessing Officer disallowed the same and the DRP confirmed it.
Before us, the learned counsel for the assessee stated that pursuant to the understanding entered into with Lucky House, the impugned amount was treated as full and final settlement of the dispute and therefore, the same is an allowable expenditure under section 37(1) of the act.
The ld. DR supported the findings of the Assessing Officer /DRP.
We have carefully perused the orders of the authorities below.
There is no dispute that the impugned amount was paid as final settlement of the dispute which arose due to infringement of use of trademark Daawat. In our considered opinion, any expenditure incurred by the assessee to protect its trademark in the ordinary course of business is to be allowed as revenue expenditure because it was a commercial expediency on the part of the assessee to have made the said payment to protect unlawful use of its trademark and the same was incurred wholly and exclusively for the purpose of business. We, accordingly, direct the Assessing Officer to allow deduction of Rs. 25,05,233/–. Ground No. 12 along with sub-grounds is allowed.
Ground No. 13 with sub grounds relates to the disallowance under section 40(a)(ia) of the Act.
The underlying facts in this issue are that the Assessing Officer, during the course of assessment proceedings and on perusal of the financial statements of the assessee, found that the assessee has claimed expenditure of Rs. 2,97,02,201/– on which no tax was deducted at source and further found that on Rs. 18,44,145/- there was a short deduction of TDS.
96. Before the DRP, the assessee filed complete documentary evidence in support the impugned amount which were sought to be disallowed under section 40(a)(ia) of the Act. Detailed breakup of the expenditure is as per the following chart:
Nature of payment As per AO Remarks Sl. No. 1. Freight Reimbursement of freight Charges of 1,54,78,051 paddy paid by party on behalf of assessee – Amount paid is below taxable limit.
2. Labour Charges 12,68,886 Reimbursement of Labour Charges of Paddy Season Purchase for Loading/Unloading paid by party on behalf of assessee to various labour contractors in mandi - Amount paid is below taxable limit 3. 8,38,180 Payment was made to non-resident as Market Development Charges market development charges. No income deemed to accrue or arise in India as per section 9 of Act, since Asian Television Network Inc. does not have any permanent establishment in India. 4. 10,55,582 Payment made to Container Rail Freight Corporation of India Limited towards rail freight – Section 194C not applicable. Similar disallowance made in AY 2007-08 deleted by CIT(A) and not further appeal preferred by Revenue. 5. 25,91,443 Steamer freight charges paid to Steamer Freight NORASIA Container Lines Ltd., which is a foreign shipping company - Section 172 applicable, hence no TDS deducted. 6. Commission 47,75,114 No expense booked - Brokerage paid on behalf of suppliers 7. 6,96,611 No expense was booked as the same Hotel Accommodation Charges was reversed. 8. Payment was made for the purchase of Job work Charges 89,868 Powder used for Fire Extinguisher 9. 7,65,850 - Clearing & Forwarding Charges 10. Bonus paid to 6,06,576 - Farmer 11. Legal and 9,91,624 - Professional Charges 12. Other Expenses - 4,59,658 - Service Charges, AMC, fumigation and inspection charges, canteen and catering charges 13. - Casting Error 84,758 2,97,02,201 Total
97. In so far as expenditure mentioned at item No. 9 and 10 above is concerned, the learned counsel, at the very outset stated that he has nothing much to say. In respect of other expenditure, the learned counsel stated that the reasons given in the chart are self explanatory.
Ld. DR supported the findings of the AO/DRP.
We have carefully perused the chart mentioned hereinabove. In so far as freight and labour charges are concerned, the same are reimbursements and in our considered view, there is no liability of TDS on reimbursement of expenses.
We have also perused evidences brought on record in the paper book. We find that each payment is below the limit on which tax is not required to be deducted at source.
Market development charges have been paid to a non-resident and since the non-resident does not have any PE in India, its income is not taxable in India and, therefore, there is no liability for TDS.
Rail freight has been paid to Container Corporation of India and section 194C of the Act does not apply on such payment.
Facts on record show that similar disallowance made in Assessment Year 2007–08 was deleted by the ld. CIT(A) and the revenue did not prefer any further appeal.
Steamer freight of Rs. 25,91,443/- has been paid to NORASIA Container Lines Ltd, which is a foreign shipping company to which section 172 of the Act applies and, therefore, there was no liability to deduct tax at source.
In so far as commission and hotel accommodation charges are concerned, the assessee did not claim this as expenditure and, therefore, there is no question of any disallowance.
Job work charges were incurred towards purchase of powder used for fire extinguisher and since it is a purchase item there is no liability for TDS.
Disallowance on clearing and forwarding charges of Rs. 7,65,850/- and bonus paid to farmer of Rs. 6,06,576/- are confirmed.
In so far as legal and professional charges of Rs. 9,91,621/– is concerned, the same is set aside to the file of the AO. The assessee is directed to furnish details and demonstrate that the recipients have shown the income in their respective returns of income and the AO is directed to verify the same and decide the issue afresh.
Similarly, expenses incurred for service charges, AMC etc amounting to Rs. 4,59,658/– is also set aside to the file of the Assessing Officer with similar directions. Rs. 84,758/– has been claimed as casting error. There is no liability of TDS on such accounting error. With the above observation Ground No. 13 with all sub- grounds is partly allowed.
Other grounds relates to charging of interest under section 234A, 234B and 234D of the Act. Since there is no delay in filing of returns, there cannot be any levy of interest for delay in filing of returns. Advance tax has to be considered on the basis of returned income and the Assessing Officer has to verify whether there was any deferment of advance tax on the returned income and decide the charging of interest afresh after affording reasonable and sufficient opportunity of being heard to the assessee.
In the result appeal of the assessee in ITS 6221/DEL/12 is partly allowed. [Assessment Year 2009-10]
The assessee has raised the following grounds of appeals:
“1. That the search conducted under Section 132 is illegal, bad in law and without jurisdiction and the assessment made U/s 153A is also bad in law and without jurisdiction.
That the notice under section 153A is illegal, bad in law and without jurisdiction and the order passed U/s 153A is also illegal, bad in law and without jurisdiction.
That the impugned assessment order passed under section 153A is illegal, bad in law and barred by time limitation.
That reference to special audit under section 142(2A) is illegal and bad in law and the report submitted by the special auditor is illegal, bad in law and without jurisdiction.
5 That the special auditor has erred on facts and in law in scrutinizing and auditing those issues which are not part of the terms of reference and has exceeded his jurisdiction in making observations about those issues in the audit report submitted.
6. That in view of the facts and circumstances of the case and in law the A.O. has erred in completing the assessment U/s 153A/144C at Rs. 29,02,72,968/-/- as against returned income of Rs. 10,65,10,920/- (after disallowing deduction under chapter VIA). The additions made are unjust, unlawful, bad in law, without jurisdiction and are also highly excessive.
That in the absence of any incriminating material found during search, the additions made by the AO while completing assessment U/s 153A rws 143(3) are unjust, arbitrary, and bad in law and without jurisdiction.
8. That the reference made to the T P O. is illegal and bad in law and the order passed u/'s 92CA(3) is illegal bad in law and without jurisdiction.
8.1 That in view of the facts and circumstances of the case and in law the A.O. / T.P.O. has erred on facts and in law in making addition of Rs. 26,77,884/- (Rs.23,857/- + Rs 5,48,065/- + 21,05,962/-) on account of adjustment in international transactions carried out with associate enterprises in view of order u/s 92CA(3) of the Transfer Pricing Officer I (3) and DRP has erred in not deleting the said adjustment.
8.2 That the addition of Rs. 23,857/- on account of export of goods is illegal, bad in law, unjust and highly excessive.
8.3 That the addition of Rs. 5,48,065/- on account of arm’s length interest on loans to AE’s is illegal, bad in law, unjust and highly excessive.
8.4 That the addition of Rs. 21,05962/- on account of interest on account receivables from AE’s is illegal, bad in law, unjust and highly excessive.
8.5 That without prejudice and in the alternative the A.O. ' T. P. O. and subsequently D.R.P. has erred in law and on facts in not allowing/directing the deduction / adjustment to the arm’s length price of 5% range as the assessee has the right to exercise this option u/s 92C.
8.6 That without prejudice the interest on loans to AE’s already charged in the books of accounts has not been considered by the A.O. / T.P.O. and the same has not been reduced while making the addition / adjustment.
Disallowance of Deduction U/s 8016(11 A)
9. That in view of the facts and circumstances of the case and in law the A.O. has erred in holding that the assessee is not entitled to deduction under section 80IB( 11 A) of Rs. 12,34,19,871/-.
9.1 That in the absence of any incriminating material found during the search the A. O. has erred on facts and in law and has exceeded his jurisdiction in making addition / disallowance of deduction under section 80IB(11A).
9 2 That in view of the facts and circumstances of the case and in law the A.O. has erred in law and on facts in not following Ld. D.R.P. directions to verify the issue afresh.
Addition U/s 14A r/w Rule 8D
10. That in view of the facts and circumstances of the case and in law the A.O. has erred in making disallowance to the tune of Rs. 53,26,986/- u/s 14A read with Rule 8D. The disallowance made is unjust, unlawful and is also highly excessive.
Addition on account of personal expenses
11. That in view of the facts and circumstances of the case and in law the A.O. has erred in holding that an amount of Rs. 11,24,307/- (Rs. 5,73,775/- + 1,75,000/- + Rs. 1,95,948/- + Rs. 1,79,584/-) is in nature of personal expense.
11.1. That in view of the facts and circumstances of the case and in law the A.O. has erred in law and on facts in not following Ld. D.R.P. directions by not allowing the expenditure of Rs.
5,73,775 - on travel of the wives of the Directors.
Disallowance of Revenue Expenditure
12. That in view of the facts and circumstances of the case and in law the A.O./D.R.P. has erred in holding deferred revenue expenditure incurred during the year and claimed as revenue expenditure during the same assessment year as capital expenditure and in not allowing deduction of Rs. 1,96,66,651/- (Rs. 1,71,61,328/- + Rs. 25,05,323/-).
12.1. That in view of the facts and circumstances of the case the AO/D.R.P. has erred in not appreciating that the expenditure incurred of Rs. 1,71,61,328/- for acquiring a subsidiary was in order to facilitate the business and was an allowable business expense as the same is in the nature of business expense.
12.2. That in view of the facts and circumstances of the case the AO /D.R.P. has erred in not appreciating that Rs. 25,05,323/- paid to lucky house was to protect the business interest of the appellant and for facilitating me business as the same is in the nature of revenue expense.
12.3. That in view of the facts and circumstances of the case the D.R.P. has erred in holding that Rs 25,05,323/- paid to lucky house was to eliminate the competition.
12.4 That without prejudice and in alternative the AO/D.R.P. has erred in not allowing depreciation on Rs. 1,96,66,651/- (Rs.
1,71.61,328/- + Rs. 25,05,323/) which is alleged to be expenditure of capital in nature.
Disallowance U/s 40a(ia) on Account of Non/Short Deduction of TPS
13. That in view of the facts and circumstances of the case and in law the A.O./DRP has erred in holding that the assessee has not deducted TDS or there is a shortfall in deduction of TDS while making payment to various concerns and further held that the same is to be disallowed under section 40a(ia) to the tune of Rs 3,15,46,346/- (Rs. 18.44,145/- + Rs. 2,97,02,201/-) and the addition of Rs. 3,15,46,346/- has been made.
13.1 That the DRP has in view of the facts and circumstances of the case has erred in law and on facts in holding that TDS was deductible from payment of room rent to the hotels and covered by the definition of rent for the purpose of deduction of TDS.
13.2 That the addition of Rs. 2.92,02,201/- on account of non deduction of TDS is illegal, bad in law, unjust and highly excessive.
14. That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do not justify the addition made.
15. That the addition/disallowance made is based on mere surmises and conjunctures and the same cannot be justified by any material on record.
That the interest u/s 234A. 234B, 234C and 234D has been wrongly and illegally charged as there is no delay in filling of return and there is no default of payment of Advance tax as the receipt / income is liable to TDS.
17. That all the above grounds are independent to each other and mutually exclusive.”
Ground Nos. 1, 2 and 3 are general in nature and need no separate adjudication.
Ground No. 4 relates to the T.P. adjustment of Rs. 64,48,052/- on account of adjustment in international transactions carried out with AEs.
The break-up of the TP adjustment is as under:
i) Rs. 9,23,713/- on account of export of goods; ii) Rs. 32,86,303/- on account of arm’s length interest on loan to AEs; and iii) Rs. 22,38,036/- on account of interest receivables from AEs.
The underlying facts in the impugned issue are that during the year, the assessee has exported rice to its AEs Kusha Inc and Nice International FZE aggregating to Rs. 17745.05 lakhs. The assessee has claimed the said international transactions to be at arm’s length by bench marking under both the methods i.e. CUP and TNMM as under:
AE/ Non-AE Brands OP/ Sales AE - Kusha (USA) Royal Brand 7.44% 7.39% OTHER BRAND AE - Nice ALL BRAND 20.05% Average 7.48% Non-AE All export 6.35% DOMESTIC RICE (ALL BRANDS) 7.72% Average 7.25% Brands OP/Sales Operating profit margin of appellant 11.86% OPERATING PROFIT MARGIN OF COMPARABLE COMPANIES 9.85%
We have carefully perused the facts and found that the facts are pari materia same as are considered in for Assessment Year 2008-09. For our detailed discussion therein, Ground No. 4 with sub-grounds is allowed and the Assessing Officer is directed to delete the impugned addition aggregating to Rs. 64,48,052/-.
Ground No. 5 relates to denial of deduction u/s 80IB(11A) of the Act amounting to Rs. 2,15,30,363/-.
Similar issue has been decided by us in for Assessment Year 2008-09 qua Ground No. 9 with sub-grounds. For our detailed discussion therein, the Assessing Officer is directed to allow the claim of deduction u/s 80IB(11A) of the Act. Ground No. 5 with sub-grounds is allowed.
Ground No. 6 relates to disallowance made u/s 14A r.w.r 8D of the Rules.
The underlying facts in this issue are that during the year under consideration, the assessee has received income aggregating to Rs. 4,60,06,679/- in respect of which exemption was claimed u/s 10 of the Act. The said income comprises of :
i) Share of profit in partnership firm M/s Raghunath Agro Industries, Amritsar -Rs. 1,22,40,470/- ii) Dividend income from shares of listed companies - Rs. 3,37,66,209/-
The assessee suo moto disallowed Rs. 1,00,52,604/- u/s 14A r.w.r. 8D. Disallowance has been computed by the assessee as under:
S. No. Particulars Amount - Direct expenditure 1 Rs.91,27,768 Interest expenditure incurred during the year attributed in the ratio of average value of investments resulting in exempt income to 2 average value of total assets [35,03,43,431 * 18,49,67,190/ 7,09,94,39,881] Rs.9,24,836 3 'A % of average value of investments [0.5% * 18,49,67,190] Total Rs.1,00,52,694
Computation of disallowance did not find any favour with the Assessing Officer who proceeded by computing the disallowance as under:
S. No. Particulars Amount - Direct expenditure 1 Rs.2,51,21,682 Interest expenditure incurred during the year attributed in the ratio of average value of investments resulting in exempt income to 2 average value of total assets [43,55,97,066 * 40,94,37,717/ 7,09,94,39,881] Rs.20,47,189 3 A % of average value of investments [0.5% * 40,94,37,717] Total Rs.2,71,68,870 Less: Suo-motu disallowance made by appellant Rs.1,00,52,694 Disallowance u/s 14A Rs.1,71,16,266
Disallowance made by the Assessing Officer was upheld by the DRP.
Before us, the ld. counsel for the assessee stated that in so far as exempt income being share of profit from Raghunath Agro Industries is concerned, the same has been considered in earlier Assessment Years also and no disallowance should be made in so far as this exempt income is concerned.
In respect of other exempt income, it is the say of the ld. counsel for the assessee that the Assessing Officer/DRP grossly erred in attributing interest expenditure when the assessee has sufficient own funds to make investment and placed strong reliance on the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd 313 ITR 340.
Per contra, the ld. DR strongly supported the orders of the Assessing Officer.
We have given thoughtful consideration to the orders of the authorities below. We have also perused the disallowance made by the Assessing Officer mentioned elsewhere. In so far as exempt income relating to share of profit from Raghuram Agro Industries is concerned, the same was also considered by us in for Assessment Year 2008-09 vide Ground No. 10 of that appeal. For our detailed discussion therein, no disallowance needs to be made in so far as share of profit from partnership firm is concerned.
In so far as exempt income is concerned, we find that the assessee has sufficient own funds to make investment and, therefore, the ratio laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd [supra] squarely applies. Therefore, attribution of interest expenditure of Rs. 2,51,2,682/- is uncalled for and the same is directed to be deleted.
In so far as half % of average value of investment is concerned, since the assessee has suo moto disallowed Rs. 1,00,52,694/-, further disallowance is not necessary and the Assessing Officer is directed to delete the disallowance of Rs. 20,47,187/-. Ground No. 6 is, accordingly, allowed.
Ground Nos. 7 and 8 are not pressed. The same are dismissed as not pressed.
Ground No. 9 relates to disallowance made u/s 40A(ia) of the Act.
The underlying facts in this issue are that the Assessing Officer disallowed a sum of Rs. 2,58,94,143/- on account of non deduction of TDS and Rs. 7,26,890/- on account of short deduction of TDS.
The break-up of the disallowance made by the Assessing Officer can be understood from the following chart:
Sl. Nature of As per AO Remarks No. payment Freight charges Reimbursement of freight Charges of paddy paid by 1 Rs.1,66,40,816 party on behalf of assessee - Amount either paid is paid on purchase below taxable limit. of Paddy & Rs.9,58,753 Only reimbursement of labour charges to Aarthiyas. TDS 2 Labour Charges provisions are not applicable
No expenditure is booked in our books, payment made on behalf of third party. Accordingly there is no liabilty 3 Steamer Freight Rs.31,95,770 to deduct tax at source and also the provisions of section 40(a)(ia) are not applicable in the case. 4 Commission Rs.42,153 TDS was duly deducted. Ledger a/c filed before AO/DRP Brokerage paid on behalf of suppliers. No expenditure for the same is booked in books of account. Accordingly there 5 Brokerage Rs.23,30,401 is no liabilty to deduct tax at source and also the provisions of section 40(a)(ia) are not applicable in the case. Overwriting TDS was duly deducted at the time of making provisions. 6 Rs.5,01,316 Commission Ledger a/c filed before AO/DRP Inland Haulage & Rail Freight charges paid on which no TDS is applicable 7 BL Charges Rs.4,80,326 U/S 194C. Amount Paid to agent of Foreign Shipping Co. - Section 8 Detention Charges Rs.4,66,656 172 applicable - 9 Job work Charges Rs.1,72,500 Other Expenses - Antenna installation, Annual report 10 Rs.5,61,165 - posting and handling charges, BAAN Support Fee, Courier Rs.75,254 - 11 Marriage event Rs.4,63,232 - 12 services Interest on security - 13 Rs.5,805 deposit Total Rs.2,58,94,147
In so far as items at Sl. No. 1 to 9 are concerned, similar issue was considered by us in Assessment Year 2008-09 vide Ground No. 13 with sub grounds of that appeal. For our detailed discussion therein, we follow the findings given therein.
Expenditure considered in Item Nos. 10 and 11 are set aside to the file of the Assessing Officer. The Assessing Officer is directed to demonstrate that the recipients have show income in their respective return of incomes and the Assessing Officer is directed to examine the same and decide the issue afresh. Disallowance of Rs. 4,63,232/- on marriage event services and interest on security deposit of Rs. 5,805/- are sustained.
Ground Nos. 10 and 11 are general in nature and need no separate adjudication.
Ground No. 12 relates to levy of interest.
Levy of interest is consequential and the Assessing Officer is directed to decide the same keeping in mind that the interest on delay in filing return of income is to be levied only when there is a delay and interest on default of payment of advance tax is on the basis of returned income.
As a result, the appeal of the assessee is partly allowed.
To sum up, both the appeals of the assessee in and 6222/DEL/2012 are partly allowed.
The order is pronounced in the open court on 11.04.2022 in the presence of both the rival representatives.