CRAFTSMAN AUTOMATION PVT. LTD.,CHENNAI vs. JCIT, COIMBATORE

आदेश / O R D E R

PER MAHAVIR SINGH, VICE PRESIDENT:

2.1 The brief facts of the case are that the TPO while going through the accounts of the assessee noticed that it had an outstanding balance of interest free advance to its AEs namely Craftsman Automation Singapore Pte Ltd., and Craftsman Marine BV to the tune of Rs.43,29,000/- and Rs.7,64,34,000/- respectively. The AO applied average Libor + 200 bps and recomputed the upward adjustment by charging interest on Craftsman Automation Singapore Pte Ltd., at Rs.1,26,537/-, Craftsman Marine BV amounting to Rs.25,37,608/-. Therefore, he made upward adjustment of Rs.26,64,145/-. Aggrieved, the assessee moved to the DRP and the DRP also affirmed the action of the TPO/AO by observing in Para No.1.3.2 as under:

“1.3.2 The main question is whether the assessee could have extended such interest free loan to any unrelated party similar to that of its AE without charging interest. Because, when independent enterprises deal with each other, the conditions of their financial relations ordinarily are determined by market· forces. Allocation of interest income to the assessee on the extended payment terms made to its AE is necessary to reflect an arm's length transaction, since unrelated parties in similar circumstances would not extend/avail any interest free loan / advance”. 2.2 Aggrieved, now the assessee is in appeal before the Tribunal.

2.3 We have heard rival contentions and gone through the facts and circumstances of the case. Before us, the ld.Counsel for the assessee made argument in regard to commercial expediency in giving interest free advances and relied on the decision of the Hon’ble Supreme Court in the case of SA Builders 248 ITR 1. Alternatively, he stated that only Libor rate should be applied. On the other hand, the ld.CIT-DR Dr.S.Palanikumar relied on the order of the TPO and that of the DRP.

2.4 We noted that this issue is covered by the decision of the Hon’ble Bombay High Court in the case of CIT v. Everest Kanto Cylinder Ltd. (378 ITR 57) (Bombay HC), wherein, the Libor + 200 bps point is accepted at the bench mark and hence, respectfully following the same, we upheld the order of the AO/TPO. This issue of the assessee is dismissed.

3.1 We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has computed disallowance of expenses relatable to exempt income at Rs.4,79,972/- and according to the AO, which was not correct. We noted that the AO simpliciter given his findings that the disallowance computed by the assessee is not correct, but he has not examined the accounts of the assessee and disallowance made even though offered by the assessee. We noted that the AO could not find any fault as to how this disallowance is not correct.

According to us, there is no satisfaction recorded by the AO in regard to this disallowance and hence, there is no satisfaction recorded by the AO in terms of sec.14A of the Act. This issue of the assessee is allowed.

4.1 Brief facts of the case are that the assessee claimed deduction u/s.80JJAA of the Act amounting to Rs.2,86,13,977/-. The AO during the course of assessment proceedings noticed from Column No.8 of Audit Report and particularly in Form No.10DA filed by assessee as per Rule 19AB of the Rules, wherein, it was certified that the number of new regular workmen entitled for deduction was 702 and at Column No.11. The AO required the assessee as to whether any of the regular workmen as mentioned in Column No.7 was employed for a period of less than 300 days during the previous year. The assessee explained before the AO that 354 number of newly recruited employees during the year was employed for less than 300 days. The AO noted that it was a cascading effect from AY 2006-07 onwards and the assessee’s contention that new regular employees in respect of whom the claim was made on the basis that they have not completed 300 days in the preceding year and therefore, deduction in respect of such employees should be allowed in subsequent years during which they have completed 300 days. According to the AO, this was not as

per law, because the provisions of Sec.80JJAA of the Act, clearly specifies that the additional wages ought to be determined only for new regular workmen employed by the assessee in the previous year and the meaning of the provision cannot be extended and benefit cannot be given by stating that provision. The AO relying on the decision of the Tribunal in the assessee’s own case for the AY 2006-07 & 2007-08 in & 1358/Mds/2010, disallowed the claim of deduction made by the assessee amounting to Rs.2,86,13,977/-. Aggrieved, the assessee preferred his claim before the DRP.

4.2 The DRP simpliciter relying the decision of the Tribunal in the earlier years, dismissed the claim of the assessee. Aggrieved the assessee is in appeal before the Tribunal.

4.3 At the outset, the Ld.Counsel for the assessee stated that neither the AO nor the DRP has considered this issue independently and the ld.Counsel argued that the Hon’ble Madras High Court in the case of CIT v. Hi Tech Ara Ltd. reported in [2010] 321 ITR 477 (Madras) [01.09.2009], has categorically held that, once the incorrect decision of earlier years, cannot be followed and for this, the Ld.Counsel for the assessee referred to Para-3 of the Hon’ble Madras High Court, which reads as under:

“3. We are not in a position to appreciate either of the contentions of the learned counsel for the petitioner. As far as the first contention is concerned, when the Tribunal by the impugned order has applied section 32(1)(iia) of the Act, to the facts involved in the case of the assessee and has found that the assessee is entitled for the additional depreciation claimed under the said provision, it cannot be held that simply because a co-ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal on this occasion also ought to have followed the same. When we find that the Tribunal has applied the law correctly in the impugned order, there is no gainsaying that there was an earlier order by the co-ordinate Bench and therefore, for that reason, this time also the Tribunal should have blindly followed its own earlier decision even if such earlier decision did not reflect the correct position of the law”.

4.4 The Ld.Counsel for the assessee relied on the amendment brought by the Finance Act, 2018 w.e.f.01.04.2019 in the provisions of Sec.80JJAA of the Act, wherein, proviso was brought in the explanation after sub-section clause-2, is as under:

"Provided further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of Two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly;".

According to the Ld.Counsel for the assessee, this proviso is only explanatory and retrospective. He explained that the note on clauses to Finance Bill 2018 has explained the provision and reduced the period for which such employee is employed for 245 days or 150 days as the case may be. The relevant clause is explained as under:

“It is further proposed to provide that where a new employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly”. It was argued by the Ld.Counsel, in view of the above note on clause explaining the provisions, stating that it was proposed to rationalize this deduction of 30% by allowing the benefit for a new employee, who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period for subsequent year.

It was explained that although this amendment is effective from 01.04.2019 and will apply for the AY 2019-20 and subsequent years but it has retrospective operation. For this, the Ld.Counsel for the assessee relied on the decision of the Hon’ble Karnataka High Court in the case of CIT-LTU v.

Texas Instruments India (P.) Ltd., reported in 435 ITR 1 (Karnataka). This provision was explained by the Hon’ble Karnataka High Court and held that the amendment brought by the legislature w.e.f.01.04.2019 by the Finance Act, 2018 though claimed curative, the same is more explanatory amendment or a clarificatory amendment which clarifies the methodology of applying the provisions of Sec.80JJAA of the Act. According to the Ld.Counsel, the judgment of the Hon’ble Karnataka High Court in the case of Texas Instruments India (P.) Ltd. (supra), has clarified the position and the same interpretation has to be taken here, because the Revenue is unable to bring any adverse judgement on this issue.

4.5 On the other hand, the ld.CIT-DR, Dr.S.Palani Kumar, argued that the AO made disallowance of claim of deduction made by assessee u/s.80JJAA of the Act, on the reasoning that the assessee in Form 10DA, has made claim as certified by the C.A that 344 newly recruited employees, out of 425 employees employed during the year employed for less than 300 days. He narrated that the A.O observed in the assessment order that this issue had cascading effect from A.Y.2006-07 onwards. The A.O had computed the quantum of disallowance by analysing the decision of ITAT in assessee's own case. The ld.CIT-DR then drew our attention to the provisions of sec.80JJAA of the Act and argued that the provisions are very clear that regular new workman does not include a casual workman; or a work man employed through contract labour; or any other workman employed for a period of less than three hundred days during the previous year. The deduction is allowable for 3 assessment years including the assessment year relevant to the previous year, in which such employment is provided. The main thrust of this section is to provide employment in the country and that should be permanent in nature. The provision is unambiguous and clearly spelt that the regular work man should have been employed for a period of at least 300 days during the previous year. Previous year defined in section- 3 of Act means the financial year, immediately preceding the assessment year. In the present case, that financial year is 2010-11.

4.6 He further argued that this issue was covered against the assessee company by ITAT in & 1358 of 2010 dated 17.03.2014. This decision was pertaining to AY 2006-07 and 2007-08. In para-5, exactly identical fact has been upheld by ITAT. He argued that the assessee filed a paper book on 10.10.2022 wherein they have relied upon the decision of the Hon'ble High Court of Karnataka in the case of CIT-LTU v. Texas Instruments India (P.) Ltd., (2021) 127 taxmann.com 59. This decision had not laid down the correct position of law. He argued that serious mistakes noted from the decision of Hon'ble High Court of Karnataka are as under:-

(1) At paragraph 12 and 12.l of the decision, Hon'ble High Court heavily placed its reliance on the decision of ITAT, Bangalore in the case of Bosch Ltd v 4CIT., LTU, Bangalore reported in (2016)74 taxmann.com 161. It is held that the Ld. senior counsel appeared on behalf of Texas Instruments submitted that the Tribunal order is proper and correct and that not require any interference.

(2) Hon'ble High Court reproduced the decision of ITAT rendered in Bosch Ltd in paragraph 12.1.1. it is as under:

"22. In the present case, the AO held that sec.80JJAA was restricted to additional wages paid to employees who have worked for more than 300 days during the relevant period irrespective of whether they were employed on a permanent basis or otherwise. Accordingly, the AO ascertained the additional wages paid to those workers who had worked for less than 300 days of Rs.25,64,771/- and 30% of which worked out to Rs.7,69,431/- was disallowed by the AO. The claim of the assessee is this that if the worker is employed on permanent basis then only because in the present year, working days are less than 300 days because he was employed after 66 days from the start of the previous year then no deduction will be available under this section in respect of such workers appointed or employed after that date and therefore, this approach of the AO is not correct.

This decision is actually rendered in favour of Revenue, where the ITAT categorically held that if some work men were employed for a period less than 300 days in the previous year then no deduction is allowable in respect of payment of wage to such work men. Having relied upon the decision of Bosch Ltd, the Hon'ble High Court ought to have upheld the disallowance made on this issue in the case of M/s Texas Instruments (India) Pvt Ltd also. The Senior Standing Counsel appeared for Revenue had clearly argued the same fact and that was discussed in paragraph 16. 7 of the decision. At paragraph 16.11 of the decision, the Hon'ble High Court committed another serious mistake wherein it was held that -

The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Ltd. (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entitled to the benefit of Section 80JJ-AA in the next assessment year and so on so forthwith for a period of three years. The Income-tax Appellate Tribunal, having held to that effect, in our considered opinion, it would not be open for the Revenue to now contend otherwise, more so since the said order has attained finality on account of the Revenue not having filed an appeal"

The decision in the case of Bosch Ltd by Hon'ble ITAT was in favour of Revenue. The IT AT had never held that even if the period is split into 2 blocks, i.e. the assessment year or the financial year, the appellant would be entitled to the benefit of section 80JJAA. The law laid down by Bosch Ltd was not correctly interpreted by Hon'ble High Court. It is submitted that this issue attained finality in favour of Revenue and not in favour of the appellant as the appellant did not file any further appeal. However, the High Court held that this issue attained finality on account of Revenue not filed further appeal. He made following points:

4.1. Per incuriam: In view of the above, the decision of Hon'ble High Court rendered in the case of Texas Instruments India Pvt. Ltd (2021) 435 ITR 1 (Kar) is per incuriam.

4.2. Bosch Ltd has to be followed: As the decision of Hon'ble High Court is per incuriam, it is prayed that, that decision cannot be followed. Rather, decision in the case of Bosch Ltd v. ACIT reported in Bosch Ltd v ACIT, LTU, Bangalore reported in (2016)74 taxmann.com 161 may kindly be followed as it had attained finality without any further appeal. It is placed at P.No.1-18 of the paper book.

4.2. Further appeal: The decision of Hon'ble High Court has not been accepted by the Revenue and further appeal was filed before the Hon'ble Supreme Court. The SLP is admitted and it is reported in Commissioner of Income-tax Vs. Texas Instruments India (P.) Ltd. [2022] 138 taxmann.com 18 (SC). It is placed at P.No.19-20 of the paper book. The appeal was exactly on the same set of facts.

4.7 This section undergone various amendments year after year. As the relevant assessment year is A.Y. 2011-12, the analysis of section 80JJAA and the amendments in various Finance Act is placed at Page.No.21-22 of the paper book. The copies of section 80JJAA as per IT Act from A Y 2011- 12 to 2020-21 is placed at P.No.23-38 of the paper book. The law remained same up to A Y 2013-14. It has evolved over the period of time as under;

► Finance Act 2013 explained that it was applicable only to manufacturing sector and excluded explicitly service industries. The definition to Factory was brought into the statute as per Factories Act. ► Up to A Y 2016-17 it had continued with same set of facts. ► In Finance Act 2016, entire section was substituted. It was categorically held that emoluments cannot exceed Rs.25000/- per month. It was also amended that duration of employment was reduced into 240 days. The benefits were extended to all the industries. If it is for manufacturing apparels, the number of days of employment were reduced to 150 days. ► In Finance Act 2018, along with apparel industry, the benefit of reduced number of employments was extended to leather industries also. This amendment was w.e.f.1-4-2019. The relevant amendment relied upon by Hon'ble High Court is pertaining to A.Y. 2019-20 that was introduced in Finance Act, 2018, with effect from 1.4.2019.

4.8 Another argument made by the ld.CIT-DR, Dr.S.Palani Kumar, that it is impossible to perform as decided by the Hon’ble High Court and on account of the above set of facts, the said amendment cannot be applied to the A.Y 2011-12. The decision of Hon'ble High court was on account of incorrect assumption of law and facts. An amendment brought into the statute in Finance Act 2018, that too with effect from 1.4.2019 can never be applicable to the A.Y.2011-12. The context of that amendment was not interpreted correctly. He narrated as under:-

5.2 Incorrect interpretation of law given by Hon'ble High Court;

Hon'ble High Court had reproduced the amendment at Para-14 of its decision. The second proviso to explanation given in Finance Act 2018 is as under;

“Following second proviso shall be inserted after the existing proviso to clause (ii) of Explanation to section 80JJAA by the Finance Act, 2018, w.e.f. 1-4-2019:

Provided further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding ear and the provisions of this section shall apply accordingly;"

► It is very clear that if the employee is employed during the previous year for a period of less than 240 days or 150 days as the case may be, and if he is employed for a period of 240 days or 150 days in the immediately succeeding year, then he shall be deemed to have been employed in the succeeding year and the provision of this section shall apply accordingly. ► The law never said that the deduction can be claimed in the previous year if he is employed for less than 240 days or 150 days as the case may be.

4.9 In view of the above arguments, Dr.S.Palani Kumar, CIT-DR, concluded as under:

I. The AO had rightly applied the law for AY 2011-12 as per the statute. II. The Hon'ble ITAT, Chennai in appellant's own case rightly decided the issue in favour of revenue. III. The decision of Hon'ble High Court of Karnataka in the case of Texas Instruments India (P.) Ltd., is Per incuriam. IV. Section 80 JJAA of the IT Act from A Y 2011-12 to 2020-21 is never ever said that the number of employments can be split into two different years.

Order pronounced on the 21st day of December, 2022, in Chennai.