TURBO ENERGY PVT. LTD.,CHENNAI vs. DCIT, LTU(APPEAL)-1, CHENNAI

In respect of the disallowance made U/s.80IC for the assessment years 2011-12 to 2014-15, the ld.AR submitted that the assessee claimed deduction U/s.80IC, in respect of its unit engaged in the business of turbo charger assembly and core assembly at Rudrapur, Uttarakhand for these assessment years. The 80IC unit at Rudrapur has been carrying on Production/manufacture of turbochargers and parts thereof. The raw material (components) as input under goes various operations and finally emerged as a turbocharger. The turbochargers and parts of turbochargers sold as a final product from the 80IC unit is totally different from the input components and is distinct object by itself with different structure. The entire process of production/manufacture in the 80IC unit segment falls within the definition of Section 2(29BA) of Income Tax Act. During January 2015, the 80IC unit received a notice elated 09/01/2015 from the Income Tax Officer, Rudrapur calling for production of books of accounts, records and his intention to visit our 80IC facility as directed by DCIT, Large Tax Payer unit, Chennai calling for certain information u/s,133 of the Income Tax Act. The Income Tax Officer inspected the premises on 23/01/2015 along with his team and all details called for were furnished during their visit. The ITO also checked the manufacturing activities carried out by the unit in its shop floor -193 & 310 - 313/Chny/2018 - 4 - including assembly of turbochargers of one particular model. Also stock held for despatches to OE market and to after sales market customer of the similar product with different pricing was checked. However the findings of the ITO Rudrapur were not made available to the assessee. Meanwhile, the AO issued a show cause notice dated 24.3.2015 to the assessee quoting an audit observation by the Excise department on the issue exemption a few of the products manufactured and cleared from the said unit and proposed to apply the rationale for the entire products manufactured and sold from the said unit. The assessee vide letter dated 28.3.2015 objected to the stand taken by the AO on the two grounds VIZ a) Whether an article is manufactured or not is to be examined based on the definition of manufacture as provided under Income Tax Act and not under Excise regulations, and b) Merely because a few of the items are considered as not undergone manufacturing operations under the provisions of Excise regulations, same cannot be extended to all the products manufactured over looking facts of the case.

-193 & 310 - 313/Chny/2018 - 5 - The AO however disallowed the assessee’s entire claim of deductions by treating the factory established at Rudrapur did not carry out any manufacturing and hence not entitled to deduction u/s 80IC for the assessment years 2011-12 to 2014-15.

3.1 The ld.AR submitted that the ld.CIT(A) erred in confirming the disallowance U/s.80IC in respect of its unit engaged in the business of production and manufacturing of turbo charging assembly at Rudrapur, Uttarakhand, without appreciating the fact that the assessee’s factory is set-up at Rudrapur is engaged in the business of manufacture as contained in section 2(29)(BA) of the Act and therefore, the assessee is eligible for deduction U/s.80IC. The ld.AR submitted that in respect of few components, the Excise Department considered the process involved is not amounting to manufacture under Excise Regulation and not the entire products manufactured from the unit, relying on the decision of the CIT vs. M/s. Faith Biotech Pvt. Ltd., [2015] 54 taxman.com 212 (Delhi). The Assessing Officer arrived the decision based on merely observations made by the Central Excise Department, which was confirmed by the ld.CIT(A). Therefore, the ld.AR pleaded that the appeal be allowed. -193 & 310 - 313/Chny/2018 - 6 - 3.2 Since, the ld.AR submitted that the report dated 28.01.2015 submitted by the Income Tax Officer –I(4), Rudrapur was not furnished to the assessee, we required the Revenue to place it on record. The Revenue placed them. The relevant portion of the order is extracted as under:- “2. In this connection it is submitted that the spot enquiries has been made in this case and found that M/s.Turbo Energy Ltd is located at Khasra No.403/1, Village- Shimla Pistaur, Kichha Road, Post- Lalpur, Distt.U.S.Nagar which is a notified area by the Central Govemment. The assessee is engaged in manufacturing of Turbo Chargers and Core Assembly. Raw material in the form of parts of Turbo charger and core assembly is purchased by head office at Cher.nai and transferred to this plant(Purchase register enclosed). . These parts are assembled as per the process chart (Annexure E) to manufacturing Turbo Charger and Core Assembly. These finished products are then sold to customers as enclosed as Annexure-D. The bills of plant and machinery have been verified at the site.

3. The required information is being submitted as under for necessary action at your end: i. The invoices of plant and machinery as Annexure – A ii. List of employees as Annexure – B iii. Details of raw material acquired by the company along with list of vendors as Annexure – C iv. List of parties to whom the finished product as Annexure – D v. Detail chart of manufacturing activities carried out by the company as Annexure – E vi. The accounts of the company at Rudrapur along with Form 10CCB is provided by the company which is enclosed as Annexure – F vii. Copy of lease agreement along with copy of notification of Govt. of India is enclosed as Annexure – G.”

-193 & 310 - 313/Chny/2018 - 7 - 3.3 The ld.DR inviting our attention to the order of the assessment submitted that the Rudrapur unit has conducted certain non- manufacturing activities as mentioned in the assessment order. Further, inviting our attention to the financials in the annexures placed in the Remand Report, he supported the AO’s order that more than 50% of the sales at Rudrapur is sold without subjecting manufacturing activity (parts of turbocharger) and even the core assembly and turbo charger that are sold from Rudrapur unit have been subjected to manufacturing activity at other units other than Rudrapur and has been subjected to naming and making plate (which is evident from the huge material cost at other units compared to Rudrapur Unit). So, the ld.DR submitted that there is no manufacturing activity at Rudrapur. More than 25 components from Chennai unit were assembled at Rudrapur. Further, the AO has recorded a finding that the profits in the Rudrapur unit were inflated by adopting a colourable device. All these findings were confirmed by the ld.CIT(A) and hence he supported the orders of the lower authorities.

3.4 We heard the rival submissions and gone through the above material. The assessee admits that more than 25 components manufactured at Chennai were sold to the Rudrapur unit, which was -193 & 310 - 313/Chny/2018 - 8 - used for the manufacture of turbo chargers at Rudrapur. The assessee also submitted inviting our attention to the statement showing sales of 80IC unit at Rudrapur unit for the impugned assessment years, that the percentage of traded items viz., overhaul kit / secondary kit and core assembly are so minuscule with reference to manufactured items viz., core assemblies, turbo chargers. From the above facts, it is clear that the lower authorities have not properly examined the issues viz., whether the product sold at Rudrapur were subjected to manufacturing activity or not, independent of the audit report from the Central Excise. Therefore, we deem it fit to remit all these issues back to the AO for a fresh examination for the impugned assessment years. The assessee shall lay all materials in support of its contention before the Assessing Officer and comply with the requirements of the Assessing Officer in accordance with law. The AO shall also furnish the copy of Remand Report and its annexures to the assessee and consider the assessee’s submissions on them and on due examination, shall pass appropriate orders for the impugned assessment years, in accordance with law.

4.1 The ld.AR submitted that the assessee made investments out of capital and reserves, representing interest free funds and not out of borrowed funds. The exempted income was earned out of the investments made long before. The ld.AR submitted that the ld.CIT(A) ought to have directed that disallowance U/s.14A should be worked out only in respect of the investments in which tax exempt income -193 & 310 - 313/Chny/2018 - 10 - have been earned. Per contra, the ld.DR supported the orders of the lower authorities.

4.2 We heard the rival submissions. Considering the assessee’s above plea, we deem it fit to remit this issue back to the AO for a fresh examination. The assessee shall lay all materials in support of its contention before the Assessing Officer and comply with the requirements of the Assessing Officer in accordance with law. The Assessing Officer is also free to conduct appropriate enquiry as deemed fit, however, he shall furnish due opportunity to the assessee on the materials etc., to be used against the assessee and on due consideration of the assessee’s clarification / explanation shall pass the order in accordance with law.

5.1 Aggrieved, the ld.AR submitted that the ld.CIT(A) without applying to the facts and circumstances upheld the disallowance based on earlier year order.

5.2 We heard the rival submissions. We find that this issue has not been examined with reference to the facts and circumstances, while the assessee pleads that the impugned asset is air circulator and it is a plant & machinery, without any discussion on this issue, the assessee’s claim is considered as electrical installation. Therefore, we remit this issue back to the AO for a fresh examination and due decision.

A.Y.2012-13 : From the records of the A.Y.2012-13, it is seen that an amount of Rs.328.85 lakhs claimed was allowed in succeeding assessment year. The appellant fairly admitted that the disallowance made by the Assessing Officer is in order. Considering the above, this amount of Rs.328.85 lakhs disallowed by the Assessing Officer is confirmed. As regards the revenue expenditure claimed by the appellant to the tune of Rs.1762.65 lakhs, DSIR certified only an amount of Rs.1610.41 lakhs leaving an uncertified amount of Rs.156.86 lakhs (which includes an amount of Rs.4.62 lakhs towards leave salary provision for R&D employees considered separately under Issue No.11 of this order. Hence, the disallowance of Rs.152.24 lakhs made by the AO under this head is confirmed. The appellant fails on this ground for the A.Ys. 2011-12 & 2012-13.”

6.1 Aggrieved against the above orders, the ld.AR submitted that the ld.CIT(A) ought to have appreciated that the clerical mistake apparent from the approval letter in form no 3CL dated 21.03.2012 issued by DSIR. The petition dated 03.05.2012 filed by the appellant before DSIR is yet to be acted upon. Following the decision of -193 & 310 - 313/Chny/2018 - 13 - assessee’s own case in ITANo.351/2013 dated 03.05.2017, the claim of the appellant should be allowed.

6.2 Per contra, the ld.DR submitted that the deduction claimed by the assessee is a statutory deduction which can be allowed by the AO only to the extent it is approved by the prescribed authority U/s.35(2AB). The AO has allowed the claim to the extent the prescribed authority, the DSIR allowed. Therefore, he pleaded that the orders of lower authorities be confirmed.

6.3 We heard the rival submissions and find merit in the submissions made by the ld.DR and hence, the corresponding grounds of the assessee fail.

7.1 Aggrieved the ld.AR submitted that following the ITAT order No.351/Mds/2013 dated 03.05.2017, the depreciation at the rate of 60% may be allowed.

7.2 We heard the rival submissions and gone through the above submissions. Since, the lower authorities have not recorded as to where and how the impugned UPS was claimed to have been used and has not recorded any finding as to how the claim was different from the impugned ITAT order relied on by the assessee, we deem it fit to remit this issue back for a fresh examination and pass due order, in accordance with law, after affording opportunity to the assessee.

8.1 We heard the rival submissions. Since, the ld.CIT(A) followed the Hon’ble Apex Court’s decision and allowed the alternate claim, we do not find any reason to interfere with his order. The corresponding ground of the assessee is dismissed.

Revenue’s Appeals: 9. The assessee claimed the payments made for logistics to Sonima Logistics, Germany in the assessment years 2011-12 to 2014- 15. The AO disallowed them observing that these payments were -193 & 310 - 313/Chny/2018 - 16 - made to non-resident entity for rendering managerial services outside India without tax deduction at source. On appeal, the ld.CIT(A) applying the decision of this Tribunal in the assessee’s case allowed the assessee’s appeal. Aggrieved against that order, the Revenue filed appeals. The ld.DR argued the case on the lines of grounds of appeal. Per contra, the ld.AR supported the orders of the ld.CIT(A).

9.1 We heard the rival submissions. The relevant portion of the order of the CIT(A) is extracted as under:- “6.3 The appellant submitted that this issue was decided in favour of the appellant in its own case by the Hon'ble ITAT vide order in 204 & 205/2014 dated 03.05.2017, which is as follows:

Extracted from ITAT's order dated 03.05.2017 : 8.0 Ground No.7 of the AY 2007-08 is the disallowance u/s. 40(a)(i) in respect of payment made to Sonima Logistics, Germany without deduction of tax at source. This issue is involved for the A.Ys 2007- 08, 2008-09 and A.Y 2009-10. The AO found that the assessee has paid commission for the AYs 2007-08 to 2009-10 as under:

• AY 2007-08 - Rs.5,19,93,634/- • AY 2008-09 - Rs.6,75,34,886/- • AY 2009-10 - Rs.5,32,06,4301-

The payment was made to Sonima Logistics, Germany for rendering the following services outside India. a) Import customs clearance including liaison with appropriate agencies -193 & 310 - 313/Chny/2018 - 17 - b) Transporting the custom cleared containers to warehouse and unloading containers. c) Unpacking cases/cartons and transferring contents to pallets. d) Delivering components to supplier as per schedule. e) After delivery acknowledgements from supplier to be forwarded to Turbo Energy Ltd f) To maintain running account of pallets received from supplier and delivered back to them and reconcile these figures on monthly basis. g) To provided in all pallets delivered to supplier, details of part number, quantity and the related master consignment reference h) To send stock status report to Turbo Energy Limited on weekly basis."

8.1 The AO held that the payments were made for managerial services and taxable u/s. 9(1)(vii) of IT Act. Since the assessee failed to deduct the tax at source u/s.195 of the IT Act, disallowed the payments u/s.40(a)(i) of IT Act. The Ld.CIT(A) deleted the addition finding that the services rendered by non-resident do not fall under managerial or technical services within the meaning of IT Act and the services are rendered outside India and non-resident party has no permanent establishment or business connection in India. Accordingly, relying on the decision of the Hon'ble Apex Court in G.E. Technological Centre Pvt. Ltd., the Ld.CIT(A) allowed the appeal of the assessee. During the appeal, the Ld.AR argued that the services were rendered by the non-resident are liasoning services but not the managerial and technical services. Further, argued that even if the services rendered outside India are to be taxable, it is taxable as business profits in which case, only the profits required to be brought to tax it there is a permanent establishment or business connection in India. Since the assessee has no permanent establishment, the application of Sec.9(1)(vii) and Sec.195 has no application. The assessee also relied on the following decisions:  Brakes India Ltd. V. DCIT (LTU) (266/Mds/2012) (Chennai)  Sun Micro Systems India (P) Ltd (125 ITD 196) (Bang)  G.E. Technology Centre Pvt. Ltd., Vs. CIT (327 ITR 456)

-193 & 310 - 313/Chny/2018 - 18 -

8.2 We heard the rival submissions and perused the material placed on record.

The assessee has produced the copy of the agreement before the Ld.CIT(A). The Ld.CIT(A) examined the Explanation of the assessee and the document placed before the CIT and concluded that the services rendered by the non-resident do not fall under the category of technical or managerial services. Ld.CIT(A) further stated that the services are rendered outside India and there is no permanent establishment or business connection to the non-resident in India. This fact has not been disputed by the Revenue. The profits of the services rendered outside India cannot be taxed in India unless the non-resident has permanent establishment/or business connection in India as envisaged in Sec.9(1) of IT Act. The Ld.CIT(A) deleted the addition relying on the decision of the Hon'ble Apex Court in the case of GE Technological Centre Pvt. Ltd. v. CIT 327 ITR 456. The findings and conclusions arrived in earlier ground in respect of payment made to M/s.Biggleswade Ltd., are squarely applicable to this ground also. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The Revenue's appeal on this issue for the A.Ys 2007-08, 2008·09 and A.Y 2009-10 are dismissed.

6.4 I have considered the findings of the AO and the written submissions made by the AR. Respectfully following the above decision of the Hon'ble ITAT, the AO is directed to delete the disallowance of payment to Logistic Services made u/s 40(a)(i) for the assessment years under consideration. The appellant succeeds on this ground.”

Since the ld.CIT(A) followed the order of this Tribunal, supra, we do not find any reason to interfere with the order of the ld.CIT(A). The corresponding grounds of the Revenue’s appeals are dismissed. -193 & 310 - 313/Chny/2018 - 19 -

10.1 We heard the rival submissions. The relevant portion of the order of the ld.CIT(A) is extracted as under: 13.2 On the other hand, the appellant submitted that this issue was decided in favour of the appellant in its own case by the Hon'ble ITAT vide order in dated 03.05.2017, which is as under: Extracted from ITAT's order dated 03.05.2017:

"6.3 We heard the rival submissions and perused the material placed on record. The Ld.DR argued that the forward contracts loss is a notional loss which is contingent in nature and not allowable to be set off against taxable income. The loss was only due to restatement of foreign -193 & 310 - 313/Chny/2018 - 20 - exchange which should be allowed only on actual happening of the event. Further, Ld.DR stated that the loss was booked without actual delivery of the commodity and hence the loss should be treated as speculative transaction as per Sec.43(5) of Income Tax Act. On the other hand, the Ld.AR argued that the loss is business loss and squarely covered by the following decisions: 1. Cotton Blossom (ITA No.2032/Mds/2011) (Chennai) 2. Wheels India Ltd. (Chennai) 3. CIT vs. Panchmahal Steel Ltd. (215 Taxman 140) (Guj HC) and also relied on the decision of CIT v. Woodward Governor of India Ltd. 312 ITR 254.

6.4 We heard both the parties and perused the material placed before us.

The assessee has entered into forward contract for hedging purposes against the underlying receivables (exports) and payables (imports) transactions in foreign currencies. As rightly explained by the assessee derivative products are intangible and are not capable of delivery or transfer. It was also explained that forex derivatives are not traded on security markets and therefore has no application of Sec.43(5) of IT Act. The assessee has entered into forward contracts for the purpose of its business and there was no dispute on this issue. As on the closing date, the foreign exchange was restated which resulted into loss and the assessee relied on the Hon'ble Apex Court judgment cited supra wherein it was held that the loss incurred on account of restatement of foreign exchange as on the Balance sheet date is a business loss. For ready reference, we reproduce the catch note of the cited judgment as under:

I. Section 37(1), read with section 145, of the Income-tax Act, 1961 - Business expenditure Allowability of - Assessment year 1998-99 Whether expression 'expenditure' as used in section 37 may, in circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from pocket of assessee - Held, yes - Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) - Held, yes - Whether accounting method followed by an assessee continuously for a given period of time -193 & 310 - 313/Chny/2018 - 21 - needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits - Held, yes - Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - Held, yes.

The Ld.CIT(A) allowed the assessee's appeal following the decision of the Hon'ble Apex Court cited supra. Therefore, we do not find any error in the order of the Ld.CIT(A) and the same is upheld. The Revenue's appeals on this issue for the A.Y.2007-08 and for the A.Y 2008-09 are dismissed."

13.3 I have considered the findings of the AO and the written submissions made by the AR. Respectfully following the above decision of the Hon'ble ITAT, the AO is directed to delete the disallowance of Rs.1,62,43,545/- for the assessment year under consideration i.e. A.Y. 2011-12. The appellant succeeds on this ground.

Since the ld.CIT(A) followed the order of this Tribunal, supra, we do not find any reason to interfere with the order of the ld.CIT(A). The corresponding grounds of the Revenue’s appeals are dismissed.

11.1 Aggrieved, the assessee filed appeal before the CIT(A). The ld.CIT(A) allowed the appeal relying on the Tribunal order in 204 & 205/Mds/2014 dated 03.05.2017 in the assessee’s case related to assessment year 2007-08. Aggrieved, the Revenue is an appeal.

11.2 The ld.DR submitted that the unit claiming deduction U/s.80IC was set up in 2009-10 at Rudrapur in Uttarkhand and commenced its production on 11.02.2010. Admittedly about 25 components manufactured in Chennai unit are assembled at this unit. The Assessing Officer has recorded a finding that the assessee has not furnished any proof in support of its claim that no sale in respect of BV 35 & BV 43 were made during the assessment year 2011-12 from the 80IC unit and the assessee is silent on the proposal to apportion the royalty payment to 10B unit. The ld.CIT(A) without considering the -193 & 310 - 313/Chny/2018 - 24 - facts and circumstances brought out in the assessment order, merely applied the Hon’ble Tribunal decision and hence the ld.DR supported the order of the Assessing Officer. Per contra, the ld.AR supported the order of the ld.CIT(A).

11.3 We heard the rival submissions and gone through the relevant material. From the above, it is clear that the ld.CIT(A) without discussing the issues with facts and figures and deciding the matter, simply followed this Tribunal decision, while the assessee established the unit claiming deduction U/s.80IC and this unit is receiving raw materials or components from the other units. Therefore, we deem it fit to remit this issue back to the AO for a fresh examination. The assessee shall lay all materials in support of its contention before the Assessing Officer and comply with the requirements of the Assessing Officer in accordance with law. The Assessing Officer is also free to conduct appropriate enquiry as deemed fit, however, he shall furnish due opportunity to the assessee on the materials etc., to be used against the assessee and on due consideration of the assessee’s clarification / explanation shall pass the order in accordance with law. The corresponding ground of the Revenue is treated as partly allowed for statistical purpose. -193 & 310 - 313/Chny/2018 - 25 -

12.1 The ld.DR presented the case on the lines of grounds of appeal. Per contra, the ld.AR supported the order of the ld.CIT(A).

12.2 We heard the rival submission. The para 6.22 of the ITAT decision in ACIT vs. Vireet Investments Pvt. Ltd., is extracted as under:- “6.22 In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8d of the Income-tax Rules, 1962.” -193 & 310 - 313/Chny/2018 - 26 - From the above, it is clear that the Assessing Officer is not prohibited for making disallowance U/s.14A. However, the Special Bench held that the Assessing Officer can make disallowance without resorting to explanation to 14A r.w.r.8D. Therefore, this issue is remitted back to the Assessing Officer for making appropriate disallowance U/s.14A U/s.115JB. The corresponding ground raised by the Revenue is treated as partly allowed.

Order pronounced in the Court on 21st November, 2019 in Chennai.