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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI G. PAVAN KUMAR
अपीलाथ� क� ओर से/Appellant by : Shri Durgesh Sumrott, CIT ��यथ� क� ओर से/Respondent by : Shri Philip George, Advocate सुनवाईक�तारीख/Date of Hearing : 07.09.2016 घोषणाक�तारीख/Date of Pronouncement : 16.11.2016 आदेश आदेश /O R D E R आदेश आदेश PER G. PAVAN KUMAR, JUDICIAL MEMBER: The Revenue has filed appeals against the orders of CIT(A) passed u/s. 143(3) and 250 of the Income Tax Act for the assessment year 2009-10 and 2010- 11. Since, the issues are common in both the appeals and are disposed of by a common order and for the purpose of convenience we take up the facts narrated in appeal for the assessment year 2010-11.
The revenue has raised the following grounds:
:-2-: & 1395/Mds/2015 2.1 The Ld. CIT(A) has erred in deleting the additions made by the AO on account of 80 IC deduction claimed for Rs. 13,47,23,642/-.
2.1.1. The relief was given by the CIT(A) on the following expenditure incurred by the 80-IC units.
Exchange difference : Rs. 74,79,886 Interest Expenditure : Rs. 86,32,290 Employee Cost : Rs. 4,08,01,026 Processing Charges : Rs. 8,38,10,440 Rs. 13,47,23,642 2.2 The Ld. CIT(A) ought to have considered that in the case of the assessee company the AO had shifted the exchange differences of Rs. 74,76,886/- from the non 80-IC units to the 80-IC units in proportion of the 80-IC units turnover to the total turnover and for the additional evidences produced before the CIT(A) regarding the sale in the domestic market by the 80-IC branches. Opportunity to the AO should have been given by calling for a remand report.
2.3 The Ld. CIT(A) failed to appreciate that interest on working capital loan and term loan is required to be allocated among the various 80-IC units and non 80-IC units based on the production in each unit and not on the basis of the inventory and the WDV of the fixed asset and the shifting of interest expenditure by the AO was based on the comparison of the net profit percentage of the non 80-IC unit with 80-IC unit.
2.4 The Ld. CIT(A) erred in deleting the addition of Rs. 4,08,01,026/- made by the AO on account of employee cost. The assessee submitted before
:-3-: & 1395/Mds/2015 the CIT(A) that only 455 employees including 330 contract labourers were working in the 80-IC unit. Whereas it has submitted before the AO that the 80-IC unit employed about 1200 employees. The Ld.CIT(A) should have allowed opportunity to the AO.
2.5 The AO had shifted processing charges of Rs. 8,38,10,440/- to 80-IC unit from non 80-IC unit. The Ld. CIT(A) allowed the assessee's contention that it arrived at the cost with the permission of Central Excise authorities even for branch transfer. The Ld. CIT(A) did not consider the fact that even though profit margin claimed by all non 80-IC units are 10%, there is significant variation in over heads claimed. The Ld. CIT(A) has not given opportunity to the AO for examining the additional evidences submitted by the assessee.
The Brief facts of the case are that the assessee is in the Business of manufacturing of Automobile spare parts and has production unit at Pant Nagar, Uttaranchal for manufacturing of chains and sprockets. The assessee company has filed Return of income on 08.10.2010 with total income of Rs. 2,12,46,980/- and the Return of income was processed u/s. 143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s. 143(2) of the Act was issued. In compliance to the notice, Ld. AR of the assessee appeared from time to time and filed documents in support of Return on income. The Ld. AO upon verification of assessment records found that the Uttaranchal Unit Supplies chains and sprockets to other units of the assessee and also to original equipment manufacturer in the automobile sector M/s.
:-4-: & 1395/Mds/2015 L G Balakrishnan & Bros Ltd. and claimed deduction u/s. 80-IC of the Act on the income of this unit Rs. 18,16,37,589/-. The Ld. AO found that the details of sales and expenditure claimed deduction u/s. 80-IC of the Act for Pant Nagar unit and non 80-IC units referred in Assessment Order requires more clarifications on comparison of profitability. The net profit percentage of non 80-IC unit is 3.47% which is comparatively lesser than 80-IC unit @ 20.52%. The Ld. Assessing Officer identified higher sales turnover in non 80-IC company in comparison to the 80-IC company unit and the expenses of consumption of material, employee cost, other expenses, interest, depreciation and amortization also varied on sales. The Assessing Officer in the assessment proceedings discussed on the various aspects on each expenses of 80-IC unit and the non 80-IC unit at page 2 to 7 of the order and shifted the expenditure to the non 80-IC unit as mentioned below and restricted deduction u/s. 80-IC of the Act:
(a) Discount Rs. 1,00,93,389/- (b) Foreign Exchange Difference Rs. 74,79,886/- (c) Interest on working capital Rs. 26,32,290/- (d) Salary Rs. 4,08,01,026/- (e) Processing Charges Rs. 8,38,10,440/- Total Rs. 14,48,20,031/- The Ld. AO allowed deduction u/s. 80-IC unit Rs. 4,12,17,558/- against original claim of Rs. 18,60,37,589/- by the assessee and also made disallowance u/s. 14A Rs. 79,16,134/- and passed the Assessment Order u/s. 143(3) of the Act dated 01.02.2013 assessing the total income of Rs. 17,39,89,150/-.
:-5-: & 1395/Mds/2015 4. Aggrieved by the order u/s. 143(3) of the Act the assessee filed an appeal with CIT(A). The Ld. AR of the assessee argued that the Assessing Officer has erred in shifting of expenditure from non 80-IC unit to 80-IC unit and Ld. CIT(A) has dealt on disputed issue independently being Discount of Rs. 1,00,96,389/- and foreign exchange loss fluctuation Rs. 74,79,886/- are transferred by the AO, whereas fluctuation loss was debited to the account of good exported and the interest on Working Capital of Rs. 26,32,290/- worked out due to the allocation of Term Loan Interest based on Fixed Assets and working capital utilisation. Similarly, the salaries of the employee cost Rs. 4,08,01,026/- and processing charges Rs. 8,38,10,440/- were transferred to 80-IC unit without any basis and unwarranted perceptions. The Ld. CIT(A) considered the findings of the Assessing Officer and submissions of the assessee on the each disputed transaction. The Ld. AR has submitted a chart with the exchange difference due to import of raw material. The Ld. CIT(A) on verifying the records found that the foreign exchange fluctuations loss debited to the account of 80-IC unit, and held at para 9 of page 7 of his order and deleted the addition:
"I had gone through the submission made by the appellant and the order of the Assessing Officer. As seen from record, the forex fluctuation loss was debited to the account of the unit which exported goods. The appellant furnished the details to show that the goods transferred from 80-IC unit to branches were not exported but sold domestically by such branches. The exchange differences arising out of import of raw materials in 80-IC unit was accounted in this unit itself. The Assessing Officer in his order has held that the entire forex fluctuation loss is claimed by non 80-IC unit for the export of the product manufactured not only by them but also for goods transferred to them by the 80-IV unit. The Assessing Officer was of the opinion that the goods manufactured by 80-IC unit were basically exported by the branches. The authorised representatives submitted that all the details were filed before the Assessing Officer stating that the goods manufactured from 80-ic unit were never exported but only sold in the domestic market. The appellant filed the :-6-: & 1395/Mds/2015 details on this issue. The forex loss/gain relating to various divisions have also been examined and from the details, it is clear that the Uttaranchal Division has accounted for the forex loss on account of raw material purchase since there was no export of manufactured items from this unit, the position of apportionment of foreign exchange expenditure does not arise. The Assessing Officer is directed to delete the addition of expenses shifted from the non 80-IC units to the 80-IC unit."
The Ld. CIT(A) on the disallowance of interest on term loan allocated on the basis of written down value of Fixed Assets and the working capital for production based on inventory value of each unit. Interest was allocated based on the actual transactions at the end of the previous year. The Ld. AR submitted chart of working capital and interest allocation referred at page 8 and 9 of the order and the Assessing Officer has not pointed out any defects on interest allocation with these observations directed the AO to delete the expenses.
The Ld. CIT(A) found that the Assessing Officer has shifted employee cost of Rs. 4,08,01,026/- of non 80-IC unit to 80-IC. The Ld. AR submitted that the details of employee cost and actual expenditure was ignored by the Assessing Officer and the claim of the employee cost is comparatively lesser than the value of turnover, and there are various factors for minimum expenses on employee cost of 80-IC unit being in a backward area, and also the employee cost in 80-IC unit has worked out to 3.91% as against the average of 10.16% and the Ld. CIT(A) relied on the chart and referred at page 11 of the order observed at para 11 and granted relief as under.
"I have gone through the submissions made by the appellant and the order of the Assessing Officer. The AR submitted that all the details in respect of employee cost have been filed before the Assessing Officer. The assessee
:-7-: & 1395/Mds/2015 was asked to submit the employee strength details for the Financial Year 2009-10 with respect to all the Divisions. As seen from these details the average employee strength per month with respect to contact labour was highest at Pant Nagar plant. Regarding, apprentice and trainees, the Pant Nagar plant had about 150 trainees and the confirmed employees were only 10 in number. The Chief Financial Officer (CFO) of the company submitted that the permanent employees number in the Pant Nagar plant was very less when compared to other manufacturing units since the contract labour strength was more at Pant Nagar plant, the cost of salary and wages was less at the Pant Nagar Unit. Regarding the trainees also there were 158 trainees at Mysore Plant, 235 at Pongalur Plant and 129 at Vaiyampalayam plant. The number of confirmed employees at other manufacturing unit was far more when compared to 10 confirmed employees at Pant Nagar plant. After examining the employee strength in the various units it becomes clear that the employee cost would be less at Pant Nagar unit because of the lower strength of confirmed employees. As seen from the information furnished, the appellant has booked the employee cost as per actual incurred by the plant. Hence, the Assessing Officer is not justified in shifting the expenditure on account of salaries from non 80-IC units to 80- IC units. "
The Ld. CIT(A) found that the Assessing Officer has shifted processing charges Rs. 8,38,10,440/- to 80-IC unit. The processing charges are based on the transfer pricing as per the cost accounting standard-4 (CAS-4) certified by the Cost Auditor. The Ld. AR submitted chart referred at page 13 of the order and submitted that the transfer price is the assessable value for calculation of excise duty liability on the plant transfer value and also submitted excise invoice copies and Cost Audit Certificate. The Ld. CIT with these submissions observed at page 14, para 13 :
" I have examined the samples of branch transfer excise invoice copies along with Cost Auditor's Certificate of CAS-4. The details consists of raw material cost, processing cost, with added costing of over-heads and profit margin of 10%. Since the appellant has to arrive at the cost with the permission of the Central Excise Authority even for branch transfer, the processing cost along with over-heads and margin of 10% thereby were included in the tax invoice of branch transfers. The Assessing Officer has not examined the details of processing charges and the cost break-up for :-8-: & 1395/Mds/2015 chain components while deciding that the processing charges claimed by the non-80IC units to be disallowed and added as expenditure in the 80-IC unit. While transferring the materials from non-80IC units to 80-IC units to 80-IC units pricing includes the processing charges, and other over-heads cost and profit margin of the non-80IC units. Hence the Assessing Officer is not correct in adding the processing charge as expenses to the 80-IC unit. In result this ground of appeal is allowed." and allowed the grounds of the assessee and partly allowed the appeal.
8. Aggrieved by the order, the Revenue has filed an appeal before the Tribunal Before us the Ld. DR argued the grounds on disallowance of shifting of expenditure from non-80IC unit to 80-IC unit and information was submitted in respect of Foreign Exchange difference, interest expenditure and employee cost processing charges by the assessee. The assessee has produced additional evidence in appellate proceeding and the CIT(A) has relied on such the interest expenditure which is based on the production fluctuation and the employee cost and also there is a difference in employee cost filed before the Assessing Officer and CIT(A). Further, the assessee has submitted the information on branch transfer based on central excise authorities and Ld. CIT(A) has accepted the additional evidence on expenditure without providing an opportunity to Assessing Officer for examining the additional evidence and prayed for set aside of order of CIT(A). Contra, Ld. AR of the assessee relied on the order of the CIT(A) and filed material information.
9. We heard the rival submissions, perused the material on record, the Ld. Dr is aggrieved that the CIT(A) has not given proper opportunity to verify evidence and overlooked the observations of the Assessing Officer and deleted additions in respect
:-9-: & 1395/Mds/2015 of 80-IC deduction. We found on Foreign Exchange difference, the assessee has submitted a detailed notes which was not referred in the assessment order.
Similarly, the Ld. AR produced working capital and interest allocation chart referred in CIT(A) order which was not available with the Assessing Officer at the time of assessment and in respect of employee cost, the statement was filed on average employee strength per month referred by CIT(A). The Assessing Officer has shifted the processing charges in respect of cost breakup chain components of Vaiyampalayam Plant, Annur Plant and Mysore Plant. The assessee has furnished the samples of branch transfer excise invoice copies and was accepted by the Ld. CIT(A). We found the CIT(A) has not called for Remand report or comments from the Assessing Officer in respect of submissions / evidence filed by the assessee. The Assessing Officer was prevented to verify the fresh material filed in the apparent proceedings having evidential value and such additional evidence are not produced in the assessment proceedings. The Assessing Officer was denied opportunity to verify such evidence and test check genuinity. Considering the apparent facts and material on record and provisions of law, we are of the opinion that the Assessing Officer should be provided with adequate opportunity to verify the information submitted in the appellant proceedings and examine genuiness of the evidence.
Therefore, we set aside the order of CIT(A) for limited purpose to the file of the Assessing Officer and Assessing Officer shall provide opportunity of hearing to the assessee before passing the order on merits and the ground of Revenue are allowed for statistical purpose.
:-10-: & 1395/Mds/2015 10. Similarly, ITA No. 139/Mds/2015 for the assessment year 2011-12 is also allowed for statistical purpose.
In the result, Revenue appeals are allowed for statistical purpose