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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
Out of three appeals – two by the assessee and one by Revenue are against the common order of Commissioner of Income Tax (Appeals)-XI, Kolkata vide Appeal No. 173/CIT(A)-XI/Cir-11/05-06 and 250/CIT(A)-XI/R-11/06-07 dated 09.01.2008. Assessment was framed by Addl. CIT, Range-11, Kolkata u/s 154/143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his separate order dated 20.02.2007 and 28.02.2006 respectively for assessment year 2003-04.
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 2 Shri Soumen Adak, Ld. Authorized Representative appeared on behalf of assessee and Shri G Mallikarjuna, Ld. Departmental Representative appeared on behalf of Revenue. 2. All the appeals are heard together and deem it appropriate to dispose all of them by this common order. At the very outset, we observe a delay of just one day in the filing of its appeal by Revenue, which though stands suitably explained as per accompanying affidavit by the concerned official of the Revenue. The appeal was accordingly admitted, and the hearing proceeded with.
First we take up assessee’s appeal in ITA 305/Kol/2008. 3. The assessee has raised the following grounds of appeal :- “1(a) That on the facts and in the circumstances of the case, Ld. CIT(Appeals) was not justified and erred in holding that tax or levy is snot be included in the computation of “Transfer Price” of power for computation of deduction u/s 80- IA in respect of power generating unit.
1(b)That on the facts and in the circumstances of the case, Ld. CIT(Appeals)failed to appreciate the fact that the “Transfer Price” of power adopted by the appellant for computation of deduction u/s. 80-IA in respect of power generating unit was in accordance with the provisions of section 80- IA(8) of the Income Tax Act, 1961.
2(a) That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in allocating common expenditure to the tune of Rs.1,52,86,622/- to the power undertaking without appreciating the fact that the said expenditure are not related to power units.
2(b) That on the facts and n the circumstances of the case, the Ld. CIT(Appeals) should have appreciated the fact that expenditure not directly related to the power undertaking should not be deducted in computing the profits earned by the said industrial undertaking for the purpose of computing deduction u/s. 80IA of the Act.
That on the facts and in relation to the circumstances of the case, the Ld. CIT(Appeals) erred in holding that eligible profits for the purpose of section 80HHC has to be computed after adjusting the profit from generation of Powe4r eligible for deduction u/s 80IA of the Act, without appreciating the fact that section 80HHC, being a self-contained code, quantification of deduction has to be arrived at on the basis of artificial formula as provided in the said section.
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 3 4(a) That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was wholly unjustified in holding that 90% of interest received (Rs.29,58,000/-) is to be reduced from the ‘Profits and Gains of Business and Profession to arrive at the ‘profits of the business’ for computation of deduction u/s/. 80HHC.
4(b) That on the facts and in the circumstances of the case, and without prejudice to ground no. 4(a) taken here-in-above, the Ld. CIT(Appeals)erred in reducing 90% of the gross income, instead of 90% of the net income, received from interest income in order to compute ‘profits of the business’ for the purpose of computation of deduction u/s. 80HHC.
That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in holding that sales tax incentive received by the appellant under the West Bengal Incentive Scheme, 1993 amounting to rs.89,44,090/- is revenue in nature.
That on the facts and circumstances of the case, the Ld. CIT(Appeals)erred in issuing an enhancement notice on account of disallowance of EPB credit in computing deduction u/s. 80HHC without appreciating the fact that the appellant has not been granted any deduction under proviso to section 80HHC(3) and hence issuance of enhancement notice tantamount to double disallowance.
That on the facts and circumstances of the case, and without prejudice to Ground No.6 here-in above, the Ld. CIT(Appeals) was not justified and erred in holding that DEPB receipt which falls under section 28(iv) also needs to be reduced from the Profit of the Business in terms of Explanation (baa) to section 80HHC.
That on the facts and circumstances of the case, and without prejudice to Ground No.6 & 7 here-in above, the Ld. CIT(Appeal) was not justified in not considering the fact that only profits on transfer of DEPB falls within the ambit of section 28(iiid) of the Act.
That on the facts and circumstances of the case, the Ld. CIT(Appeals)was not justified and erred in not deleting interest levied u/s. 234D of the Act as th same is bad in law.
That the appellant craves leave to add, amend, modify, rescind, supplement or alter any of the grounds stated herein-above either before or at the time of hearing of the appeal.”
The facts in brief as have been brought on record are that the assessee in the present case is a limited company and engaged in the business of Generation of Power
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 4 and Manufacturing of Electrodes. The return of income was filed by the assessee on dated 07.11.2003 declaring total income of Rs. 3,47,00,774/- which was subsequently revised at Rs.2,83,48,680/- on dated 31.3.2005. The total income of the assessee consists of income from business, House Property and other sources. Thereafter the case was selected for scrutiny assessment and accordingly notice u/s 143(2) was issue to initiate the proceedings u/s 143(3). The assessment u/s 143(3) was completed on 28.02.2006 by determining total income at Rs.26,16,24,330/- by making certain addition and disallowance. The assessee, for the year under consideration also claimed deduction u/s 80IA for its power generation business and u/s 80HHC for its manufacturing of Electrodes business on its export turnover. The additions and disallowances made by the AO and subsequently enhanced by the ld. CIT(A) are subject-matter of disputes in this appeal. The assessee has total 7 plants out of which 3 are for power generation units and the balance 4 are for manufacturing of electrodes plants. One power generating plant is located in Bangalore within the factory compound of electrode plant, Bangalore, second power generating plant is located at CHUNCHUNKATTE in the state of Karnataka at a distance from Bangalore factory and third power generating plant is located within the factory of Nasik plant of electrode, Maharashtra. The assessee majorly used the electricity power generated by its units for captive consumption in its plants manufacturing Electrodes. However, the assessee sold the power generated by its second plant to third parties through Karnataka Electricity Board (for short KEB). Besides the above, assessee also purchased power from KEB for its Bangalore factory and from Maharashtra State Electricity Board (for short MSEB) Nasik Factory.
Now coming to the specific issues of the case which are as under : 5. The first issue raised by the assessee in ground no. 1(a) & 1(b) is that ld. CIT(A) erred in holding that tax or levy on power is not to be included in the computation of transfer price for claiming deduction under section 80-IA of the Act. The assessee determined the value of its power units generated by its power plants which was utilized for captive consumption at a price at which the assessee had to buy from KEB. However, the AO disregarded the same by holding that it should be price
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 5 at which the assessee sales its power to KEB. The contentions of AO for observing so are as under : 1) In the past the assessment was framed taking the unit rate at which power was sold to the KEB. 2) As per section 80-IA of the Act the market value is the price that such goods or services would ordinarily fetch in the open market. 3) The assessee in the instant case is itself a buyer and seller of electricity as it is utilized for captive consumption. So the open market rate for buying the power cannot be accepted. It has necessarily to be closed market rate. 4) The selling rate of KEB for the power is higher because it suffers distribution losses though the assessee in the instant case does not suffer any distribution loss. 5) The assessee sales power to third parties at a price ranging between 3.30 to 3.60 per unit and the same price should be accepted. In view of above the AO has taken the sale price of the power at which the electricity was sold to the third parties through KEB for the purpose of deduction u/s 80-IA of the Act.
Aggrieved assessee preferred an appeal to ld. CIT(A) who has given the relief to the assessee in part by relying on the orders of earlier years and accordingly directed to adopt the price at which the assessee buys the electricity from the Electricity Board less the element of tax component embodied in the Electricity Board bill. The extract of the order is reproduced below : “III. 3 Ground no. 2 relates to valuation of transfer price of electricity consumed for captive consumption within the meaning of section 80IA(8). The A/R has filed a copy of ITAT Kolkata ‘B’ Bench decision dated 06-12-2007 for AY 2001-02 in ITA No. 949(Kol) of 2005 filed by the assessee and ITA No. 1142(Kol) of 2005 filed by Revenue, as also for AY 1999-00 in ITA No. 1926(Kol) of 2005 filed by Revenue and ITA No. 191(Kol) of 2005 filed by the assessee. I have also seen the decision of my predecessor in these appeals, and the facts are similar to the facts of the appeal in hand for AY 2003-04. In Explanation below section 80IA(8), reference to market value of such goods or services has to be construed in terms of the prices at which such goods or services are likely to be traded in a two-way transaction among buyers and sellers, and not just cases of distress sale. The assessee company usually buys
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 6 power from Electricity Board, this price can be only one of the indicators of the market value. The other indicators of market value could be the value or price discovered in trading of electricity by the Power Trading Corporation of India, or even the price at which the power was sold to other parties. The final indicator could have been the actual cost of generating the power+ an acceptable rate of return on investment made in the power project. The last indicator, perhaps, would have been the best indicator of value, but the necessary facts are not available on record.
At this stage, I may mention that I feel uncomfortable in accepting the findings for earlier years to be applied for this year because accepting the price of power at the rates charged by the electricity board less duty or tax elements does significantly distort the results if the same is applied for the extent of power utilized for captive consumption. It results in ascribing profits to the were generation business of the assessee that are far more lucrative, or rather a significant multiple of the profits of any efficient business of generating and selling electric power run by any power company even as renowned as National Thermal Power Corporation (NTPC). By the same yardstick, NTPC or any other such company would have been the most profitability of the world. In fact, adopting the price as indicated in the order for earlier years gives ridiculous figures of profitability of the Power Division, and it is a moot point whether it can be laid down as law to determine the price of captive use of power so as to result in absurd results.
However, following the decision in the earlier years, I direct that in respect of electricity consumed in its own units, the transfer price would be the price charged from it by Sate Electricity Bard less the tax/duty component in the SEB bill.”
Being aggrieved by the order of ld. CIT(A) - assessee came in second appeal before us on the ground that the element of tax and duty should not be excluded from the value of the electricity. Revenue is also in appeal before us on the amount of relief granted by the ld. CIT(A) for adopting buying rate from the Electricity Board.
The Revenue has raised the following ground of appeal no. 1 in ITA 559/Kol/2008. 1. Whether under the facts and circumstances, the ld. CIT(A) was justified in allowing ‘Market Value’ as defined in sec. 80IA(8) of the I Tax Act at the price at which power was purchased from KEB in place of the price at which the assessee sold surplus power to customers.”
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 7 8. First we take up the issue raised by the Revenue in its ground no. 1. At the outset, we find this issue is already covered in favour of assessee in its own case for the assessment year 2001-02 in ITA No. 949/Kol/2005 order dated 06.12.2007, AY 1999-00 in ITA no. 1142/Kol/2005, ITA No. 1926/Kol/2005 and 1931/Kol/2005. The relevant extract of the order is produced below :
7.2. The case of west Coast paper Mills Ltd.and Jindal Steel & Power Ltd. deal with captive consumption of generated power as is involved in the instant appeal. The Mumbai Bench of the Tribunal in the case of West Coat Paper Mills Ltd. (supra in para 32 held as under:-
’32. Having held that the assessee is entitled for the deduction available under s. 80-IA, the next question is what should be the price attributable to the power generated and consumed by the assessee. The answer to the question is readily available in sub-s. (8) of s. 80-IA, which reads as follows:- “where any goods held for the purpose of the eligible profits are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, 9in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of transfer, then for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date.”
The above concept of transfer pricing is also apparent in r. 7 of IT Rules, 1962 provided for determining the income from agricultural products consumed by the agriculturist-assessee in his business as raw material. The rule provides that in the case of income which is partially agricultural income and partly income chargeable as business income, in determining that part which is chargeable to income-tax, the market value of any agricultural produce which has been raised by the assessee and utilized as a raw material in such business shall be deducted at the prevalent market value. This principle has been considered and upheld by the Supreme Court in the case of Thiru Arooran Sugars Ltd. vs. CIT (1977) 142 CTR 9 (SC); (1997) 227 ITR 432 (SFC). Therefore, we direct the assessing authorit9y to work out the profits on the basis of the price of the power generated by the assessee at the average of the annual landed cost of electricity purchased by the assessee from Karnataka State Electricity Board during the impugned previous year. It may be determined on the basis of payment details available from the bills
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 8 issued by the Karnataka State Electricity Board, during the year under consideration.”
7.3 In the case of Jindal Steel & Power Ltd. (supra) the assessee was receiving Rs.2.32 per unit for the electricity supplied by it whereas State Electricity Board was selling it at Rs.3.72 per unit. It computed transfer price under s4ection 80IA (8) of the Act at Rs.3.72 per unit the rate at which the State Electricity Board supplied power to the industrial consumers. After examining the scope of section 80IA (8) and the expression “market value” appearing therein in para 18 the Tribunal held as under:-
‘Having held so, the natural corollary is to ascertain whether the price recorded by the assessee at Rs.3.72 per unit can be considered to be the market value for the purposes of section 80-IA (8) of the Act. The answer to our mind is in the affirmative. This is for the reason that the assessee as an industrial consumer is also buying power from the Board and the Board supplies such power at the rate of Rs.3.72 per unit to its consumers. This is the price at which the consumers are able to procure the power. We may consider hypothetical situation as well. Had the assessee not been saddled with restrictions of supplying surplus power to the State Electricity Board, it would have supplied power to the ultimate consumers at rates similar to these of the Board or such other competitive rates, meaning thereby the price received by the assessee would be in the vicinity of Rs.3.72 per unit i.e. charged by the Board from its industrial consumers / users. Thus, under the given circumstances, it would be in the fitness of things to hold that the consideration recorded by the assessee’s undertaking generating electric power for transfer of power for captive consumption at the rate of Rs.3.72 per unit corresponds to the market value of power. Therefore, on this aspect, we uphold the stand of the assessee and set aside order of the CIT(A) and direct the Assessing Officer to allow relief to the assessee under section 80-IA as claimed. Assessee succeeds on this ground.
“8. We have examined the rival submissions. Respectfully following the decision of the Tribunal ground no. 1 taken in the departmental appeal fails and is dismissed.”
8.1 Hence, Revenue appeal vide ITA No. 733 of 2008 with reference to GA No. 3114 of 2008 was also dismissed dated by the Hon’ble High Court 10-12-2008. The relevant extract is reproduced below:- “Such fact and the position have also been considered by the learned Tribunal which would be evident from the order so passed by the learned Tribunal. The learned Tribunal also in paragraph 7.1 dealt with the matter extensively which is also set out herein.
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 9 7.1 From the facts it is clear that the assessee was not a regular supplied of power and could not supply power on any regular and sustained basis. In terms of the agreement with KSEB it was allowed to sell the surplus power banked with it subject to the condition that such surplus would lapse at the end of the monsoon year. The assessee had therefore to dispose of its such surplus banked power which remained after its own use on ad hoc basis to avoid loosing the benefit altogether. In terms of the provisions of section 80IA(8) such transfer price has to be taken at the market value of such goods which the Explanation to the said sub section defines to mean the price that such goods would ordinarily fetch in the open market. It cannot be disputed that the amount charged by KSEB for supply of the power to the assessee is the price which is ordinarily charged in the open market. This issue also came up for consideration in several decisions of the Tribunal in the undernoted cases:- (i) Assam Carbon Products Ltd vs. ACIT (2006) 100 TTJ 224 (Kol) (ii) JCIT vs. Cipla Ltd. (2005) 2 SOT 617 (Mum) (iii) West Coast paper Mills Ltd. vs. JCIT (2006) 100 TTJ 883 (Mum) (iv) Addl. CIT vs. Jindal Steel 7 Power Ltd. (2007) 16 SOT 509 (Del)
Furthermore, it appears that during the subsequent assessment year also, the learned Tribunal has also accepted such position and the appeal preferred before this court which was not pressed by the appeals at that point of time. Therefore, the law has already been settled by this court. Therefore, in our considered opinion, we do not find that there is any substantial question of law involved in this matter which is to be gone into by this court.
Hence, the appeal being ITA No. 733 of 2008 is dismissed.”
Respectfully following the judgment of Hon’ble jurisdictional High Court in GA No. 3114 of 2008, we dismiss the ground No.1 of Revenue appeal.
Now coming to the issue raised by assessee in its aforesaid ground of appeal is that the element of tax should not be excluded from the valuation of the power units consumed in house.
We have heard the contentions of the rival parties and perused the materials available on record. The ld. AR before us has filed a paper book comprising pages from 1 to 338 and submitted that the ld. CIT(A) held to exclude element of the duty from the transfer price of the units consumed in house following the order Hon’ble ITAT of the earlier years in the own case of the assessee. The earlier orders were passed by the ITAT Mumbai Bench in the earlier years following the decision of
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 10 Hon’ble ITAT Mumbai Bench in the case of West Coast Paper Mills Ltd. Vs ACIT (2006) 103 ITD 19 (Mum). The same decision of ITAT Mumbai has since been reversed by ITAT Mumbai in the same assessee’s case in West Coast Paper Mills Ltd. vs. Addl. CIT (2014) 33 ITR (Trib) 560 (Mum), wherein ITAT Mumbai held that in the said order Tribunal has neither considered its earlier orders where the issue has already been decided in favour of the assessee nor considered provisions of Sec. 80-IA (8) for arriving at a different conclusion. Hence as per provisions of Sec. 80IA (8), market price cannot be arrived by reducing the price by any other factors like taxes, duties etc., as the same are embedded in the price. Further, ITAT Mumbai in DCW Ltd. vs. Addl. CIT (2010) 37 SOOT 322 (Mum), distinguished the decision in [103 ITD 19 (supra)] and held that market price would include electricity duty for computing deduction u/s. 80-IA. The said decision is also followed in DCW Ltd. vs. Addl. CIT (ITA No. 5969/Mum/2008 dt. 29.07.2010). Reliance is also placed on the decision in Garden Silk Mills Ltd. vs. Addl. CIT (2013) 35 CCH 135 (Ahd-Trib). In view of the above, it is submitted that the later decision be preferred, since the same has more precedence value. Further, the iss9ue is now covered in favour of the assessee by the decision of Hon’ble Gujarat High Court in CIT vs. Shah Alloys Ltd. (Tax AP/2092-2094/2010 dtd. 22.11.2011), wherein it has been held that electricity duty shall form part of the market value at which electricity is transferred by CPP unit while computing deduction u/s. 80IA. Departmental SLP has been dismissed by the Apex Court in SLP No. 11106 of 2012 dtd. 16.07.2012 and again in SLP No. 13348 of 2012 dtd. 15.10.2012). IT is a settled principle that in absence of any contrary decision of the high courts, the decision of non-jurisdictional Tribunal & / or Special Bench. [refer Rajamahendri Shipping & Oil Field Services Ltd. vs. Addl CIT (2012) 51 SOT 242 (Vizag & CIT vs.s Godavari Devi Saraf (1978) 113 ITR 589 (Bom).
On the other hand the ld. DR vehemently supported the order of the authorities below.
From the above discussion, we find that order of the ITAT Mumbai Bench for the earlier years was based on the order of West Coast Paper Mills Ltd. (supra) which
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 11 has been reversed by the same Hon’ble ITAT. The relevant extract is reproduced below :
“Assessee has worked out the notional sale of power supplied by its power unit to its paper division @ Rs.5.80 per unit. This was on the basis of average actual grid charges charged by Karnataka Electricity Board for supplying the electricity to the Assessee. This was shown from the amount of the bill and the total number of units consumed. From the said bills, the Assessing Officer noted that the Assessee is paying fuel excavation charges, taxes, etc., which should be reduced for working out the average price per unit for working out the sale price of the electricity supplied by its power unit to the paper division. If the paper division has been purchasing the electricity form the Karnataka Electricity Board at an average cost of Rs.5.80, which fact is not in dispute, then the same price should be considered as market value for bench marking the price at which power units are supplying the electricity to the paper division. If the taxes and duties are part of the price at which the power/electricity is supplied by the Karnataka Electricity Board to the paper division, then the same price is the indicator of the market value which is fetchable in the open market. ITAT do not find any reason for excluding the element of tax and duty while determining the “market value” of the electricity price per unit supplied by the power unit to the Assessee as contemplated in sub–section (8) of section 80IA. Under these facts and circumstances, ITAT are rendering our decision purely on the basis of our interpretation of statutory provisions, sans going by any earlier year precedence. Thus, in ITAT opinion, we have to follow the provisions as contained in section 80IA(8) for determining the market price, which cannot be arrived by reducing the price by any other factors like taxes, duties, etc., as the same are embedded in the price. Thus, ITAT set aside the impugned order passed by the learned Commissioner (Appeals) on this issue.”
Similarly the same issue was decided in favour of assessee by the Hon’ble Gujrat High Court in the case of CIT vs. Shah Alloys Ltd. in TAX Appeal No. 2092 of 2010 dated 22.11.2011 and relevant extract is reproduced below:- “7. We may notice that the Tribunal did not accept the contention of the assessee that the electricity is neither goods nor services and that, transfer of electricity, therefore, would not be covered under sub-section (8) of Section 80IA of the Act. However, in so far as the Tribunal’s reasoning to adopt the market value of the goods at Rs.5.40 ps. Per unit is concerned, we find no error. Undisputedly, GEB supplied the electricity to its consumers at th9e same rate. This, therefore, was a market value of the electricity supplied by the CPP unit to the general unit. The fact that this amount of Rs.5.40 ps. Comprises of a component of 8 paise, which was electricity duty, to our mind, would make no difference in so far as the market value is concerned. To a consumer, the price being paid remains 5.40 ps. Per unit. The act that the seller retains only Rs.5.32 ps. Out of the aid collection and passes on 8 paise per unit to the Government in the form of electricity duty, to our mind, would make no difference. This question, is therefore, not required to be considered.”
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 12 Respectfully follow the judgment of Hon’ble Gujarat High Court in the case of Shah Alloys Ltd. (supra) we allow assessee’s ground.
The next issue raised by the assessee in ITA No. 305/Kol/2008 A.Y 03-04 its grounds of appeal in. 2(a) & 2(b) is that the ld. CIT(A) erred in allocating common expenditure to the tune of Rs. 1,52,86,622/- to the power generating units.
The assessee has shown the cost per unit of electricity generated from diesel generator at Rs. 3.35 per unit and 3.83 per unit at Bangalore and Nasik Factory respectively. However the AO during the assessment proceedings observed that the cost per unit of other companies generating power from diesel generator is ranging Rs. 5.28 to 14.79 per unit. Accordingly the AO opined that the assessee has shown less expense to the power divisions in order to show more profit so that it can claim more deduction under section 80IA of the Act. The AO also observed that the investment in the power divisions is 28.62% of the total funds including loans. Accordingly the AO allocated the total interest expenses in the above stated ratio i.e. 28.62% amounting to Rs. 2.44 crores only. On the similar analogy the AO also allocated other expenses as listed on page 8 of the AO order to the power divisions amounting to Rs. 2,71,84,554.00 (9,81,72,227.00 @ 28.62% - amount already allocated Rs. 9,12,346.00) only.
Aggrieved, assessee preferred an appeal to ld. CIT(A) who deleted the entire amount of interest expenses allocated to power divisions by observing that there was separate and specific loan facility utilized in the power divisions. The relevant connected interest expense has been duly claimed in determining the profit from the power divisions. Hence no addition with regard to the interest expenses needs to be disallowed.
14.1 However with regard to the other indirect expenses the ld. CIT(A) has restricted the disallowance to Rs. 1,52,86,622/- and granting relief of Rs. 1,18,97,932/- out of the total disallowance of Rs. 2,71,84,554.00. The ld. CIT(A) in
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 13 principal agreed with the working of the AO but found some clerical error in the total amount of other expenses i.e. Rs. 9,81,72,227/-. The ld. CIT(A) observed that certain figures have been included double and certain expenses are exclusively for the export business of electrode products for Rs.4,15,72,056/- (figures of Rs. 1,70,66,277.00 included double and a figures of Rs. 2,45,05,779.00 was used exclusively for the export of electrode products). Accordingly the ld. CIT(A) upheld the order of the AO by removing the error from the total other expenses claimed by the assessee.
Being aggrieved by the order of ld. CIT(A) both assessee and Revenue came in appeal before us.
First we take up the issue of the assessee. The assessee is against the confirmation of AO order to the extent of Rs. 1,52,86,662/-.
The ld. AR before us submitted that while determining profit and gains derived from power generating unit, the assessee duly debited the entire expenditure which have direct and immediate nexus with the power generating unit. Thus, further allocating of any other expenditure does not arise. Ld.AR further submitted that on the perusal of the expenditure allocated, it could be seen that the expenditure incurred by the HO and electrode division does not have any direct and immediate nexus with the power generating unit and hence cannot be considered for allocation for determining profits of the unit eligible for tax holiday. He stated that the use of the expression ‘derived from’ as used in Sec. 80IA(1) signifies that only income / expenditure directly and inextricably related to eligible undertaking should be considered in computing profit of the eligible undertaking. Indirect expenditure which has no direct nexus or connection with the profit of industrial undertaking should not be considered in computing deduction u/s. 80IA. The aforesaid view is supported by the principle laid down in the following decisions. Liberty India vs. CIT (2009) 317 ITR 218 (SC) CIT vs.Sterling Foods (1999) 237 ITR 579 (SC) Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC)
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 14 Pandian Chemicals Ltd. vs. CIT (2003) 262 ITR 278 (SC) Further, Co-ordinate Bench in the case of Balarampur Chini Mills Ltd. vs. DCIT (2011) 140 TTJ 73 (Kol)(UO) has categorically held that expenditure which does not have first degree relation with the eligible unit cannot be considered for allocation to the eligible unit. Similar view is also expressed recently by the Co-ordinate Bench in the case of DCIT vs. SICPA India Pvt. Ltd. ITA No. 599/Kol/2012 dated 04.12.2015 and also by the Mumbai ITAT in DCW Lt. vs. ACIT (2010) 37 SOT 322 (Mum) Again similar view is also taken in the following decisions:- National Fertilizers Ltd. in re (2005) 142 taxman 5 AAR New Delhi DCIT vs. Catvision Products Ltd. )2004) 84 TTJ 241 (Del) RRB Consultatnts & Engg. (P) Ltd. vs. ITO (2007) 112 TTJ 794 (Del) CIT vs. Hindustan Lever Ltd. (2014) 221 taxman 71 (Mad) Reliance Infrastructure Ltd. vs. ACIT ITA No.4631/Mum/2009 dtd.31.01.2011 Without prejudice to above, the expenses have been allocated by AO on the basis of the capital investment which have no nexus with the expenses incurred. Hence, the basis of allocation of the expenses by the AO is totally unjustifiable.
On the other hand, Ld DR submitted that the assessee has claimed certain expenses which cannot be attributed solely to the electrode divisions such expenses are charity, donation, Gifts and documentation & legal expenses. The ld. DR requested the bench to restore the issue to AO for fresh verification.
We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case have already been elaborated in the foregoing paragraph. So the same are not reproduced to avoid the repetition. We find that the lower authorities have not found any defect in the books of accounts which are maintained separately. The AO allocated the cost to the power divisions on finding the cost of production of other power generating units on higher side than the production cost of the assessee. The borrowed fund was directly used by the assessee for its power divisions. There was no ambiguity with regard to the interest expenses claimed by the assessee in their divisions. The AO has allocated the cost his premise
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 15 and conjuncture. In this connection we rely in the judgment Hon’ble Supreme Court of India in the case of Liberty India vs. CIT (2009) 317 ITR 218 (SC). The relevant extract of the order is reproduced below :
“The IT Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when s. 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under s. 80-IA/80-IB is the generation of profits (operational profits). It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub-ss. (3) to (11A) (as they stood at the relevant time). One more aspect needs to be highlighted. Each of the eligible businesses in sub-ss. (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of "Segment Reporting" stands introduced in the Indian Accounting Standards (IAS) by the ICAI. Analysing Chapter VI-A, it is found that ss. 80-IB and 80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, the Court needs to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that s. 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" are narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. On analysis of ss. 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-s. (2), would be entitled to deduction under sub-s. (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-s. (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking".—CIT vs. Kirloskar Oil Engines Ltd. (1985) 44 CTR (Bom) 98 : (1986) 157 ITR 762 (Bom) approved.” Respectfully follow the judgment of Hon’ble Supreme Court of India in the case of Liberty India vs. CIT (2009) 317 ITR 218 (SC). We allow assessee’s ground of appeal. 19. Now coming to the remaining issues of Revenue’s appeal in ITA No. 559/Kol/2008 for which following grounds no. 2 and 3 were raised. 2. Whether under the facts and circumstances, the Ld. CIT(A) was justified in reducing the interest expenditure allocated by the AO for the purpose of computing profit for the purpose of deduction u/s 80IA, assuming that
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 16 accumulated profit from power division was retained in the power unit itself whereas in the accounts of the assessee company, such profit was not shown to have been separately retained.
Whether under the facts and circumstances, the Ld. cite was justified in allowing relief of Rs.1,18,97,932/- on account of allocation of other expenses in computing profit for the purpose deduction u/s 80IA on the basis of assessee’s claim without appreciating the fact mentioned in the assessment order and without giving finding as to how these expenses are included twice or not allocable.”
We have already decided the issue in favor of assessee vide para no. 18 of this order as stated above. Hence, both issue raised by Revenue stand dismissed.
The next issue raised by the assessee in ground no. 3 is that the ld. CIT(A) erred in confirming the order of the AO by holding that the deduction under section 80HHC shall be worked out after adjusting the profit eligible amount of deduction under section 80 IA of the Act.
20.1 At the outset, we find that issue is covered in favour of Revenue and against the assessee in its own case in ITA No.949/Kol/2005 dated 06.12.2007, wherein the Tribunal has held as under:- “10.1 The claim of the assessee that the business profits for computation under section 80HHC of the Act should not be reduced by the amount of profits for which deduction has been allowed under section 80IA of the Act has to be considered in the light of the provisions of section 80IA(9) of the Act which provides that where any amount of profits or gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under the said section for any assessment year, the deduction to the extent of such profits or gains shall not be allowed under any other provision of Chapter VIA. The deduction for the profits under section 80IA has been allowed in respect of the power undertakings. Most of the energy generated therein has been captively used for manufacture of goods profits whereof are part of profits of business. The counsel for the assessee also relied on the decision of Bombay High Court in the case of Godrej Agrovet Ltd. vs. ACIT ((2007) 290 ITR 252. This issue came up for consideration before the Special Bench of the Tribunal at Chennai in the case of Assistant Commissioner of Income Tax vs. Rogini Garments reported in (2007) 294 ITR (AT). In view of the said decision of the Special Bench which is binding on us the contention of the assessee cannot be accepted
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 17 and ground no. 3 in the assessee’s appeal is dismissed and the order of CIT(A) on the issue is affirmed.”
In view of the foresaid facts and circumstances and respectfully following the decision of this co-ordinate Bench in assessee’s own case we dismiss assessee’s ground. AO is directed accordingly.
The next issue raised by the assessee in grounds no. 4(a) & 4(b) is that ld. CIT(A) erred by holding that 90% of interest received is to be reduced from the profit to work out the eligible deduction under section 80 HHC of the Act.
At the outset, we find that this co-ordinate Bench in assessee’s own case (supra) has decided the issue remitted back to the file of AO and relevant extract is reproduced below:- “10.2 So far as the claim of the assessee that 90% of the net amount of rent and interest should be deducted from the profits of the business and not the gross amount we find that this issue came up before the Tribunal in the assessee’s own case for the assessment year 1996-97 in ITA No. 5241/Mum/2000, the Tribunal restored the matter to AO to examine the nexus between the rent and interest receipts and payments and in case there was such a nexus then only 90% of the net amount was to be exclude from the business profits. We find that similar view was also taken in the case of Gloster Jute Mills Ltd. vs. DCIT in ITA No. 1879(Kol) of 2006 dated 20/04/07. Accordingly, we restore the issue to AO to examine whether there is any nexus between the receipts and payments and if he so finds then to take only 90% of net amount of such rent and interest for deduction from business profits for computation under section 80HHC of the Act. Ground Nos. 1(a) and 4(b) in the assessee’s appeal are accordingly restored to AO with the directions aforesaid and order of CIT(A) on the issue is set aside.”
Respectfully following the decision of the co-ordinate Bench we set aside the order of Ld. CIT(A) and remit the matter back to the file of AO with a direction as contained. Assessee’s ground is allowed for statistical purpose.
The next issue raised by the assessee in grounds no. 5 is that ld. CIT(A) erred by holding that sales tax incentive received under the west Bengal Incentive Scheme 1993 for an amount of Rs. 89,44,090/- as revenue in nature.
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 18 24. At the outset, we find that coordinate Bench has decided this issue against the assessee in assessee’s own case (supra) and relevant extract is reproduced below:- “16.1 However the Calcutta High Court in the case of CIT vs. Chhindwara Fuels reported in (2000) 245 ITR 9 held that sales tax subsidy received from the Government was after commencement of production and was not a capital receipt. The assessee’s contention that the subsidy involved in the said case was not under the 1993 Scheme and was different cannot be accepted in view of the decision of the High Court specifically laying down that subsidy on account of sales tax is not a capital receipt. Accordingly the said amount is assessable under the normal provisions of the Act as a revenue receipt. Since the receipt in question is a revenue receipt the question of excluding it from book profits under section 115JB of the Act also does not arise. Accordingly additional ground nos. 1and 2 in the assessee’s appeal are dismissed.”
Taking a consistent view in assessee’s own case we dismiss assessee’s ground accordingly.
The next issue raised by the assessee in grounds no. 6 to 8 is that ld. CIT(A) erred by reducing the amount of DEPB sale for working out the profit of the business under section 80HHC of the Act.
The assessee during the year has received DEPB on account of the export for Rs. 35,23,24,936/- which was credit in the profit & loss account. The AO did not reduce the 90% of it while working out deduction under section 80HHC of the Act at the time of original assessment. Accordingly the AO issued a notice under section 154 of the Act to rectify the aforesaid mistake. In compliance to the notice the assessee submitted that the deduction has been claimed by the assessee at the correct amount and within the provisions of section 80HHC of the Act. However the AO disregarded the claim of the assessee and computed the deduction under section 80HHC of the Act at Rs. 1,22,74,092/-. Accordingly, the excess deduction of Rs. 9,18,77,535/- was disallowed and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to ld. CIT(A) who has confirmed the order of the AO by holding that the turnover of the assessee is exceeding the amount of Rs. 10 crores therefore the benefit for the deduction of DEPB face value is not
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 19 available in terms of 3rd proviso to section 80HHC of the Act. The provisions to section 28(iiid) just clarifies that the profit on transfer of DEPB will also be reduced from the profit for calculating the profit from the business as contemplated under explanation (baa) to section 80HHC of the Act. As per the ld. CIT(A) face value of the DEPB and any profit arose there on the transfer of the DEPB, both will be reduced by 90% as per the provisions of section of explanation (baa) to the section 80HHC of the Act if the assessee has the turnover exceeding Rs. 10 Crores.
Being aggrieved by the order of ld. CIT(A) the assessee came in appeal before us. The ld. AR before us submitted that the face value of the DEPB is covered under the section 28(iiib) of the Act and not under the section 28(iiid) of the Act. On the other hand the ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions & perused the materials available on record. At the outset we find that the Section 28(iiid) of the Act talks about the profit derived on the transfer of DEPB and the face value accrued to the assessee for the DEPB is covered by the provisions of section 28(iiib) of the Act. Hence we conclude that the face value of the DEPB is covered under the provisions of section 28(iiib) of the Act. In this connection we find support from the Judgment of Apex Hon’ble Supreme Court in the case of Topman Exports Vs. CIT (2012) 342 ITR 29 (SC). The relevant extract of the order is reproduced below : “To the figure of profits derived from exports worked out as per the formula under sub-s. (3)(a) of s. 80HHC, the additions as mentioned in first, second, third and fourth provisos under sub-s. (3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28 are added in the same proportion as export turnover bears to the total turnover of the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in cl. (iiid) or cl. (iiie). Hence, profit on transfer of DEPB or DFRC are not to be added under the first proviso. Where therefore in the previous year no DEPB or DFRC accrues to the assessee, he would not be entitled to the benefit of the first proviso to sub-s. (3) of s. 80HHC because he would not have any sum referred to in cl. (iiib) of s. 28 of the Act. The second proviso to sub-s. (3) of s. 80HHC states that in case of an assessee having export turnover not exceeding Rs. 10 crores during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 20 per cent of any sum referred to in cls. (iiid) and (iiie) of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The third proviso to sub-s. (3) of s. 80HHC states that in case of an assessee having export turnover exceeding Rs. 10 crores, similar addition of ninety per cent of the sums referred to in cl. (iiid) of s. 28 shall be made only if the assessee has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the DEPB Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the DEPB Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs. 10 crores does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to sub-s. (3) of s. 80HHC. The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs. 10 crores and has made profits on transfer of DEPB under cl. (iiid) of s. 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-s. (3) of s. 80HHC, but he would get the benefit of exclusion of a smaller figure from "profits of the business" under Expln. (baa) to s. 80HHC and there is nothing in Expln. (baa) to s. 80HHC to show that this benefit of exclusion of a smaller figure from "profits of the business" will not be available to an assessee having an export turnover exceeding Rs. 10 crores. In other words, where the export turnover of an assessee exceeds Rs. 10 crores, he does not get the benefit of addition of ninety per cent of export incentive under cl. (iiid) of s. 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit. The High Court, therefore, was not right in coming to the conclusion that as the assessee did have the export turnover exceeding Rs. 10 crores and as the assessee did not fulfill the conditions set out in the third proviso to s. 80HHC(3), the assessee was not entitled to a deduction under s. 80HHC on the amount received on transfer of DEPB and with a view to get over this difficulty the assessee was contending that the profits on transfer of DEPB under s. 28(iiid) would not include the face value of the DEPB. It is a well-settled principle of statutory interpretation of a taxing statute that a subject will be liable to tax and will be entitled to exemption from tax according to the strict language of the taxing statute and if as per the words used in Expln. (baa) to s. 80HHC read with the words used in cls. (iiid) and (iiie) of s. 28, the assessee was entitled to a deduction under s. 80HHC on export profits, the benefit of such deduction cannot be denied to the assessee. Where DEPB accrues to the assessee in one previous year and it transfers the DEPB certificate in another previous year, only ninety per cent of the profits on the transfer of the DEPB covered under cl. (iiid) of s. 28 and not ninety per cent of the entire sale value including the face value of the DEPB has to be excluded to arrive at the "profits of the business" under cl. (baa) of Explanation to s. 80HHC; where the export turnover of an assessee exceeds Rs. 10 crores, it does not get the benefit of addition of ninety per cent of export incentives under cl. (iiid) of s. 28 to its export profits, but it would have the
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 21 benefit of exclusion of a smaller figure from the "profits of the business" under cl. (baa) of Explanation to s. 80HHC which would ultimately result in computation of a bigger export profit.”
Respectfully following the judgment of Hon’ble Apex Court in the case of Topman Exports (supra) we reverse the order of authorities below and allow the issue raised by assessee. AO directed accordingly. This ground of assessee’s appeal is allowed. 29. In the result, assessee’s appeal is partly allowed. Coming to assessee’s appeal in ITA No.304/Kol2008. 30. Grounds raised by assessee are reproduced below:- “1.0 That on the facts and circumstances of the case, the Ld. CIT(Appeals)was not justified and erred in holding that rectification proceedings u/s. 154 was snot bad in law and there was a mistake apparent from record which was rectified by the AO vide order u/s. 154.
2.0 That on the facts and circumstances of the case, the Ld. CIT(Appeals)was not justified and erred in holding that DEPB receipts which falls under section 28(iv) also needs to be reduced from the Profit of the Business in terms of Explanation (baa) to section 80HHC.
3.0. That on the facts and circumstances of the case and without prejudice to Ground No. 2 here-in above, the Ld. CIT(Appeals) was not justified in not considering the act that only profits on transfer of DEPB falls within the ambit of section 28(iiid) of the Act.
4.0 That the appellant craves leave to add, amend, modify, rescind, supplement or alter any of the grounds stated here-in-above either before or at the tme of hearing of the appeal.”
At the outset, we find that the issue raised by assessee in ground No.2 & 3 on merit in ITA 305/Kol/2008 has already been decided in its favour vide para-28 of this order. Hence, we allow both the grounds of assessee’s appeal in terms of above.
Coming to technical issue raised by assessee in Ground No. 1 in this appeal regarding the validity of the order passed by AO u/s. 154 of the Act. We find this issue has already been decided in favour of assessee on merit. Therefore, we are not inclined to adjudicate this technical issue raised by the assessee. Hence, this ground of assessee is dismissed as infructuous.
ITA No.304-05 & 559/Kol/2008 A.Y 03-04 Graphit e India Ltd. vs. Addl. CIT, Rng-11, Kol. Page 22 33. Last ground of assessee’s appeal is general in nature and does not require any separate order.
In the result, assessee’s appeal is partly allowed.
In the result, both appeals of assessee are partly allowed and that of Revenue is dismissed. Order pronounced in open court on 24/08/2016 Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp �दनांकः- 24/08/2016 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक/Assessee –Graphite India Ltd., 31, Chowringhee Road, Kolkata-16 2. राज�व/Revenue-Addl. CIT, Range-11, Aaykar Bhawan, P-7, Chowringhee Sq. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file.
By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता