M/S. NUMERIC POWER SYSTEMS LTD., NOW KNOWN AS,CHENNAI vs. ITO (OSD),, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

-11 for the assessment year 2010-2011 passed u/ss.143(3) and 250 of Income Tax Act (in short ‘’the Act’’).

The brief facts of the case are that the assessee is a limited 2. company and in the business of manufacturing of UPS systems and filed return of income on 30.09.2008 disclosing total income of �21,98,17,563/- and return of income was processed u/s.143(1) of the Act on 22.02.2010. Notice u/sec 142(1) was issued and the assessee filed detailed information and submitted explanations duly supporting the return of income. The Assessing Officer completed the assessment u/s.143(3) of the Act by making additions and assessed income at �22,52,35,607/-.

3.1 The assessee company is manufacturer of electronic components and filed audit report under section 44AB and also claimed exemption u/s.10B in respect of EHTP Division (Electronic Hardware Technology Park Division) engaged in manufacture of UPS and power condition system. Out of the total turnover of ITA No.1344/Mds/2012 :- 3 -:

�3,91,72,095/-, net profit on export turnover has worked out to �15,09,803/- after considering the overheads. The assessee has filed all statutory forms for claiming deduction u/s.10B and also copies of foreign inward remittances undertaken by the EOU division. Against the total turnover of �3,91,72,095/-, the foreign exchange received within stipulated time of six months from the end of financial year into country is �3,42,66,477/- and the balance sum of �48,23,426/- was received from subsidiary company after the due date. The ld. Assessing Officer has restricted the deduction u/sec 10B to the extent of �42,64,057/- as against claimed by the assessee �52,16,537/-.

Aggrieved by the order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

3.2 In the appellate proceedings, the ld.AR argued that the restriction on remittances cannot be applied to 100% owned subsidiary company. The disallowance under section 10(B)(3) is against law and filed copy of RBI circular No. RBI/2010-11/457 AP(DIR SERIO) Circular 47 dated 31.03.2011 in extending inward remittances pertaining to assessment year 2011-2012 and after hearing the submissions, the ld Commissioner of Income Tax (Appeals) has confirmed the Assessing Officer disallowance by observing at page 7 of the order as under:-

ITA No.1344/Mds/2012 :- 4 -:

‘’As regards the circular of the RBI, a photocopy of which has been furnished by the appellant as Annexure II, it was pointed out to the AO of the appellant to show as to how the said circular was applicable to the period under consideration in the appellant's case as the said circular apparently applied to the subsequent periods since it was extending the relaxation allowed up to March 31, 2011 vide circular number 57 dated June 29,2010, up to September 30,2011. In response, apart from placing reliance on the said circular, nothing has been submitted or brought on record to show that the said circular was also applicable to the appellant's case for the exports effected within the assessment year 2008-09. Further as regards foreign exchange gain, nothing has been said or submitted during the appeal proceedings on this count . In view of the above, I do not find any infirmity in the action of the AO in restricting deduction under section 10B to the exports, the sale proceeds of which have been received by the appellant in convertible foreign exchange within the stipulated time. The grounds of appeal, therefore, are dismissed.’’ Aggrieved by the order of CIT(A), assessee preferred an appeal before the Tribunal. The ld. Authorised Representative submitted to treat the remittances of subsidiary company received after due date by applying the RBI circular. We after hearing the submissions of both the parties and law applicable for 100% EOU found as per Explanation 3 of Section 10B reads as under:-

ITA No.1344/Mds/2012 :- 5 -:

‘’This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee inconvertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.’’ At the outset, RBI is the competent authority to give special permission in writing to the assessee to receive sale proceeds after the said date. In the present case �48,23,426/- was received in October, 2008 and February 2009, after a period of six months from the end of the previous year and the circular of the RBI is effective from 2011 onwards in respect of inward remittances and not retrospectively. Considering the above facts, we are inclined to uphold the order of the Commissioner of Income Tax (Appeals). The ld. AO also excluded from the export turnover foreign exchange gain of �2,98,953/- for the computation of deduction u/s.10B as assessee could not explain the source for foreign exchange gains attributed to units and the ld.CIT(A) has confirmed the addition. Before us, the Authorised Representative has not submitted any particulars but pleaded for consideration of foreign exchange gains for deduction u/s.10B and it is also apparent from the facts of the case that ld.AR could not substantiate his ground with any material evidence.

ITA No.1344/Mds/2012 :- 6 -:

Therefore, we are inclined to uphold the order of the ld. Commissioner of Income Tax (Appeals) on this ground also.

4.1 The assessee company received dividend income of �46,75,918/- and claimed exemption u/s.10(34) of the Act and has not disallowed any expenditure in the computation of income. In the assessment proceedings the ld.AR submitted that company has not incurred any expenditure for earning dividends and the Assessing Officer applied the provisions of Rule 8D and calculated the disallowance of �16,91,712/- and added to the returned income. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

4.2 The ld. Authorised Representative submitted that the provisions of Sec. 14A are not applicable for the assessment year 2008-09 and the ld.CIT(A) relying on High Court and Supreme Court decisions followed judicial precedent of Jurisdictional ITAT Bench in Southern Petro Chemical Industries vs. DCIT (93 TTJ 161) and concluded that Rule 8D is applicable to the present assessment year and there is no dispute or mistake by Assessing Officer in calculating disallowance and ITA No.1344/Mds/2012 :- 7 -: confirmed the order of the Assessing Officer. Aggrieved by the order of CIT(A), the assessee has assailed appeal before the Tribunal. The ld.AR argued that ld.CIT(A) erred in confirming the order of the Assessing Officer and the expenditure debited to the profit and loss account by way of interest does not attribute to the dividend income and relied on alternative ground in respect of in respect of nonapplicability of Rule 8D prior to 24.03.2008 and if any disallowance has to be considered, it shall be proportionately and referred to page 39 of the Annual report of the assessee company and explained that dividend income is from 100% subsidiary company Numeric Lanka Technologies (Private) Limited, Sri Lanka. On the other hand ld. Departmental Representative relied on the findings of the lower authorities and objected to the submissions of information before the Tribunal regarding dividend income of Srilanka subsidiary company and prayed for dismissal of the ground of the assessee.

4.3 We heard both the parties and perused the material on record. We find that facts and circumstances of the present case pertaining to holding and subsidiary company of two different countries, and which needs to be verified with the quantum of share holding and DTA agreement for dividend income. We are of the ITA No.1344/Mds/2012 :- 8 -: considered opinion that matter needs to be re-examined and set aside the issue in dispute to the file of the Assessing Officer. The Assessing Officer is directed to allow the claim after considering the satisfactory explanations and material evidence for dividend income.

The third ground raised by the assessee with regard to 5. disallowance u/s.40(a) (ia) to the tune of �11,68,912/- 5.1. The assessee company is in the business of manufacturing and export of the UPS and electronic parts used for global networking and has entered into contracts with various communication channels which provides internet services including M/s.SAP India Pvt. Ltd for providing software services. The assessee company based on the nature of transaction and working conditions deducted TDS under provisions u/s.194C of the Act @2% on such contract payments. In the assessment proceedings, the ld.AO has objected to TDS deduction at 2% and treated such expenditure is covered u/s.194J of the Act for technical services and made proportionate disallowance. The assessee has further submitted that provisions of Sec.40(a) (ia) are not applicable and payments are contract payments and not for any professional or technical services. After hearing the submissions, the ld.AO neither considered provisions of 194C or 194J of the Act but invoked disallowance under provisions u/s.40a(ia)

ITA No.1344/Mds/2012 :- 9 -: of the Act for contract payments. Aggrieved by the order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

5.2 Before the ld.CIT(A), the assessee raised various grounds about the applicability of sec 40a(ia) of the Act and the provisions u/sec. 194C of the Act which are applicable for contract payments to business modules of internet service provider. The ld.CIT(A) heard the submissions and also verified the lower deduction of TDS certificate issued by the Assessing Authority of the contractee and concluded that certificate is applicable for assessment year 2012-13 and dismissed the grounds of the assessee by confirming the order of Assessing Officer.

5.3 Aggrieved by the order of ld.CIT(A), the assessee filed an appeal before the Tribunal. Before us, the ld. Counsel has submitted that provisions of section 40a(ia) shall not be applicable in respect of short deduction of TDS and prime facie the assessee is following going concern practice of deducting TDS on contract payments and relied on the judgment of Calcutta High Court in the case of CIT vs. S.K.

Tekriwal 260 CIT 0073 (Cal) and also on the decision of ITAT Delhi Tribunal in the case of ACIT vs. Pankaj Bhargava in Dated 24th May, 2013 and pleaded for deletion of ITA No.1344/Mds/2012 :- 10 -: addition. On verifying the legal position, we find that the addition u/s.40a(ia) of the Act can be made if both the conditions are satisfied in respect of applicability of TDS under chapter XVII B and tax was not deducted by the assessee. In the present case, the assessee had deducted TDS at a lower rate, on perusing the case laws and decisions relied by the ld. counsel. We found that expenses are not liable to be disallowed u/s.40(a)(ia) of the Act on account of short deduction of tax at source. The assessee has further complied with both the limbs of applicability of provisions by deducting TDS on payments and depositing the same with the Government, which is not disputed by the Assessing Officer. We are of the opinion, that if any difference in strategy of taxability or nature of payment arises, in such circumstances alternatively, the Assessing Officer can treat the assessee as defaulter u/s.201 of the Act but not by invoking provisions u/s.40(a)(ia) of the Act. It is also apparent from facts of the case the assessee has deducted TDS and remitted to the treasury and we direct the Assessing Officer to delete the impugned addition and allow the grounds of the assessee.

6 The last ground raised by the assessee with regard to disallowance of interior decoration works �16,05,120/-.

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6.1 The assessee in the financial year 2007-08 has incurred an expenditure of �17,83,467/- on the interior works in the nature of Aluminum glass partitions, toilet refurbishing, granite tiles and strips doors etc., The assessee company has treated such expenses as Revenue expenditure. In the assessment proceedings, it was explained that temporary partitions, fixation of glass, granite tiles etc on rented premises are considered as current repairs and 100% deduction claimed but the Assessing Officer allowed depreciation at the rate of 10% and disallowed expenditure of �16,05,120/-.

Aggrieved by the order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

6.2 Before the Commissioner of Income Tax (Appeals), the ld.AR filed a detailed submissions explaining such expenditure is necessary for corporate office which has a global business in different countries having a international exposure and dealing with foreign nationals. To improve the feasibility and business brand image such up gradation is required at regular intervals. Even the partitions are temporary in nature if they are removed they cannot be reused for any other purpose and also tiles flooring does not give enduring benefit but necessarily increase the image of the business associates. The ld.CIT(A) after hearing the submissions overlooked the information

ITA No.1344/Mds/2012 :- 12 -: and confirmed the addition of the Assessing Officer. Aggrieved by the order of CIT(A), the assessee assailed an appeal before the Tribunal.

The ld. AR submitted that the company has global presence and the type of Revenue expenditure incurred compared to the total turnover of business is very small. The ld. AR referred to page Nos. 97 and 98 of paper book were the tax invoice copies are filed with information of payments for material and labour charges and most of the expenditure incurred cannot be recovered as they perished due to usage and removal after some period. The ld. Counsel also relied on the legal decisions and prayed for deletion of addition and treat such Revenue expenditure as current repairs. On the other hand, the ld. Departmental Representative relied on the orders of the lower authorities.

6.3 We have heard both the parties and perused the material on record. The expenditure incurred by the assessee is only to upkeep the business enterprises to maintain wear and tear but not to increase the productivity or manufacturing activity. The change of flooring and other connected works will only improve the brand image which is indeed required for such global company. The legal position of such expenditure when it is dismantled cannot be rebuild or used for any other purpose as held by jurisdictional Madras High Court in the case

ITA No.1344/Mds/2012 :- 13 -: of CIT vs. Amrutanjan Finance Ltd. 363 ITR 135 and Thiru Arooran Sugars Ltd vs. DCIT 350 ITR 324, were distinction has been made between capital and revenue expenditure and allowed as current repairs in the previous year. Applying the principles of law of Jurisdictional High Court. We are of the opinion that such expenditure has to treated as revenue expenditure and we direct the Assessing Officer to allow the deduction accordingly. The ground of the assessee is allowed.

7 In the result, the appeal filed by the assessee in is partly allowed for statistical purpose.

Order pronounced on Friday, the 20th day of November, 2015, at Chennai.