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:

The appeal is filed by the assessee against the order of the

Commissioner of Income-tax (Appeals)-V, Chennai dated 14.03.2012 in

ITA No.1344/Mds/2012 :- 2 -:

ITA No.399/2010-11 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/-.

of exemption claimed u/s.10B of the Act in respect of export proceeds

received after stipulated period and also foreign exchange gains from

the calculation of exemption u/s.10B of the Act.

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

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�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:-

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‘’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:-

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‘’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.

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Therefore, we are inclined to uphold the order of the ld. Commissioner

of Income Tax (Appeals) on this ground also.

u/s.14A read with Rule 8D to the extent of �16,91,712/-.

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

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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

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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)

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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 ITA No.59/Del/2011, Dated 24th May, 2013 and pleaded for deletion of

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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

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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

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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 ITA No.1344/Mds/2012 is partly allowed for statistical purpose.

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

Sd/- Sd/- (ए. मोहन अलंकामणी) (जी. पवन कुमार) (A.MOHAN ALANKAMONY) (G. PAVAN KUMAR) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai �दनांक/Dated:20.11.2015 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF