DCIT, NEW DELHI vs. M/S. MACHINO PLASTICS LTD., GURGAON

O R D E R PER PRASHANT MAHARISHI, A. M. 1. Revenue has filed appeal directed against the order of the LD CIT (A)-IX, New Delhi dated 28.08.2013 for the Assessment Year 2010-11 and in that appeal assessee has filed cross objections. 2. The revenue has raised the following grounds in its appeal :-

a. The assessing Officer made disallowance u/s 14A of the act of Rs. 14,52,485/-- in respect of expenditure incurred by the assessee in relation to income which does not form part of the assessee’s total income . b. AO notice that the assessee had claimed expenses of Rs.7,84,83,193/- on account of power and fuel under schedule 11 titled as manufacturing expenses in the balance for the year ending 31.03.2010. The assessee company did not deduct tax at source on payments made/ credited to M/s MSIL on this account. Therefore as per the provisions of section 40(a)(ia), this expenditure of Rs.5,96,83,010/- is disallowed. Accordingly, as addition of Rs.5,96,83,010/- is made to the total income of the assessee company.

DCIT V Machino Plastics Limited Del 2013 & CO no 199 Del 2013 A Y 2010-11 4. Aggrieved the assessee field an appeal before the learned Commissioner of Income-tax (Appeals), who partly allow the appeal of the assessee. Ld CIT (A) restricted the disallowance u/s 14A to Rs. 13,51,985/- u/s 14A and deleted the disallowance of Rs 5,96,83,010/- u/s 40a (i) of the Income tax act based on his own decision in AY 2009-10. Therefore revenue being aggrieved with the deletion of disallowance of Rs 5,96,83,010/- is in appeal before us and assessee has field cross objection contesting confirmation of disallowance u/s 14A of the Income Tax act.

5. Coming to the ground of the appeal of the revenue where in deletion of disallowance of Rs 5,96,83,010/- is under challenge, brief facts are that assessee has made payments to MSIL for purchases of gas based captive power and for this it has made payments. Ld AO was of the view that tax is required to be deducted on this payment by the assessee u/s 194C of The income Tax Act ,1961. As no tax is deducted by assessee AO has disallowed rejecting the explanation of the assessee that it is not required to deducted tax at sources as it is not a payment for carrying out any work but it is purchase of power.

DCIT V Machino Plastics Limited Del 2013 & CO no 199 Del 2013 A Y 2010-11 “2. The brief facts of the case are that assessee is engaged in the business of manufacturing of plastic, automotive components for Maruti vehicles like bumper, installation penal and grills. It has filed its return of income on 28.9.2009 declaring a loss of Rs.1,89,45,163. On scrutiny of the accounts, learned Assessing Officer observed that assessee had claimed expenditure of Rs.5,16,82,300 on account of power and fuel under Schedule-II titled as manufacturing expenses. Learned Assessing Officer has examined the ledger account of the expenses and the details of payments made to M/s. MSIL in respect of power supply. Learned Assessing Officer has reproduced the summary of such accounts on page Nos. 5 & 6 of the assessment order. He observed that assessee has credited the account of Maruti Suzuki India Ltd. by a sum of Rs.4,80,96,613. In the opinion of the Assessing Officer, assessee had purchased electricity from MSIL and, therefore, it ought to have deducted TDS while crediting the account of MSIL. He issued a show-cause notice. Assessee had contended that it had entered into an agreement with MSIL. There is a gas based captive power generation, where electricity charges are to be accounted on the basis of consumption as well as overhead expenses basis. It is a power sharing project where every constituent has to contribute its share of expenditure. Thus, assessee had paid the expenditure which were fallen to its account. It has not purchased the power on a contract. Learned Assessing Officer was not satisfied with the explanation of the assessee. He made references to clause nos. 3, 4, 6,11, 12, 16 and 17 and observed that it has a colorable device adopted by the assessee. The assessee also contended that such expenses were reimbursed by it right from assessment year 2002-03 and assessments were made under sec. 143(3) in assessment years 2002-03, 2004-05 and 2008-09. No disallowance was made. Learned Assessing Officer was not satisfied with the explanation of the assessee. He made the disallowance of Rs.4,80,96,613 under section 40A(4)(a)(ia) of the Income-tax Act, 1961 for non-deduction of TDS under section 194-C.

3. On appeal, Learned CIT(Appeals) has appreciated the facts and circumstances and gone through the clauses of agreement referred by the Assessing Officer. Learned CIT(Appeals) has culled out following points: “6.4 The contentions of the appellant was considered. The following points emerges: 1. After examining the agreement between M/s. Maruti Udyog Ltd. and the appellant company that was signed in May 2005 it is clear that there does not exist a relationship of principal and contractor between the two entities. The agreement clearly points out that it is a power sharing agreement where certain companies contributed certain amounts on account of cost of the aforesaid captive generating plant and how share the cast of running the said plant primarily on the basis of consumption.

3. The appellant has been claiming depreciation in earlier year on the assets of the captive power plant that it jointly owns with M/s. Maruti Udyog Ltd. and its other venders on a proportionate basis. This shows that the appellant is a part owner of the assets of the captive power plant.

DCIT V Machino Plastics Limited Del 2013 & CO no 199 Del 2013 A Y 2010-11 4. After going through various clauses of the agreement, Learned CIT(Appeals) has held that there is no relationship of principle and contractor between the two entities. The assessee had made contribution of expenditure which were on its own account as a constituent of captive power generation. Learned CIT(Appeals), in this way, deleted the disallowance.

5. With the assistance of learned representatives, we have gone through the record carefully. The assessee has placed on record copy of the agreement between the assessee and MSIL. It was executed on 11.5.2005. It is available on pages 46 to 60 of the paper book. We have gone through the agreement. Learned Assessing Officer has made reference to clause No. 3. This clause has duly been noticed by the Learned CIT(Appeals) on page No. 10 of the impugned order. As per this clause, second party (i.e. assessee ) agrees to reimbursement of fixed and variable cost of power generation and distribution through dedicated transmission line. There is nothing significant in this clause which suggest that it was a service contract between the parties. The assessee has not purchased electricity from MSIL. Apart from this clause, learned Assessing Officer made reference to clause 4. According to this clause, MSIL shall incur certain minimum cost on account of generating electricity from the captive generating plant and assessee agrees to reimburse its shares, on account of minimum monthly unit irrespective of the fact of actual user of the electricity drawn from captive power plant. Learned Assessing Officer drew inference from this clause that assessee would pay minimum monthly charges irrespective of the actual consumption, suggests, that MSIL and assessee entered into a commercial agreement safeguarding their own individual interest. We have perused this clause on page 11 of the Learned CIT(Appeals)’ order, for maintaining a captive plan, the parties are required to incur minimum expenses which is to be shared by them. The assessee was not only required to reimburse price of actual electricity consumed from the plant but in order to keep the plant into running condition, it has to pay something minimum which are the basic amounts. The reading of the complete agreement suggests that it regulates the business between the parties of drawing electricity from a common captive power plant. Learned Assessing Officer has misread it. Learned First Appellate Authority has appreciated the facts and circumstances in right perspective and held that assessee had not availed services of MSIL, rather it is one of the constituents of power generation plant. It has reimbursed cost of its shares. Therefore, while reimbursing cost of its share, it was not supposed to deduct TDS. After going through the order of Learned CIT(Appeals), we do not find any error in it on this issue. Accordingly, the appeal of the revenue is de void of any merit, it is dismissed.”