VIDEOTEX INTERNATIONAL (P) LTD,LUDHIANA vs. JOINT COMMISSIONER OF INCOME TAX, LUDHIANA

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA No.833/Chd/2016 (Assessment Year : 2009-10) Videotex International (P) Ltd., Vs. The J.C.I.T., Ludhiana. Range III, Ludhiana. PAN: AAACV5472C And ITA No.834/Chd/2016 (Assessment Year : 2009-10) Videotex International (P) Ltd., Vs. The Addl. CIT, Ludhiana. Range III, Ludhiana. PAN: AAACV5472C (Appellant) (Respondent)

Appellant by : Shri Navneet Sehgal, CA Respondent by : Shri Manjit Singh, DR Date of hearing : 21.12.2017 Date of Pronouncement : 19.03.2018

ORDER PER ANNAPURNA GUPTA, A.M.:

Both the above appeals have been preferred by the

same assessee against separate orders of Ld. CIT (Appeals)-

1, Ludhiana dated 24.5.2016 and 27.5.2016 relating to

assessment years 2009-10 and 2010-11 respectively.

therefore, they were heard together and are being disposed

off by this common order. For the sake of convenience, we

shall be dealing with the facts in the appeal of the assessee

in ITA No.833/Chd/2016 and the decision rendered therein

would apply mutatis mundis to the appeal in ITA No.834/Chd/2016.

ITA No.833/Chd/2016:

“1. That the prejudicial observations made in the appellate order as well as in the assessment order are either unfounded or not susceptible of giving rise to any adverse conclusion. 2. That the learned Commissioner of Income tax (Appeals) has grossly erred in confirming the application of sec.14A read with Rule 8D of the Income tax Act on the basis of conjectures, surmises and confirming without any basis. The application of sec.14A read with rule 8D of the Act merits deletion. 3. That the action of the Learned Commissioner of Income tax (Appeals) has grossly erred in confirming the disallowance of Rs.2790/- is unwarranted, uncalled for and arbitrary and without appreciating the facts of the case under sec.14A read with Rule 8D of the Income tax Act. The .disallowance of Rs.2790/- merits deletion. 4. That the Learned Commissioner of Income tax (Appeals) has grossly erred in confirming the part disallowance of deduction u/s 80IC of Rs. 6,69,128/- on account of apportionment of certain expenses of Head Office:- Apportioned Directors Remuneration Rs.1,02,00,000/- Keyman Insurance 30,82,210/- Financial Expenses 25,14,832/- (Interest only – Rs.6,38,997/-) Auditor’s Remuneration 90,000/- ------------------ Total Rs.1,58,87,042/- ------------------- Part disallowance = 4,14,81,368 x 1,58,87,042 = Rs.6,69,128/- 98,48,88,110 To eligible unit:- - when these expenses have been incurred wholly and exclusively relate to Head Office only - and the goods have been sold by other units to the eligible unit at Market Rates and - alternatively, and without considering the apportionment of income at Head Office on the basis of conjectures, surmises and without appreciating the facts of the case. The disallowance of deduction merits allowance.

5.That the action of the Ld Commissioner Income tax (Appeals) in confirming the part disallowance of deduction u/s 80IC f Rs.6,69,128/- on account of apportionment of following expenses of Head Office:-

Apportioned Directors Remuneration Rs.1,02,00,000/- Keyman Insurance 30,82,210/- Financial Expenses 25,14,832/- (Interest only – Rs.6,38,997/-) Auditor’s Remuneration 90,000/- ------------------ Total Rs.1,58,87,042/- ------------------- Part disallowance = 4,14,81,368 x 1,58,87,042 = Rs.6,69,128/- 98,48,88,110 To eligible unit:- - when these expenses have been incurred wholly and exclusively relate to Head Office only - and the goods have been sold by other units to the eligible unit at Market Rates and - alternatively, and without considering the apportionment of income at Head Office is arbitrary, unwarranted and uncalled for . The disallowance of deduction merits allowance.” 4. Ground No.1 raised by the assessee is general in

nature and needs no adjudication.

worded and relate to reduction of profits eligible for

deduction u/s 80IC of the Income Tax Act, 1961 (in short ‘the Act’) on account of allocation/apportionment of

common expenses to the eligible unit of the assessee.

company is engaged in the business of manufacturing of

colour TV sets and electronic chassis, with units at

Ludhiana, Noida and Himachal Pradesh. Vis a vis the unit

at Himachal Pradesh the assessee is claiming deduction u/s

80IC of the Act, which amounted to Rs.46,71,374/- during

the impugned year. During assessment proceedings for the

impugned year the Assessing Officer noticed that certain

expenses debited to the Profit & Loss Account of the

assessee company were not proportionately apportioned and

debited to the eligible unit at Himachal Pradesh. After

seeking explanation from the assessee in this regard the AO

allocated the following common expenses in the proportion

of turnover of the Units including transfer to other units:

Directors Remuneration Rs.1,02,00,000/- Keyman Insurance 30,82,210/- Financial expenses 25,14,832/- Service Compensation 18,30,975/- Auditors Remuneration 90,000/- Rs.1,77,18,017/- 8. Accordingly expenses amounting to Rs.7,37,374/- were

allocated to the eligible unit resulting in reduction of

eligible profits and addition to the taxable income of the

assessee to this extent.

the Ld.CIT(Appeals) who after considering the assessees

submissions upheld the allocation of expenses relating to

Directors salary, keyman insurance premium and Auditors

remuneration since no submissions relating to the same

were made before him. Further he held the allocation of

service expenses as unjustified since he found that they

were incurred only vis a vis the other units and not the

eligible unit of the assessee. Regarding the financial

expenses, the allocation of the same was also upheld,

rejecting assessees contention of netting of the same with

income earned. The relevant findings of the Ld.CIT(Appeals)

at para 6.2 of her order is as under:

6.2 I have considered that facts of the case, the basis of the addition and the arguments of the AR during the course of the assessment as well as the appellate proceedings. The Assessing Officer has reallocated the expenses pertaining to all the units i.e. Director's salary, keyman insurance premium, financial expenses, service compensation and auditor remuneration. The appellant has not filed any submissions relating to the reallocation of Director's salary, keyman insurance premium and auditor's remuneration either before the Assessing Officer or during the appellate proceedings. The said reallocation done by the Assessing Officer pertaining to these expenses and the disallowance of the same u/s 80IC is upheld. However, the service compensation is paid only by the Ludhiana and Noida Unit to the service agents at the time of sales. No service compensation is paid to any outsider/ agent by the Himachal Pradesh unit and therefore reallocation of the said expense is not justified for the purpose of deduction u/s 80IC and the Assessing Officer is directed to recalculate the deduction u/s 80IC accordingly. Regarding the financial expenses, the plea that the interest received is more than the interest paid and also that if the interest paid is considered as a common expense, the credit for interest received should also be given, is not acceptable as no such netting can be allowed for calculating the deduction u/s 80IC. Interest income cannot be treated as profits and gains derived and undertaking by an enterprise from any business refer to in sub sec 2 of Sec 80IC. Therefore, this plea is not acceptable and reallocation of financial expenses by the Assessing Officer is held to be justified. These grounds of appeal are partly allowed.”

appeal before us. During the course of hearing before us,

the Ld. counsel for assessee raised only two arguments

against the allocation of expenses sustained by the CIT(A);

i) that the goods were transferred from other units to

eligible unit at profit and, therefore, no expenses were

required to be allocated to the eligible unit. Reliance

was placed on the decision of the I.T.A.T. Ahmedabad

Bench in the case of Cadila Healthcare Ltd. Vs.

Addl.CIT reported in 21 TAxmann.com 483 and

decision of the ITAT Chandigarh Bench in the case of

Amartex Industries Ltd. Vs. Addl.CIT reported in 37

Taxmann.com 455;

ii) that in any case the entire financial expenses could

not be said to be common expenses incurred on behalf

of all the units of assessee since it included interest

on car loan and letter of credit charges which were

incurred solely for the head office only. It was also

pleaded that the financial expenses allocated should

exclude interest paid since the interest received was

much more than that paid.

of the Ld.CIT(Appeals).

pertains to allocation of common expenses incurred by the

head office to the eligible unit of the assessee Himachal

Pradesh unit for the purpose calculating the quantum of

deduction available u/s 80IC of the Act. The fact that the

assessee’s unit at Himachal Pradesh is eligible to claim

deduction u/s 80IC of the Act is undisputed. Further the

fact that following expenses have not been allocated to the

eligible unit at Himachal Pradesh is also not undisputed:

1) Directors remuneration Rs.1,02,00,000/- 2) Keyman Insurance 30,82,210/- 3) Financial expenses 25,14,832/- 4) Auditors remuneration 90,000/-

against the allocation/apportionment of the aforesaid

expenses to the eligible unit is that the goods were

transferred to the eligible unit from other units at a profit

including all costs therein ,therefore the common costs

stood automatically apportioned on transfer of goods. It

was stated by the Ld. counsel for assessee that the assessee

company had three units in Ludhiana, Noida and Khadeen

Kamil, Himachal Pradesh. The Ld. counsel for assessee

stated that while units in Ludhiana and Noida were engaged

in the manufacturing electronic sub assembly and color TV

sets, the unit in Khadeen Kamil was engaged only in the

manufacturing of color TV sets. The Ld. counsel for

assessee submitted that the electronic sub assemblies

required by the eligible unit were transferred from the other

units to eligible unit at the same price as it was sold to

others, at cost plus margin as required under the Central

Excise Act. The Ld. counsel for assessee stated that in

such a situation there was no question of transfer of

administrative expenses to the eligible unit. The Ld.

counsel for assessee stated that the above submissions had

been made to the Assessing Officer and drew our attention

to the letter filed before the Assessing Officer placed in the

Paper Book. The Ld.AR stated that the Central Excise Act

prescribes excise to be charged at cost plus administrative

overheads and other charges and the assessee had

transferred the electronic sub assembly at market price to

its eligible unit. The Ld. counsel for assessee also drew our

attention to the comparative sale bills of the electronic sub

assembly to the eligible unit and other units to prove its

point placed in the Paper Book.

that the goods had been transferred at sale price did not

and could not raise a presumption that all administrative

cost had been transferred proportionately to the eligible

units.

We do not find merit in this argument of the Ld. counsel for

assessee, firstly for the reason that the impugned expenses

as a matter of record are not incurred in the non-eligible

units but are common expenses which have not been

allocated to any of the units of the assessee whether eligible

or non-eligible. The finding of fact in this regard by the

Assessing Officer at para 3.2 of his order categorically

stating this fact is as under:

“3.2 The fact remains the following expenses are pertaining to all the units but the same have not been allocated at all or even if allocated not proportionately. The following expenses pertain to all the units and required to be allocated to all the Units in proportion to total turn over. S.No Particulars of expenses Amount Rs. 1 Director salary 10200000 2 Keyman insurance premium 3082210

3 Financial expenses 2514832 4 Service compensation 1830975 5 Auditor remuneration 90000 Total 17718017

assessee either before the Assessing Officer, the

CIT(Appeals) or even before us. Moreover the assessee has

also not established as a matter of fact that the costing of

sub assemblies worked out by the non-eligible units for the

purpose of transfer to the eligible units included such

unallocated expenses. The assessee has neither filed any

cost sheet in this regard before us of the sub assemblies

transferred or the calculation of the cost for the purpose of

levy of excise duty as claimed by the assessee. Therefore,

when the fact that the said expenses are included in the

cost of the sub assemblies transferred to the eligible units

by the non-eligible units has not been established, the

claim of the assessee that by virtue of transferring goods by

non-eligible units to the eligible units at selling price

results in allocating common expenses to the eligible unit,

falls flat. Except for making such claim the assessee has

made no effort for establishing the said facts before any of

the authorities. The claim of the assessee is, therefore,

liable to be dismissed for this reason alone. Further even if

the contention of the Ld. counsel for assessee that the cost

of sub assemblies transferred includes indirect and

impugned unallocated expenses, is accepted this fact alone

does not establish the allocation of the impugned common

expenses to the eligible units. As per the assessee’s

contention that the indirect common cost are allocated to

the eligible units on transfer of sub assemblies, what

emerges is that the said cost are allocated to the extent and

in relation to the goods transferred to the eligible units by

the non-eligible units. Now, without bringing on record he

quantum of goods so transferred to the eligible units, the

extent of common cost/expenses allocated to the eligible

units cannot be established. Therefore, it cannot be

determined whether reasonable common expenses have been

allocated to the eligible units by adopting this method of

allocation of expenses. The contention of the assessee is,

therefore, dismissed for this reason also. We may conclude

that in the absence of any relevant factual data provided by

the Ld. counsel for assessee, the contention of the assessee

that the impugned common cost stood allocated to the

eligible units when the sub assemblies were transferred to

the eligible units by the non-eligible units at market price

is dismissed. For the same reason we also hold that no

benefit can be derived by the assessee by relying on any

judgement since each judgement is rendered in the context

of the peculiar facts of the case which have to be read

alongwith the same for a correct interpretation of the

judgement.

expenses. The Ld. counsel for assessee drew our attention

to the details of financial expenses placed at Paper Book-12

as under:

Interest Rs.548154.08 Credit Charges 1319125.54 Processing charges 53346.00 Interest to others 10601.22 Interest of Credit Charges 503364.00 Interest on Car Loan 80242.00 _____________ Total Rs. 2514832.84 --------------- 18. The Ld. counsel for assessee thereafter pointed out

that the letter of credit charges were incurred vis-à-vis the

imports made of sub assembly by the head office from

China which was submitted to the Assessing Officer also

during assessment proceedings. The Ld. counsel for

assessee, therefore, stated that there was no reason to

allocate the same to the eligible unit. The Ld. counsel for

assessee further stated that the interest on car loan also

pertained to car purchased by the head office and had

nothing to do with the eligible unit and was also, therefore,

not required to be allocated.

contention of the Ld. counsel for assessee and, therefore,

we agree with these contentions and direct that the letter of

credit charges and interest on car loan be excluded for the

purpose of allocation to the eligible unit. The Ld. counsel

for assessee stated that the interest expenses included in

the financial expenses should be netted with the interest

received during the year or alternatively the interest earned

should also be allocated to the eligible units. We find merit

in this contention of the Ld. counsel for assessee. If

interest expenses incurred benefiting all the units are to be

logically allocated to all the units, similarly interest

income, common to all the units and not particularly earned

by any one unit is also to be allocated to all the units. The

benefit of netting is thus to be allowed to the assessee. We,

therefore, agree with this contention of the Ld. counsel for

assessee also. In view of the above, we uphold the

allocation of common expenses being directors

remuneration, keyman insurance and auditors

remuneration, while the financial expenses to be allocated

are to be reduced by the letter of credit charges and the

interest on car loan and the remaining interest expenses

are to be allowed after netting. Ground of appeal no.4 &5

are therefore partly allowed

In view of the above, the appeal of the assessee stands

partly allowed.

ITA No.834/Chd/2016:

circumstances of this appeal are similar to the facts and

circumstances in ITA No.833/Chd/2016 and the findings

given in ITA No.833/Chd/2016 shall apply to this appeal

also with equal force. The appeal of the assessee is partly

allowed.

partly allowed.

Order pronounced in the Open Court. Sd/- Sd/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 19th March, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR Assistant Registrar, ITAT, Chandigarh