TMI Blog2012 (8) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... uty, cess or fee actually paid or incurred by the assessee to bring goods to the place of its location and condition as on date of valuation is required to adjust as per law by the A.O - A.O. is directed to make suitable adjustment as per law. - ITA No. 715 & 716/Ahd/2010 - - - Dated:- 25-5-2012 - Shri D.K.Tyagi, Shri T.R. Meena, JJ. By Appellant: Shri Dinesh Chandra Sharma, Sr. D.R. By Respondent Shri Yagnesh Desai, A.R. O R D E R PER : T.R.Meena, Accountant Member These are two appeals of the revenue arises out of the order of CIT(A)- I, Baroda, orders dated 25.11.2009 26.11.2009 for assessment years 2004- 05 2005-06 respectively. 2. The main addition was made by the A.O. under Section 40A(2) (b) of the IT Act in A.Y. 2004-05 at Rs. 5,25,000/- and Rs. 1,50,853/- and in A.Y. 2005-06 the addition was Rs. 6,00,000/- and Rs. 3,04,197/-. The third ground of appeal for A.Y. 2005-06 is against deleting the addition of Rs.4,59,676/- on account of adjustment of Excise Duty on closing stock under Section 145A of I.T. Act. 3. The effective grounds of ITA No. 715/A/2010 for A.Y. 2004-05 are as under:- 1. On the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of excise duty on purchase, sales and closing stock u/s. 145A of the Act. The method adopted by the assessee by excluding excise duty for the purpose of valuation of finished goods is untenable and in order to show decreased profit rate in view of section 145A of Finance (No.2) Act, 1998 w.e.f.01.04.1999. 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. 5. Apropos to ground nos. 1 and 2 are as stated:- (a) Transaction with M/s. Baroda Intermediates Pvt-Ltd. As stated above the assessee company had entered into a contractual agreement dated 13th Oct. 2000 with M/s, Baroda Intermediates Pvt. Ltd. (hereinafter referred to as BIPL) for causing to carry out certain processes at its factory facility at 128/27,GIDC, Nandesari. Under the said service contract the assessee company was to provide the contractee i.e. BIPL the raw materials for the manufacture of products enlisted in the said service contract. All the overheads relating to manufacture and other incidentals were to be borne by M/s. BIPL. In recognition of the service contract the assessee company was contracted to pay BIPL service charges of Rs.175000/- PM. During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of Rs. 50 lacs appeared to be higher on the higher side resulting in excessive payments being made by the assessee company in respect of the transaction of service contract with M/s. BIPL. Accordingly it was proposed that adopting reasonable standard rate as per the market trend 25% disallowance was proposed to be made. This entailed addition of Rs. 525000/- (i.e. 25 x 21 / 100) It was submitted in this regard that the payment made to BIPL for outsourcing production of 4/NAP was reasonable in view of the fact that the production charges incurred by the assessee in house was higher than the production charges incurred by BIPL for the manufacture of the same product. It was also pleaded that since it was economical for the assessee company to outsource the manufacture of its products it had taken the business decision having regard to commercial expediency to engage the services of BIPL whose machineries were otherwise lying idle. It was also stated that for use of any facility the owner of such facility would always charge a certain lumpsum amount to pay as deposit for enabling the use of such facilities and therefore it was ordinary business transaction for the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details furnished in this regard, the per kilogram cost of production for 4/CAP has been worked out by the assessee company at Rs. 51 per kg, thus the total cost incurred for manufacturing of 55.065 MT of 4/CAP by YIPL worked out to Rs. 2808365/- against which they had received the service charges of Rs. 225000/- PM in all amounting to Rs. 27 lacs. It is further to be stated in this regard that YIPL being a separate entity also would be recovering a sum equivalent cost plus profit for its manufacturing activities. Considering profit element of 10% of the cost of production the total sale value of YIPL inclusive of labour and cost would approximately amount to Rs. 3089147/- (i.e.2808315 + 280832 = 3089147). As in the case of BIPL the assessee company had placed a deposit of Rs. 45 lacs with YIPL for which the interest loss at 12% of Rs. 45 lacs is also required to be considered as the cost adding upto the service charges payable / paid by the assessee company to YIPL. Thus a sum of Rs. 540000/- being the interest income which otherwise would have been earned stood ceded in favour of YIPL and together with the service charges of Rs. 27 lacs, the total outflow of economic resources e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the specified person or the specified person has a substantial interest in the business of the assessee. It is noteworthy that having any interest would not be sufficient to attract the provisions; the interest must he a substantial interest. In the explanation below section 40A(2) substantial interest had been defined, in the case of a company, to mean the beneficial owner of shares carrying not less than 20% of the voting power. Here, the shareholding of both BIPL YIPL in the assessee company was NIL, On the contrary, the assessee owned 12.04% of the shares of BIPL. Hence, the transactions with BIPL YIPL would not be hit by the provision of section 40A(2)(b). 5.5. In the instant case, the assessee made advances to its associated concerns for enabling them to utilize the same as operating capital, which in turn was to be used for ensuring production of 4-NAP and 4-CAP. There is hence a direct co-relation and nexus between the advances made and the benefit derived by the appellant. By paying the service charges as well as the interest-free advances to its sister concerns, the appellant company could achieve higher turnover and correspondingly higher profits. Just b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (B-A) 1,50,853 b) In case of M/s BIPL Ld. AO has simply disallowed 25% of job charges of Rs. 21,00,000/- which works to Rs. 5,25,000/- . Ld. AO if ought to have followed the same basis as adopted in case of M/s YIPL which works as Particulars Amt (Rs.) Cost of M/s BIPL 23,53,100 Add: Notional Profit @ 10% 2,35,310 Total (A) 25,88,410 Service Charges Paid by defendant 21,00,000 Notional Interest @ 12% on deposit of Rs. 50,00,000/- 6,00,000 Total (B) 27,00,000 Disallowance (B-A) 1,11,590 Copy of Audited Accounts of M/s BIPL for verification of cost is attached as per Annexure B for ready reference though it has already been furnished during assessment proceedings. Thus, prima facie excess disallowance of Rs. 4,13,410/- has been made by Ld. AO Which may be retained if Your Honour intends to allow revenue s appeal. 3) As per the facts, both M/s BIPL and M/s YIPL has worked exclusively for the defendant during the hearing, deploying their production staff and production facility including electricity for the purpose of manufacturing on job-w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expediency. None the less the issue evolved is disallowance U/s 40A(2)(b) and not the rejection and not the disallowance of the interest paid U/s 36(1)(iii) where the funds thereof have been used in making interest free loans. 7) U/s 40A(2)(b), onus is on the Ld. AO to justify unreasonable or excessive payment which in-fact has not been so discharged. Ld. AO has not cited similar payments made between the dependant parties data thereof available in public domain. Simply, Ld. AO has opted to indirectly tax the notional interest on interest free advance under the guise of Sec 40A(2)(b) where its actual taxation is not permitted U/s 28. Hence, from this ground as well Ld. AO is not justified in making this disallowance. 9. We have perused the order of the authorities below. The A.O. made hypotheticated calculation in assessment order without any base and material. The addition was made on presumption. In both years, there is no nexus between the borrowed fund and interest free loan. The assessee did not take substantial interest in the business of the specified person or the specified person has a substantial interest in the business of the assessee. The A.O. has not brought o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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