TMI Blog2014 (4) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a manner to increase the profit of Kathua Unit and reduce the profit of Kallakal Unit - the AO is justified in redrafting of Profit and Loss A/c. assessee's three units so as to bring the true profit for taxation. In the preceding year the Department has no grievance and that the expenses incurred were pure and simple administrative expenses, monitoring the requirement of finance and other action which are necessary for running of the business - in the absence of any details made available by the assessee to establish that particular expenses were incurred for its particular unit out of its three units, the expenses have to be treated one for all the three units which has to be divided based on the proportion of the turnover - the assessee having failed to furnish satisfactory explanation to the discrepancies noticed by the AO, including the nomenclature of various commodities mentioned in the sale bills, the assessee's unit-wise accounts are not reliable – the AO is justified in redrawing the Profit and Loss A/c. based on the turnover of the assessee's units so as to grant deduction u/s. 80IB of the Act – Decided against Assessee. Computation of deduction u/s 80IB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which 100% tax exemption under section 80IB(4) is claimed (for short Kathua unit ). 3. The assessee maintains separate set of books for all the above units. As per the books of accounts, the profits reported by the assessee for the respective units at Kallakal, Kanchipuram and Kathua units are Rs. 2,82,40,824/-, (-) Rs. 99,093/- and Rs. 6,92,24,879/-, respectively. The Assessing Officer in the course of assessment entertained a suspicion that the assessee has organized its business in a manner whereby the profits in the non-exempted units are transferred to Kathua unit (which is a 100% tax exempted unit) by transferring finished goods/raw materials there by enabling Kathua Unit to make more profits. For examining the above issue, the Assessing Officer had called for details of the raw materials dealt with by the assessee in respective units, details of finished products manufactured by respective units and details of financial data for the respective units. The details of Profit and Loss A/c. are as follows:- 3.1 From the details furnished by the assessee, the Assessing Officer came to a conclusion that there was transfer of finished goods from Kallakal Unit to Kathua U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excise records and sales tax returns. The books are audited and in specific sales tax audit is also conducted for Kathua unit; (iv) No discrepancies whatsoever were pointed out in purchases or sales of each unit; (v) Each unit is selling their product to different parties and in most of the cases product also differs from one unit to another unit; (vi) The material sold by Kallakal Unit to Kathua unit is not sold to outside parties. This itself proves that it is a raw material which is intermediate chemical which require further process at Kathua Unit; (vii) The Kallakal unit has sold 3.29 crore worth of material out of 33.89 crore to Kathua Unit at cost plus method and at arm's length price; (viii) The expenses of Kallakal unit for the Fys. 2005- 06, 2006- 07 and 2007-08 are in proportionate to the turnover, and Kallakal unit has not spent any additional expenditure for the Kathua Unit; (ix) The statement of Sri Dinesh Bhargav (Ans: 17) specifically states that Kathua unit was set up with a view to provide better services to the paper industry as Hyderabad Unit is far off from north ; (x) The Kathua unit was entitled for reimbursement of duty to the tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses for excluding from prorate purpose. The expenditure like manufacturing expenses, payment and provision to employees and depreciation are direct expenses of the each unit and are not common to all units and hence should be excluded from the prorate distribution. Neither the AO nor the CIT(A) has pointed out any expenditure incurred by Head office towards manufacturing activity of Kathua Unit. Against this, the assessee is in appeal before us and raised the following grounds: (1) The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the order of assessment being based on surmises and conjunctures and far from hard facts of the assessee's case is erroneous and is liable to be quashed. The Assessing Officer throughout the assessment proceedings entertained suspicion and therefore could not appreciate the facts submitted before her in proper perspective. (2) The learned Commissioner of Income Tax (Appeals) ought to have held that the Assessing Officer erred in estimating the profits by redrawing the accounts by distributing the total expenditure of the business of three units in proportion to their turnover to all the three units. (3) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the prorate which are direct attributed to the each unit. The expenditure like manufacturing expenses, payment and provision to employees and depreciation are direct expenses of the each unit and are not common to all units and hence should be excluded from the pro rate distribution. (8) The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the method adopted of redrawing the accounts is totally baseless and does not stand to reason and logic. In the absence of a finding that finished goods were transferred from Kanchipuram unit to Kathua unit, the entire exercise carried out by the Assessing Officer is futile and unsustainable. For these and other grounds that may be urged at the time of hearing, the assessee prays that the appeal may be allowed. 10. The Revenue also raised in its appeal the following grounds: (1) The order of the CIT(A) is erroneous both on facts and law. (2) The CIT(A) erred in observing that the purchases and sales are directly linked unit-wise. The CIT(A) should have appreciated the fact that the stock transfer admitted by the assessee itself shows that the purchases were not done unit-wise. (3) The CIT(A) has erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Kathua Unit is serving to the customers in the area where manufacture of paper chemicals are not many. Further, they are small in compared to the customers of the Kallakal Unit. Therefore, the bargaining power and negotiable capacity is less of the customers of the Kathua Unit in compared to customers of the Kallakal unit. The other reasons like package deduction, power and fuel, excise refund and other expenditure is given in the statement, The list of customers of the Kathua Unit as well as Kallakal Unit was furnished. It shows clearly that customers of the Kathua Unit are small player in paper industries in compared to customers of the Kallakal Unit. f) The statement of monthly production of Kathua Unit was also furnished. g) The AR relied on the judgement of Hon ble Supreme Court in LM Chhabda Sons vs. CIT 65 ITR 638 (SC) wherein it was held that there is no such general principle that where an assessee carried on business ventures of the same character at different places, it must be held as a matter of law that the different units are parts of a single business. h) The AR also relied the judgment the Hon'ble Supreme Court in the case of Waterfall Estate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the amount of profits as may be reasonably deemed to have been derived therefrom. 10.1.2 As can be seen from the provision, the Assessing Officer can only invoke this provision only when there is a close connection between the assessee carrying on the eligible business and any other person or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits. This sub-section postulates that there should be close connection between the assessee and any other person. In this case, the assessee is generating and also transmitting in its business only. There are no transactions with any other person. As submitted by the Learned Counsel, section 80IA(10) has no relevance to the assessee s business transactions in generation and transmission of power. Accordingly, we are of the view that invoking the provisions of section 80IA(10) does not arise in this case. As already stated elsewhere in the facts of the case, the Assessing Officer originally has invoked section 80IA(8) which is the correct provision applicable to the transactions of the assessee. Section 80IA(8) is as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxmann.com 213 (Mum. Tribunal.) (h) CIT vs. Wipro Ltd. (360 ITR 606) (Karn.) (i) DCW Ltd. vs. Addl. CIT, 132 TTJ 442 (Mum) wherein held as under: 18.2 1st reason for disallowance of deduction under section 80-IA is in respect of electricity tax whether part of market price or not. The crux of the matter to be examined here is what should be the market price of the electricity while transferring the manufactured electricity from C.P.P. unit to other unit for the purpose of calculation of deduction under section 80-IA(8) of the Income-tax Act. The assessee, while transferring the manufactured electricity from C.P.P. unit to other unit, has taken into account the electricity tax levied by the State Government on the bill amount at the rate of Re. 0.18 per unit charged by the Tamil Nadu Electricity Board from the consumers on the bill raised. The CIT(A) was of the view that the electricity tax is a statutory and extraneous payment the same cannot form part of the market price. The CIT(A) heavily relied upon the decision of Mumbai Bench in the case of West Coast Paper Mills Ltd. (supra). The relevant section 80-IA(8) of the Income-tax Act reads as under:- 80-IA. Deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The market value is an expression which denotes a price arrived at between the buyer and the seller in the open market wherein the transactions take place in the normal course of trading and competition in contrast to a situation where the price is fixed between a buyer and a seller in a negotiation done under the shadow of legislatively mandated compulsion. In the case of the former, the price fixed between the buyer and seller can be understood as denoting 'market price' since the elements of trading and competition exist, whereas in the case of the latter situation, the price fixed between the buyer and seller cannot be understood as denoting the market price since the elements of trade and competition are conspicuous by their absence. 18.4 The facts of West Coast Paper Mills Ltd.'s case (supra) are that the assessee was engaged in the manufacture and sale of paper and paper boards, multilayer boards, etc., and in the business of power generation. The assessee had set up four DG Units to facilitate its power requirement in the paper plant at Dandeli in Karnataka. The assessee claimed deduction under section 80-IA on the ground that these DG Units were catering to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... traneous charges and its fair market value was to determine. The ITAT was of the view that the average rate minus certain extraneous charges was fair and reasonable rate. We find force in the submission of the learned AR that the case decided by the ITAT as above is not applicable to the facts of the case under consideration as that case decided on the issue that which rate is to be adopted out of two rates available on record, i.e., one is adopted by the assessee and the other adopted by the CIT(A). Since there was no issue to decide whether market value of the electricity unit minus certain extraneous charges, therefore, that decision is distinguishable on facts. 18.5 In the light of above discussions if we considered the facts of the case under consideration we noticed that the Assessing Officer did not dispute the price taken by the assessee. The CIT(A) has taken action under section 251(1)(c) of the Act whereas the requirement of the section is that where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily fetch in the open market, therefore, the CIT(A) was not correct in disallowing claim of assessee under section 80- IA of the Act on this ground. 18.6 2nd reason for disallowance of deduction under section 80-IA is in respect of allocation of indirect expenses. We noticed that for the purpose of deduction under section 80-IA only income derived from industrial undertaking that has to be reckoned in computation as such the income and expenditures which are not directly relatable to that industrial unit cannot but be ignored, in other words, such income and expenditure need not to be considered. In view of this position, the CIT(A) is not justified in allocation 25 per cent of such indirect expense which are not directly relatable to that industrial unit to eligible unit for the purpose of computation of income for deduction under section 80-IA of the Act. The order of CIT(A) on the issue is set aside. 13. On the other hand, the learned DR submitted that the provisions of section 80IA(8) are applicable as the assessee has transferred the finished goods from Kallakal Unit to Kathua Unit at lesser than market price so as to increase the profit of Kathua Unit and decrease prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kal units cannot be equated in the situation where the price is determined in normal course of trade and competition. The price at which the Kathua Unit purchased the material from Kallakal Unit could be considered at market price for the purpose of section 80IA(8) only if the price charged is as charged by Kallakal Unit to the goods sold in open market. Thus, the price at which the Kathua Unit got it from open market is the same to be paid to the Kallakal Unit. 16. In the present case, the AO brought on record the anomaly/variation in booking various expenditure by Kathua Unit as compared Kallakal Unit as mentioned in the argument of the DR. The AO clearly brought on record the various methods adopted by the assessee in booking various expenditures by inflating the same as seen from the comparative statement furnished by the DR. The assessee failed to give proper explanation with regard to higher expenditure on account of manufacturing, salary, administrative and selling expenses in Kallakal Unit as compared to Kathua Unit and it is not in proportion to the sales. Further, it was also brought on record by the AO that no freight charges was charged nil in Kathua Unit as recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee units which has to be divided based on the proportion of the turnover. 19.1 To sum up, the assessee having failed to furnish satisfactory explanation to the discrepancies noticed by the AO, including the nomenclature of various commodities mentioned in the sale bills, we are of the opinion that the assessee's unit-wise accounts are not reliable. Being so, the Assessing Officer is justified in redrawing the Profit and Loss A/c. based on the turnover of the assessee's units so as to grant deduction u/s. 80IB of the Act. Accordingly, all the grounds raised by the assessee in its appeal are dismissed and the appeal of the assessee is dismissed. 20. Now we will take up the Department appeal in ITA No. 892/Hyd/2012. The first effective grounds i.e., ground Nos. 2 and 3 are as follows: (2) The CIT(A) erred in observing that the purchases and sales are directly linked unit-wise. The CIT(A) should have appreciated the fact that the stock transfer admitted by the assessee itself shows that the purchases were not done unitwise. (3) The CIT(A) has erred in ignoring the provision of 80 IB(13) read with 80 IA(10) which were squarely applicable to the facts of the assessee& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naskatha unit and the same being in the nature of indirect expenses, there was no reason to consider the same while determining the profit derived from the manufacturing unit at Banaskatha for the purpose of allowing deduction u/s 80IB. The learned CIT(Appeals) did not find merit in the stand taken by the assessee. According to him, the expenses incurred in relation to head office and registered office at Mumbai were partly attributable to Banaskatha unit and while computing the profit of the said unit eligible for deduction u/s 80IB, the same should have been taken into account. He, therefore, upheld the action of the AO in deducting the head office expenses while computing the profit of Banaskatha unit on prorate basis for the purpose of computing profit of the said unit eligible for deduction u/s 80IB. 5. We have heard the arguments of both the sides and also perused the relevant material on record. It is no doubt true that deduction u/s 80IA/80IB is allowable in respect of profit derived from the eligible undertaking as held by the coordinate bench of this Tribunal in the case of DCW Ltd. vs. Addl. CIT 37 SOT 322 relied upon by the learned counsel for the assessee. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us with the 'operational profits' derived from the industrial undertaking. 25. She had also observed that the income of Rs. 1,09,26,502 attributable to the receipt of Excise duty refund received by the assessee cannot be considered for the computation of deduction u/s. 80IB of the IT Act, 1961. Therefore, the assessee is not eligible for deduction u/s. 80IB(4) of the IT Act, 1961 on profit attributable to Central Excise duty refund. Accordingly, she had disallowed the deduction to the extent of Rs. 1,09,26,502 and directed to add to the returned income of the assessee as 'Income from other sources'. Against this, the Revenue is in appeal before us. 26. The learned DR relied on the judgement of Hon ble Supreme Court in the case of Liberty India vs. CIT (317 ITR 218) wherein the Apex Court held that DEPB/Duty Drawback are incentives which flow from the scheme framed by the Central Government or from section 75 of the Customs Act, 1962. Hence, incentives are for profits derived from the eligible business and, therefore, DEPB benefits/Duty Drawback receipt do not form part of net profit of the industrial undertaking for the purpose of section 80IA/80IB of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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