TMI Blog2014 (10) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... ments - Disallowance u/s 40(a)(ia) - Manufacturing companies made any profit on account of payments or not – Held that:- The transactions are so arranged that excise duty was paid first and then claim as refund later - There is evidence on record that assessee was providing funds to the OCMs for payment of excise duty which as and when refunded were passed to Assessee company/ or to the bank who provided loans as per arrangement - Consequent to the withdrawal of the notification, those assessees have become liable to pay the excise duty and since they were only getting service cost for manufacturing cigarette, the liability in a way is passed-on to assessee company - whether the amounts were paid as compensation or whether amounts are paid for business expediency or against the notice issued by Excise Department to Assessee, the fact is that ultimate liability is that of assessee company. In that view, assessee’s claim of entire amount being paid directly to the Excise Department is to be accepted - ultimate liability is that of assessee company as the cigarettes were manufactured at the instance of Assessee company and any excise duty liability is on Assessee company - assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remitted back to the AO to examine whether any disallowance is required to the extent of interest amount provided at the end of year, if paid immediately as provided u/s 43B - the amount has been paid during the year, the amount is correctly allowed by the AO even though he did not examine it completely - the directions of CIT is modified given in the order u/s 263 and the AO is directed to examine the amount of interest provided under the provisions of section 43B - If the same is not discharged under the provisions, it may require disallowance u/s 43B – Decided partly in favour of assessee. - ITA No. 758/Hyd/2011 - - - Dated:- 16-9-2014 - B. Ramakotaiah, AM And Asha Vijayaraghavan, JM,JJ. For the Appellant : Mr. H. Srinivasulu For the Respondent : Mr. P. Somasekhar Reddy ORDER Per B Ramakotaiah, A.M. This appeal by Assessee is directed against the Order of Ld. CIT-III, Hyderabad dated 31.03.2011 for the A.Y. 2006- 2007. 2. Briefly stated, Assessee VST Industries Limited is a company in which public are substantially interested and is carrying on the business of manufacture and sale of cigarettes. For the assessment year 2006-07, Assessee filed its r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od February 2000 to October 2000, when their services were utilized for manufacture cigarettes in their factories situated in Northern Eastern States. The OCM's had claimed the benefit of Excise Duty exemption as it was then available, for the period February 2000 to October 2000. Thereafter, Assessee Company discontinued the manufacturing Contract with the OCM's and had no business relationship with them. Subsequently, the Government of India withdrew, retrospectively, the benefit of excise duty exemption to the units in North Eastern States vide Sec.154 of the Finance Act, 2003. The said retrospective withdrawal of Excise duty exemption and retrospective amendment of the law, was upheld, after a prolonged legal battle, by the Honourable Supreme Court vide order dated 19th September,2005. As a result demands were raised on the OCM's for payment of the Excise Duty of ₹ 31,19,52,341, in respect of which they had earlier availed exemption (the benefit of which was passed on to Assessee) and further interest of ₹ 12,69,19,426 on the excise duty demand. These demands pertain to the manufacturing carried out by the OCM's during the period of February 2000 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n discharging of the excise duty demands. 4.3. It is therefore, submitted by Assessee that the impugned payments are not liable to deduction of tax at source under section 194C of the Act and consequently, no disallowance is required to be made under section 40(a)(ia) of the Act. 4.4. It was also submitted that in view of the above facts and circumstances of the cases, the assessment is not erroneous and prejudicial to the interests of the Revenue. It was also submitted that the said four OCM's have not made any profit out of the payment of excise duty and interest, and hence, there is no loss of revenue and hence revision of the assessment u/s.263 is not permissible. 5. The CIT passed an order u/s 263 dated 31.03.2011 and in para 4 of the order, gave a factual finding that the Contract manufacturing work ended by October,2000 and there was no business relationship of Assessee with these companies after the expiry of the contract period mentioned above and by April 2001. 5.1. However, the CIT in the impugned order u/s 263 went on to consider the allowability of the payments to the OCM's u/s 37(1) and the commercial expediency of the payments. The CIT held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, Assessee is in appeal before us and has raised as many as 15 grounds on the above issue which are nothing but various submissions on the issue. The summary of the grounds are in fact can be represented in grounds no. 14 and 15 which are as under : 14. The learned CIT-III ought to have appreciated that (a) the impugned payments are genuine (b) the manufacturing companies have not made any profit on account of impugned payments and (c) the impugned payments are to discharge of a statutory liability, and consequently ought to have upheld the expenditure claim by the appellant instead of resorting to technical considerations to revise the assessment which has reached finality. 15 For these and any other ground or grounds of appeal that may be urged at the time of hearing. a) It is prayed that the impugned order u/s 263 dated 31.03.2011 be quashed and the assessment order dated 27.11.2008 be restored. b) that the Assessing Officer be directed to keep in abeyance and not to proceed to give effect the impugned order u/s 263 and not to rise any additional tax, interest or other demands in pursuance of the impugned order u/s 263, till the disposal of this appeal by the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest payable provided in the books of accounts are to be examined under provisions of section 43B. There seems to be no enquiry on this aspect. In this regard, to the extent of invoking jurisdiction by Ld. CIT under section 263, we agree with the orders of Ld. CIT that A.O. has not examined the issue in correct perspective, therefore, these proceedings under section 263 to that extent are upheld. 10. Coming to the merits of the issue, however, in the opinion of Ld. CIT the amount should have been disallowed under section 40(a)(ia) as per the notice issued. However, in the final order passed by him under section 263 in addition to the provisions of section 40(a)(ia), he also invoked provisions of section 37(1). As rightly submitted by learned A.R. these two provisions are mutually exclusive. Unless the amount is allowable under section 37(1), provisions of section 40(a)(ia) cannot be invoked. Therefore, there is a contradiction in the stand taken by the Ld. CIT. Be that as it may, we examine the issue on merits in order to arrive at a conclusion whether direction of Ld. CIT can be upheld. There is no dispute with reference to the fact that assessee has entered into agreements wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igarette companies which have closed down their cigarette manufacturing units but started new business in other products. C. Industrial units which have set up their own units and have reinvested their earnings in their businesses in the State after closing down the manufacture of cigarettes. Some units have admittedly not passed on the excise duty benefits to their customers. On the other hand the large cigarette companies have recovered the excise duty from the customers. Other units claim to have passed on the benefit of the entire exemption to their customers. All the petitioners however claim that they would be financially crippled if they were called upon to repay the refund of the excise duties or pay the excise duty on the cigarettes manufactured by them. According to them the quantum of excise duties would far exceed their profits from the manufacture of cigarettes. The respondents on the other hand have urged that the petitioners were merely fronts for the large cigarette companies which had misused the notification to avoid the excise duty otherwise payable by them. This was clear from the agreements entered into between them and the various industrial units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not by itself invalidate the demand. [See: Epari Chinna Krishna Moorthy vs. State of Orissa (supra)] It needs to be emphasized that in effect the retrospective operation extended over a very short period and principles of equity must give way to express statutory provision. As was said in Story on Equity (3rd Eng.Ed.1920)p.34:- Where a rule, either of the common or the statute law, is direct, and governs the case with all its circumstances, or the particular point, a court of equity is as much bound by it as a court of law, and can as little justify a departure from it . No doubt in British Physical Lab India Ltd vs. State of Karnataka Ors. (1999) 1 SCC 170 relied upon by the petitioners the Sales Tax Authorities proposed to recover the difference in duty from manufacturers within the State having regard to the fact that the notifications giving them the benefit of a lower rate of tax had been struck down. This court held that they should not do so. The rationale behind the decision has been explicitly stated in Texmaco Ltd vs. State of Andhra Pradesh (2000) 1 SCC 763. In directing that the State shall not collect the amount of sales tax that had become payable by reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of this, since the amounts are paid to the Government directly by assessee company, we are of the opinion that question of covering the amounts under 194C does not arise. Moreover, as submitted by Assessee the amounts paid to the contract manufacturers for manufacturing the cigarette were already subjected to TDS. These amounts paid are not to be paid to the OCMs as part of manufacturing charges, but it is a liability arising because of statutory levy by the Government and ultimately borne by assessee company, which on facts of the case was discharged by assessee company by direct payment and not routed through the four OCMs. In view of this, we are of the opinion that amounts cannot be considered as a liability as per provisions under section 194C. Therefore, provisions of section 40(a)(ia) does not arise. To that extent, findings of Ld. CIT cannot be upheld. 12. However, one aspect which required to be examined on which we could not give any finding is whether assessee has discharged the balance of the interest provided at the end of the year also, as per the provisions of section 43B. There is no dispute with reference to the fact that excise duty liability is to be cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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