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2017 (2) TMI 449 - ITAT KOLKATA

2017 (2) TMI 449 - ITAT KOLKATA - TMI - Disallowance u/s 40(A)(9) - reimbursement of expenses of appellant made to its Staff Recreation club - Held that:- This issue is covered by the decision of the co-ordinate bench of this tribunal in assesseeís own case for the Asst Year 2003-04 - Disallowance of deduction u/s 80HHC of the Act on total company as against the individual product wise claimed by the assessee - Held that:- We find that as agreed by the ld AR that this issue is covered agains .....

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selection - Held that:- Auction and Private Businesses are different in terms of the functions performed, risks assumed and hence should not be combined for the purpose of comparison. The auction business of the assessee is comparable with auction purchases with third parties. Price charged by the assessee on the international transactions computed on the basis of segmental results of Auction and Private Business is at Armís Length and no adjustment need to be made thereon. In view of the above .....

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of depreciable assets used in tea business, only 40% instead of 100% of depreciation allowable at the prescribed rate should be deducted. - I.T.A No. 511/Kol/2010, I.T.A No.2105/Kol/2010 - Dated:- 3-2-2017 - Shri N. V. Vasudevan, JM And Shri M. Balaganesh, AM For the Assessee: S/Shri Manish Sheth & Prasun Kr. Maity, ARs For the Revenue : None ORDER Per Shri M. Balaganesh, AM These cross appeals by assessee and revenue are arising out of order of CIT(A)- IV, Kolkata vide appeal No. 146/CIT(A .....

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upholding the addition made in the sum of ₹ 1,18,71,000/- towards notional interest on advances made to M/s Haldia Petrochemicals Ltd (HPL) in the facts and circumstances of the case. 2.1. The brief facts of this issue is that the assessee along with other Tata Group Companies were the promoters of M/s Haldia Petrochemicals Ltd (HPL). The ld AO observed that the assessee on one hand had been suffering interest liability on the loans borrowed by it but on the other hand had made interest f .....

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e. Subsequently the assessee had decided to withdraw from further participation in the project. However, as HPL was not in a position to repay the money advanced, it was agreed that until commencement of commercial production, HPL would not be compelled to make any refund nor would pay any interest on such advances. The assessee stated that under the Income Tax Act, there is no concept of subjecting to tax any notional income which had not accrued to the assessee, in support of this proposition, .....

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.65 1991-92 410.33 16276.65 3358.70 19635.35 1992-93 265.62 19635.35 3188.67 22824.02 1993-94 87.23 22824.02 3063.34 25887.42 1189.21 Accordingly, it was pleaded that no addition towards notional interest need to be added back. The ld AO however proceeded to bring to tax a sum of ₹ 118.71 lakhs being 12% of 989.21 lakhs on the pretext that similar additions made for FY 1999-2000 to 2002-03 were confirmed by the ld CITA in first appeal. 2.2. Before the ld CITA, the assessee reiterated the s .....

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118.71 lakhs. Aggrieved, the assessee is in appeal before us on the following grounds:- 1a. That on the facts and in the circumstances of the case, the learned CIT(A) erred both in facts and in law, by confirming the sum of ₹ 1,18,71,000/-, added back by the Assessing Officer purely based on surmise and conjecture, alleging hypothetical notional interest on advances made to Haldia Petro Chemical Limited as a co-promoter. 1b. That on the facts and in the circumstances of the case the learn .....

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arlier orders, had failed to consider that the loans appearing in the books of the appellant at the time of making the advances, were all paid-off before the beginning of the previous year relevant to the year under appeal. 2.3. The ld AR argued that this issue is covered by the decision of the co-ordinate bench of this tribunal in assessee s own case for the Asst Year 2006-07 in ITA No. 2006/Kol/2013 dated 21.10.2016 wherein the issue was set aside to the file of the ld AO and prayed for the si .....

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the ld AO and decide the same afresh in accordance with law. Accordingly, the Grounds 1(a) to 1 (c ) raised by the assessee are allowed for statistical purposes. 3. The next issue to be decided in this appeal is as to whether the ld CITA is justified in upholding the disallowance of ₹ 5,50,000/- u/s 40A(9) of the Act on account of expenditure incurred towards employees recreation club in the facts and circumstances of the case. 3.1. The brief facts of this issue is that the ld AO observed .....

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on or towards setting up or formation of any trust, society or any AOP etc and hence does not fall under the ambit of disallowance u/s 40A(9) of the Act. The ld AO however proceeded to disallow the same u/s 40A(9) of the Act. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following ground :- 2. That on the facts and in the circumstances of the case, the learned CIT (A) erred in holding that the reimbursement of expenses of appellant made .....

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that the issue under dispute is covered by the earlier order of this tribunal in assessee s own case as stated supra wherein it was held as below:- 15. At the time of hearing before us, the Ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of CIT vs Bharat Petroleum CorporationLtd 252 ITR 43 (Bom) wherein it has been held that 40A(9) of the Act is not applicable in case the assessee has reimburs .....

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ea of the Ld. Counsel for the assessee that the Tribunal, Kolkata Bench in the case DCIT vs Chloride Industries Ltd (Supra) has deleted the addition by observing as under: The Commissioner (Appeals) had deleted the said addition by following the Tribunal s order in the case of DCIT vs APE Belliss India Ltd (IT Appeal Nos. 527 to 531 (Cal) of 1989) . The Tribunal observed that section 40A(9) is not applicable because this section stands for any funds, institutions, where the assessee made the sub .....

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leted the said addition. By respectfully following the earlier order of the Tribunal there was no infirmity with the order of the Commissioner (Appeals) who had rightly deleted the said additions pertaining to the staff welfare. In this view of the matter and in the absence of any distinguishable material brought on record by the revenue, we respectfully following the order of the Tribunal (cited supra) hold that the disallowance of ₹ 5,37,755/- is not sustainable in law and therefore, the .....

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ividual product wise claimed by the assessee in the facts and circumstances of the case. 4.1. The brief facts of this issue is that the assessee is engaged in export of black tea, instant tea, packet tea and spices etc and had claimed deduction u/s 80HHC of the Act in respect of each product separately, as against the relief granted by the department on global basis i.e aggregating the trading results of all the businesses. The ld AO by following the principles laid down by the Hon ble Supreme C .....

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tive cannot be determined unless the trading results of all the units are aggregated. Accordingly, the ld AO determined the deduction eligible u/s 80HHC of the Act at ₹ 2,27,79,937/-. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds :- 3a That on the facts and in the circumstances of the case, the CIT (A) erred in holding that the deduction under section 80HHC of the Act allowable on a global basis, by wrongly relyi .....

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ons. We find that as agreed by the ld AR that this issue is covered against the assessee by the decision of the Hon ble Apex Court in the case of IPCA Laboratory Ltd vs DCIT supra and accordingly dismiss the Grounds 3(a) and 3 (b) raised by the assessee. 5. The last issue to be decided in this appeal is as to whether the ld CITA is justified in upholding the adjustment made by the ld TPO / ld AO to the Arm s Length Price in the facts and circumstances of the case. 5.1. The brief facts of this is .....

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f tea was part of the international transactions entered into by the assessee. The tea exported comprised of various grades, either manufactured from its own gardens or teas bought in auction market through bidding process or teas sourced from third parties under pre-existing contracts. The international transactions entered into by the assessee pertain to the purchase of tea from auction markets through bidding process and sale to its AE - Tetley, UK (hereinafter referred to as Auction Sales ) .....

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at 1.84 % ) and justified the Arm s Length nature of transactions. Further it also carried out a Segmental analysis where the assessee compared the segmental margins from sales to AEs (OP / Sales at 1.53%) with that of the comparable companies (OP / Sales at 1.07%). With regard to the methodology adopted by the ld TPO in the proceedings u/s 92CA of the Act, wherein he had proposed to combine the Auction and Private Sales with AE to compare the margins in this segment with the margins of the Auct .....

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ee tried to explain the flow of transactions under Auction sub-segment as below:- (a) The assessee sends a broad brush statement along with samples to its AEs for approval. (b) The list of teas in the Auction Market are forwarded to the AEs. (c) The offer list is returned back by the AEs with an approval for the teas and the price negotiated with the AE. (d) The assessee has a price range within which it has to sell to the AE. (e) The assessee would put into application its procuring skills and .....

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purchase from the third party lies with the assessee. 5.2.2. Whereas, in the Private Business , it is only in the nature of a facilitator entering into forward contracts as stipulated by the assessee, whether it is the sale or the purchase of tea. The assessee enters into a forward sale contract with its AE once there is a back to back forward contract with a third party, decided by the AE for supplying the tea at a future date at a fixed price to the assessee. The price negotiations and the qua .....

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r variation in the profits due to the variation in the pre-fixed transportation costs or freight costs or any foreign exchange fluctuation, but not on account of the price of tea. Thus the assessee bearing such limited risks and performing functions of a facilitator, it would not be appropriate to compare its margins to that of distributor. Accordingly the assessee submitted that the functions performed, risks assumed, characterization of the transactions being entered into along the varying nat .....

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/ Direct Costs) with the same margins of auction purchases with third parties by stating that the nature of functions performed in auction business and in private business are totally distinct and separate and even the risks assumed in each category are distinct. Not satisfied with the replies of the assessee, the ld TPO passed an order dated 26.12.2006 u/s 92CA(3) of the Act recomputing the ALP of the assessee s international transactions by making an adjustment of ₹ 17,68,000/- was made .....

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92 of the Act. 4b. That on the facts and circumstances of the case, the CIT(A) had erred in not considering the 5% tolerance benefit as allowed under the proviso to section 92C(2) of the Act. 5.4. We have heard the rival submissions and perused the materials available on record. We find that the assessee is a widely held domestic company engaged in the business of inter alia blending and packaging tea for sale in the domestic and export markets and in manufacturing and exporting instant tea. The .....

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for benchmarking for auction purchases as well as third party purchases with AE. The reply in this regard was filed by the assessee vide submissions dated 22.11.2006. The ld TPO passed an order dated 26.12.2006 u/s 92CA(3) of the Act recomputing the ALP of the assessee s international transactions by making an adjustment of ₹ 17,68,000/- was made and which was added to the total income of the assessee by the ld AO. The assessee objected to the approach of the ld TPO in combining the aucti .....

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and Private Business and distinct features thereon :- Particulars Auction Sales Private Sales Sale is a Forward Contract √ √ Purchase is a forward Contract X √ Back to back contracts with appellant and third party X √ Fixed Arbitrage X √ Pre-determined purchase Price X √ Purchase is a Spot Contract √ x Purchase effected through Open Bidding Process √ x Particulars Auction Sales Private Sales Price Risk borne by appellant √ x Application of P .....

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th the assessee. Thus the assessee had performed the functions only of a trader as could be evident from the sequence of transactions enumerated supra. We find that in this Auction Business, a price range of tea is negotiated with the AE instead of a single price. The assessee then explores the auction market and put into application its procuring skills so as to obtain teas at a cost which it can sell within the price range negotiated and make profits thereon. The assessee enters into forward c .....

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moreso, when the price negotiations and the quality of tea for the AE are decided upon by the AE. Hence, it could be safely concluded that the assessee had merely acted as a facilitator passing the information between the AE and the third party supplier, the sample of tea given by the supplier and the confirmation notes to the third party. The assessee is not instrumental in deciding the price of the tea at which it would be procured. All the costs are controlled by the AE and no opportunity fo .....

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r. 5.4.4. In view of the aforesaid specific functions performed in each business (i.e Auction and Private Business) , we hold that both Auction and Private Businesses are different in terms of the functions performed, risks assumed and hence should not be combined for the purpose of comparison. The auction business of the assessee is comparable with auction purchases with third parties. The segmental results show that the GP / Direct costs of the assessee from auction purchases with third partie .....

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t require any consideration. Accordingly the Ground No. 4 a raised by the assessee is allowed and Ground No. 4 b is dismissed as infructuous as stated above. 6. In the result, the appeal of the assessee in ITA No. 511/Kol/2010 is partly allowed for statistical purposes. ITA No. 2105/Kol/2010 - Asst Year 2004-05 - Revenue Appeal This appeal of revenue is delayed by 43 days and condonation petition has been filed by the revenue. After perusing the condonation petition and the concession given by t .....

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which were paid to Governments of Assam and West Bengal. The ld AO placed reliance on the decision of the Hon ble Gauhati High Court in the case of Jorhat Group Ltd vs Agricultural ITO reported in 226 ITR 622 (Gau) wherein it was held that the cess on green leaf is deductible from the agricultural income only and not from the composite income. The assessee placed reliance on the decision of the Hon ble Calcutta High Court in the case of CIT vs A.F.T. Industries Ltd reported in (2004) 270 ITR 167 .....

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nue is in appeal before us on the following ground :- 1. That on the facts and circumstances of the case, Ld. CIT(A), Kolkata has erred in law in deleting the addition of ₹ 3,69,88,000/- on account of cess on green leaf without considering the fact that expenses on account of cess on green leaf is related to 100% agricultural operation and SLP is pending before the Hon'ble Supreme Court against the decision of Calcutta High Court in the case of AFT Industries Ltd. -vs- CIT (270 ITR 167 .....

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ision relied upon supra in favour of the assessee and essence of the decision is already discussed in the facts above. Respectfully following the same, we dismiss the Ground No.1 raised by the revenue. 8. The last issue to be decided in this appeal of the revenue is as to whether the ld CITA is justified in allowing the claim of depreciation of the assessee in the facts and circumstances of the case. 8.1. The brief facts of this issue is that the ld AO observed that the assessee claimed deprecia .....

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