TMI Blog2005 (12) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... under conditions enabling every person desirous of purchasing the goods to place orders with the manufacturing unit and obtain supplies. As such, the impugned export did not constitute open market transaction. We find that the assessee's claim u/s 80-I was allowed by the Department upto financial year 1998-99 i.e., relevant to the asst. yr. 1999-2000. The assessee had entered into a technical collaboration with the Government for getting approval. As a result of this collaboration, the assessee had to export NH coke in order to pay dividends. The export was made to the company from whom technical collaboration was made. As a result thereof, the assessee-company earned profits whereas previously they had incurred losses. We are of the view that whatever was done by the assessee was based on commercial expediency subject to the Government regulation. We also agree with the view of the learned Authorised Representative of the assessee that the open market price would be that price the assessee could obtain NH coke in the open market. We also note that the Revenue has accepted the orders of the learned CIT(A) and did not come to the Tribunal, when similar matters were decided upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(3) after making the following additions: Sr. No. Particulars of addition made Amount (Rs.) 1. Disallowance of generator subsidy 48,281 2. Disallowance of subscription 25,000 3. Disallowance of advertisement and publicity expenses 40,000 4. Disallowance of expenses debited under the head 'postage, telephone fax' 25,000 5. Disallowance under s. 43B 5,279 6. Disallowance of claim under s. 80-IB 1,82,10,073 (Rs. 2,13,30,870 - 31,20,797) Total disallowance/addition to total income 1,83,53,633 4. The learned CIT(A) confirmed the disallowance under s. 80-IB of Rs. 1,82,10,073 and also disallowance of subscription to the tune of Rs. 25,000. 5. Against this, the assessee is in appeal before us. 6. The facts of the case are that the appellant-company manufactures electrical carbon and mechanical carbon products. NH coke is an important intermediary raw material used by the company for manufacture of electrographitized carbon blocks. The company has two units at Guwahati (hereinafter referred to as Unit-I and Unit-II) and one industrial unit at Patancheru in Andhra Pradesh (hereinafter referred to as Unit-III). Unit-I and Unit-II are set up in the same premises. Unit-II was set u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . yr. 2000-01 ending with asst. yr. 2003-04. While claiming deduction under s. 80-IB, the transfer value of products used for captive consumption by other unit was valued at Rs. 357.32 per kg., being the notional imported cost (i.e., the landed cost). The said price was higher than the price at which the said product had been exported to group concern as per export stipulations laid down by the Government of India, viz., Rs. 137.45 per kg. The appellant-company claimed that since NH coke was an import substitute, the same had to be valued at the landed cost. The landed cost was determined on the basis of proforma invoice dt. 17th Jan., 2000 received from Morganite Electrical Carbon Ltd. of UK from whom the company used to import NH coke prior to set up of Unit-I. Copy of the said proforma invoice is enclosed at p. 90 of the paper book. Accordingly, the appellant claimed deduction under s. 80-IB for asst. yr. 1999-2000 as under: Deduction under s. 80-IB (being profit of Unit-I) Amount (Rs.) Sales (export) 1,00,63,741 Value of captive consumption (82,822 kgs. x 357.32) 2,95,93,957 3,96,57,698 Less: Expenses of Unit-I 1,83,26,828 Allowable deduction 2,13,30,870 The P L a/c for the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: 7.1 The fact that the assessee is entitled to 100 per cent deduction in respect of profits derived from Unit-II [being situated in North Eastern Region as provided under second proviso to s. 80-IB(4)] is undisputed. Further, the fact that goods held for the purposes of eligible business (viz., Unit-I) have been transferred to other business carried on by the assessee (viz., Unit-II) is also undisputed. Again, the AO also agrees that for the purpose of computing the deduction allowable under s. 80-IB, as per express mandate of s. 80-IA(8), applicable for computing the quantum of deduction by virtue of s. 80-IB(13), the 'market value' of such goods as on the date of transfer has to be determined. For the said purpose, 'market value' has been defined to mean the price which the impugned goods would ordinarily fetch on sale in the open market. Under the facts and circumstances of the case, as narrated above, the primary area of dispute boils down to: (i) Whether, taking into consideration the fact that the impugned goods are import substitute and no other unit manufactures NH coke in India, the landed cost (import value) thereof would be indicative of the mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficient to bring their overall share capital in the assessee-company to 51 per cent at the prevailing market price, MCCP would thereafter inter alia, transfer new technologies to the assessee-company in order to substitute imports of NH cokes by producing NH cokes within the assessee-company and progressively using indigenous raw materials. Copy of foreign collaboration agreement dt. 11th March, 1992 between the assessee-company and MCCP is enclosed at pp. 127-135 of the paper book. 7.5 The aforesaid agreement was, however, subject to the stipulations laid down by the Government of India and the permission from RBI. The Government of India vide letter No. FC-II, 69(91), dt. 13th Dec., 1991 laid down the following conditions for grant of approval to the aforesaid foreign collaboration proposal: (iv) This approval is further subject to the condition that the collaborators have undertaken to buy-back 55 per cent of the annual production over a period of 5 years. (v) The outflow of foreign exchange on account of dividend payments will be balanced by export earnings on the following basis: (a) The balancing of dividend would be over a period of 7 years from commencement of production. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son desirous of purchasing the goods to place orders with such manufacturing unit and obtain supplies, they will constitute purchases from the open market.-Ahura Chemicals Products (P) Ltd. vs. Union of India AIR 1981 SC 1782, 1785. 7.9 In the instant case, the price at which the assessee-company exported goods (NH coke) to MCCP cannot be termed as the open market value. As stated above, the assessee-company was earning marginal profits and even incurring losses prior to entering into collaboration with MCCP for in-house production of NH coke. MCCP agreed to impart the necessary technical know-how to the assessee-company, but only after acquiring at least 51 per cent of the equity share capital of the assessee-company. The said arrangement would however, result in outflow of foreign exchange on account of payment of dividend to MCCP. As such in order to save the foreign exchange reserves of the country, the Government of India and the RBI stipulated that the foreign collaborator would have to necessarily buy-back 55 per cent of the annual production of the impugned goods over a period of 5 years and that the outflow of foreign exchange on account of dividend should be covered by ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgain and when the agents of the State seized paddy under the authority of some law and paid for it at some rate fixed by themselves they did not create a regulated market; they created no market at all; therefore, the Tribunal erred in taking into account the procurement rate. 7.12 Now, looking at the case from the other angle, if for any reason, the assessee stopped producing NH coke, the only available option would be to meet its requirement through imports. In fact, since the Morgan grade NH coke was not produced by any other unit in India, any person willing to procure the same would have to import it from the Morgan group. Prior to setting up of Unit-I, even the assessee had been importing the said intermediary product from Morgan Electrical Carbon Ltd. As such, taking into consideration the fact that the impugned product was an import substitute, the only way to arrive at the representative market value was to take the notional landed cost of import. The term 'open market value' has been defined in the Advanced Law Lexicon at p. 3349 as under: Open market value (OMV). The price which would be paid by a willing buyer to a willing seller at the port of landing, is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee. He erred in blindly following the order of the AO without giving his own independent findings on the matter. 7.15 It is pertinent to note that the assessee had claimed a similar deduction under s. 80-IA in the asst. yr. 1994-95 wherein the AO accepted the assessee's claim under the said section but disagreed with the method of calculation of profit. Aggrieved by the said order, the assessee-company preferred an appeal before the learned CIT(A). After verifying all the relevant facts and records, the learned CIT(A) vide order dt. 17th Dec., 1997 directed the AO to allow the claim of the assessee. Copy of assessment order for asst. yr. 1994-95 is enclosed at pp. 1-6 of the paper book-II. Further, copy of order of learned CIT(A) for the said year allowing the claim of the assessee is enclosed at pp. 7-15 of the paper book-II. It may be noted that even for asst. yr. 1999-2000, the assessee-company had valued the NH coke transferred to Unit-II at landed cost in order to ascertain the deduction under s. 80-IA. The same was allowed by the Department. The assessee had also exported NH coke in earlier years at prices lower than the landed cost and the Department had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter and, if there was no change, it was in support of the assessee, we do not think the question should have been reopened and contrary to what had been decided by the CIT in the earlier proceedings, a different and contradictory stand should have been taken. 7.18 In view of the above, it is submitted that the assessee's action of valuing the goods transferred from Unit-I to Unit-II for captive consumption at the notional landed cost for the purpose of claiming deduction under s. 80-IB is perfectly within the four corners of law. The AO's allegation that the assessee used a colour able device so as to evade taxes, is misplaced and unsubstantiated. Accordingly, judgment of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 referred to by the Revenue authorities, is not applicable to the assessee's case. As such, ..... 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