2015 (4) TMI 1059 - AT - Income Tax

Tribunal grants relief for manufacturing & IT services, modifies disallowance, upholds interest decision

M/s. APA Engineering Pvt Ltd. Versus The Dy. Commissioner of Income Tax,

The Tribunal partly allowed the assessee's appeals, granting relief under section 10A for manufacturing and IT-enabled services, and modifying the section ... Denying deduction under section-10A - Held that:- The assessee is engaged in manufacturing activity/assembling the products, for exports, and also rendering Information Technology Enabled services which entitles the assessee to claim deduction U/s.10A of the Act. - Decided in favour of the assessee. Levy of interest U/s. 234B is mandatory see CIT Vs. Anjum M.H. Ghaswala [2001 (10) TMI 4 - SUPREME Court] Reopening of assessment - Held that:- The return was only processed U/s. 143(1) of the Act and within a period of four years the assessment was reopened based on the information gathered while making assessment in the case of the assessee for the earlier period viz. A.Y. 2006-08 - Decided against assessee. Disallowance u/s.14A of the Act read with Rule 8D for expense incurred on exempt dividend income for the assessment year 2007-08 - Held that:- Rule 8D was inserted by the IT(Fifth Amendment) Rules, 2008 w.e.f 24.03.2008, however the relevant assessment year before us is 2007-08, therefore Rule 8D will not be applicable to the case of the assessee. In this situation, this Bench of the Tribunal has been taking a consistent view that 2% of the exempt income should be disallowed as expense incurred for earning exempt income while invoking the provisions of section 14A of the Act. Accordingly, we hereby direct the Ld. Assessing Officer to restrict the disallowance to 2% of the exempt income earned by the assessee. - Decided in favour of the assessee. Disallowance U/s. 14A r.w.r 8D for expense incurred on investments made to earn exempt income for the assessment year 2009-10 - Held that:- Since the Rule 8D is applicable for the relevant assessment year, we find that the computation of disallowance made U/s.14A of the Act by the Ld. Assessing Officer to be in order and accordingly, we hereby uphold the order of the Ld. Assessing Officer.- Decided against assessee. Issues Involved:1. Denial of relief under section 10A of the Act for the assessment years 2006-07 to 2009-10.2. Levy of interest under section 234B of the Act for the assessment years 2006-07 to 2009-10.3. Reopening of assessment under section 147 of the Act for the assessment year 2007-08.4. Disallowance under section 14A of the Act read with Rule 8D for expense incurred on earning exempt income for the assessment year 2007-08.5. Disallowance under section 14A of the Act read with Rule 8D for expense incurred on investments made to earn exempt income for the assessment year 2009-10.Detailed Analysis:1. Denial of relief under section 10A of the Act for the assessment years 2006-07 to 2009-10:During the assessment proceedings, the Assessing Officer (AO) observed that the assessee claimed deduction under section 10A for engaging in the export of computer software and manufactured articles. The AO noted that the assessee's activities included identifying manufacturers, providing technical drawings, and supervising manufacturing, but the assessee did not possess significant manufacturing infrastructure. The AO concluded that the assessee was not engaged in manufacturing or software development, thus denying the section 10A deduction.On appeal, the CIT (A) upheld the AO's decision, noting that the assessee acted as an intermediary between overseas clients and Indian manufacturers, without engaging in actual manufacturing activities or possessing the necessary infrastructure.Before the Tribunal, the assessee argued that it was involved in manufacturing through job work and rendering IT-enabled services, supported by agreements with various clients. The Tribunal found that the assessee's activities, including creating and maintaining websites, developing ERP software, and rendering back-office operations, qualified as IT-enabled services. Citing the CBDT Circular and the Madras High Court decision in CIT Vs. Elgi Ultra Industries Ltd, the Tribunal concluded that the assessee was entitled to the section 10A deduction for manufacturing and IT-enabled services.2. Levy of interest under section 234B of the Act for the assessment years 2006-07 to 2009-10:The CIT (A) upheld the AO's imposition of interest under section 234B, relying on the Supreme Court's decision in CIT Vs. Anjum M.H. Ghaswala, which held that such interest is mandatory. No arguments were advanced on this issue before the Tribunal, which confirmed the CIT (A)'s order.3. Reopening of assessment under section 147 of the Act for the assessment year 2007-08:The CIT (A) supported the AO's reopening of the assessment for 2007-08, based on findings from the 2006-07 assessment that the assessee was not eligible for section 10A deduction. The Tribunal agreed, noting that the return was initially processed under section 143(1) and reopened within four years based on new information from the earlier assessment. The Tribunal dismissed the assessee's ground on this issue.4. Disallowance under section 14A of the Act read with Rule 8D for expense incurred on earning exempt income for the assessment year 2007-08:The AO disallowed Rs. 2,34,025 under section 14A, invoking Rule 8D, based on interest expenses and managerial remuneration. The CIT (A) restricted the disallowance to 1.5% of the average investment and directed the deletion of interest expenditure disallowance after verification. The Tribunal noted that Rule 8D did not apply to the relevant assessment year (2007-08) and directed the AO to restrict the disallowance to 2% of the exempt income, following consistent Tribunal practice.5. Disallowance under section 14A of the Act read with Rule 8D for expense incurred on investments made to earn exempt income for the assessment year 2009-10:For the assessment year 2009-10, Rule 8D was applicable. The Tribunal found the AO's computation of disallowance under section 14A to be in order and upheld the AO's decision.Conclusion:The Tribunal partly allowed the assessee's appeals, granting relief under section 10A for manufacturing and IT-enabled services, and modifying the section 14A disallowance for 2007-08. The Tribunal upheld the AO's decisions on interest under section 234B, reopening of the 2007-08 assessment, and section 14A disallowance for 2009-10.