2021 (7) TMI 1466 - AT - Income Tax

100% EOU wins section 10B exemption for DEPB and duty drawback income, transfer pricing adjustments deleted

M/s. Kiri Dyes And Chemicals Ltd. Versus A.C.I.T, Circle-2 (1) (2), Ahmedabad.

The ITAT Ahmedabad ruled on multiple tax issues for a 100% EOU. The tribunal allowed section 10B exemption for other income including DEPB, duty drawback, ... Denial of exemption claimed u/s 10B - whether the other income shown by the assessee in its eligible undertaking is entitled for the exemption under section 10B? - HELD THAT:- The provisions of subsection 1 of section 10B of the Act provides that a deduction will be available to a 100% EOU for the profit derived from the export of articles or things or computer software for a period of 10 years. Thus the profit and gains derived from the export activities by an eligible undertaking as discussed above is eligible for deduction under section 10B of the Act. Under the above provision, what has been referred is the profit of the eligible undertaking which implies that all the income pertaining to such eligible undertaking will be taken into consideration while working out the deduction. Now coming to the case on hand, there is no ambiguity to the fact that the other income as discussed above belongs to the eligible undertaking which was offered as business income in the income tax return by the assessee. Accordingly we hold that all the incomes shown by the assessee under the head other income post EOU period are eligible for deduction under section 10B of the Act. We direct the AO to allow the exemption to the assessee with respect to DEPB, Duty Drawback and DEPB rate difference income in the manner as discussed above. Hence the ground of appeal of the assessee is allowed and the ground of appeal of the Revenue is dismissed. Nature of expenses - expenses paid to SBI Capital Markets Ltd for the study of the capital market - HELD THAT:- The onus lies upon the assessee to satisfy the conditions imposed under section 37(1) of the Act. However the ld. AR before us has not demonstrated based on the documentary evidence the purpose for which such expenditure has been incurred. On perusal of the order of the AO, we note that such expenditure has been incurred for study of capital market in connection with IPO. Therefore, in our considered view the same cannot be allowed as deduction by treating the same as revenue expenses under the provisions of section 37(1) of the Act. Whether the impugned expenditure pertains to the previous year 2006-07 as alleged by CIT (A)? - Admittedly, the expenditure was incurred in the earlier year but the same was claimed as deduction in the year under consideration. However, there is no loss to the revenue in a situation, if law permits, to allow the deduction in the year under consideration as there is no change in the rate of tax applicable on the company in the year under consideration viz a viz the earlier year. Therefore, on this count, the deduction of the impugned expenditure cannot be denied as held by the learned CIT (A). But, this finding of the learned CIT (A) becomes irrelevant as we have denied the claim of the assessee for the deduction under section 37(1) of the Act. Whether such expenditure is eligible for deduction under section 35D? - We hold that the assessee is eligible for deduction of the impugned expenditure as per the provisions specified under section 35D of the Act. Accordingly, the alternate ground of appeal of the assessee is allowed. Addition of provision for the diminution in the value of investments - whether such investment was made by the assessee in the undertaking eligible for deduction u/s 10B? - HELD THAT:- Such loss with respect to investments in mutual fund on account of the diminution in its value has been shown in the profit and loss account of the eligible unit. This fact was also not doubted by the authorities below - DR at the time of hearing has also not advanced any argument contrary to the arguments advanced by the learned AR. Thus we can draw an inference that such loss pertains to the eligible unit - direct the AO to enhance the amount of deduction under section 10B of the Act by the amount. Assessee has claimed double deduction with respect to the other income being Duty Drawback - HELD THAT:- The profit of the eligible undertaking has been computed by taking the turnover of the eligible undertaking. From this turnover there were various deduction made in form 56 G. Such deductions include Freight and insurance on export sale, trading export sales, indirect expenses, loss on export trading etc. This eligible undertaking has shown the other income separately. In other words the assessee has not computed the deduction under section 10B of the Act with respect to Duty Drawback income while computing profit on export turnover. Accordingly, the assessee has calculated separately the deduction available with respect to such Duty Drawback income. These facts have been verified from the form 56 G placed in the paper book as discussed above. Authorities below have misunderstood the detail filed by the assessee and wrongly drew an inference against the assessee by holding that the assessee has claimed double deduction with respect to duty drawback income. On this count, we allow the ground of appeal of the assessee. Allocation of the expenses of the sister concern - AR before us prayed to provide one more opportunity to the assessee to justify its stand that the expenses incurred by the sister concern are not attributable to the eligible undertaking - HELD THAT:- Accordingly in the interest of justice and fair play we are inclined to remit the issue to the file of the AO for fresh adjudication. MAT - addition to the book profit computed u/s 115JB on account of provision for diminution in the value of assets - HELD THAT:- There was no provision created on the side of liability in the balance sheet of the assessee. Accordingly, it seems that the assessee has actually adjusted such loss on account of diminution in the value of assets against the investments. Hence, the principles laid down in the case of Vodafone Essar Gujarat Ltd.. [2017 (8) TMI 451 - GUJARAT HIGH COURT] are squarely applicable to the facts of the case on hand. Accordingly we direct the AO to delete the addition made by him while determining the books profit under the provisions of section 115JB. Addition u/s 14A r.w.r. 8D without recording dissatisfaction about its claim - disallowances on account of interest and administrative expenses - HELD THAT:- As own fund of the assessee exceeds the amount of investment. Therefore there cannot be any disallowance of interest expense. We direct the AO to delete the addition made by him on account of interest expenses. Addition on account of administrative expenses - We direct the AO to limit the disallowance of the administrative and interest expenses, if any, then it should be lower of exempted income or the disallowance made under section 14A r.w.r. 8D of Rules of Income Tax Rules. Accordingly, we confirm the disallowance made by the AO which was subsequently confirmed by the learned CIT (A) towards the administrative expenses. Thus the grounds of appeal raised by the assessee is partly allowed. Correct head of income - treating the rental income as the income from other sources and thereby disallowing the deduction claimed under section 24 - HELD THAT:- What we find from the fact of case is that it was open land which was out let out not the building and rental income received for the letting out of land not shades or building. Thus in our humble understanding, the impugned rent cannot be treated as income from building or shades for the reason that what was let out is an open land not the building or shades. See GOWARDHAN DAS AND SONS [2006 (9) TMI 134 - PUNJAB AND HARYANA HIGH COURT] wherein held what is covered by the expression 'appurtenant' is the land which is necessary for enjoyment of the building and not the land only - Decided against assessee. MAT addition for disallowance u/s 14A - We hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of section 115JB of the Act as per M/S. JAYSHREE TEA & INDUSTRIES LTD. [2014 (11) TMI 1169 - CALCUTTA HIGH COURT]. But the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. How to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently? - Since there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently, therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed. Disallowance of expenses namely advertisement, consultancy, stationary and travelling out of claim made u/s 35D - HELD THAT:- The deduction u/s 35D was not allowed to the assessee with respect to the expenditures which can be broadly categorised as under: i. lack of supporting evidence in respect of stationary and travelling expenses. ii. IPO and consultancy expenses were incurred without deducting the TDS. Statutory and travelling expenses, we find that there was no documentary evidence furnished by the assessee in support of his claim. Therefore, we do not find any reason to interfere in the order of CIT (A). Thus, we deny the deduction of stationary and travelling expenses under the provisions of section 35D of the Act. Penalty u/s 271(1)(c) - income from letting out the land is not chargeable to tax under the head income from House Property and impugned income is taxable under the head income from other sources - HELD THAT:- assessee’s explanation that there was a shed constructed by the tenant on the leased land and on the basis of such shed, the assessee under the bona fide belief concluded that the lease rental will be taxed as income from house property. This explanation of the assessee has not been controverted by the Revenue. Further all the materials facts relating to the claim of deduction on lease rental have been disclosed by the assessee in the return of income. Thus in our considered view the claim made by the was based on genuine difference of opinion related to taxability of the rental income which cannot be made to subject to penalty u/s 271(1)(c) . TP adjustment on account of corporate guarantee provided by the assessee to its AE’s - Internation transaction or not? - HELD THAT:- Since in the case on hand, the guarantee is not having 'bearing on profits, income, losses or assets,' therefore, respectfully following the same we are also of the opinion that such guarantee issued by the assessee is not covered under the definition of section 92B of the Act. We also note that admittedly the assessee has charged guarantee fee from its AE in the immediate previous assessment year for providing very same corporate guarantee which was written off in the current year. The assessee in this regard furnished that there were no cost involved in such corporate guarantee extended to its AE. Thus they mutually decided to waive off the guarantee fee and decided not to charge fee in future also. Thus what inferred is this that the revenue in one previous year has accepted the claim of the assessee but making an addition in current year which is against the principles of consistency. Therefore there no effect on the income of the assessee. Accordingly, we direct the TPO/AO to delete the addition made by him. Disallowance on account of professional fees - AO found that the assessee has incurred the expenses in connection with the share subscription, shareholders agreement and convertible bond subscription agreement, thus such expenses were in the nature of capital - HELD THAT:- on perusal of the order of the learned CIT (A), we find that the learned CIT (A) has given very clear-cut finding that the assessee has not incurred such expenses wholly and exclusively for the purpose of its business. TDS u/s 195 - Addition u/s 40(a)(ia) on account of non-deduction of tax on export commission - HELD THAT:- In this case, the non-residents agents have rendered their services outside India in connection with procurement of sale. All the agents have overseas offices and they were not having any permanent establishment in India. At the time hearing learned DR has not brought any material on record suggesting that the non-resident agents are having any permanent establishment in India or services were provided within India. In absence of such finding it is held that the commission income earned by the foreign agent cannot be deemed to be accrue or arise in India. Regarding the applicability of section 195 of the Act, we observe that once the income is not taxable, there is no liability of deduction of tax, therefore, it was not applicable for the assessee to deduct tax. Therefore, there was no violation of provision of section 195. Addition on account of diversion of fund u/s 36(1)(iii) - HELD THAT:- We hold that there cannot be any disallowance of interest expenses. Accordingly the grounds of appeal raised by the Revenue is dismissed. Late payment of employee’s contribution towards EPF and ESI decided against assessee as relying on GUJARAT STATE ROAD TRANSPORT CORPORATION [2014 (1) TMI 502 - GUJARAT HIGH COURT] Upward adjustment of interest free loan given to AE - HELD THAT:- TPO/AO cannot disregard any apparent transaction and substitute it by re-characterizing the said transaction without any material or exceptional circumstances that the assessee has tried to conceal the real transaction. Investment made in shares or applying for the shares cannot be given different colour so as to expand the scope of transfer pricing adjustment by re-characterizing it as interest free loan. Thus, we are unable to uphold the contention of the Revenue that share application money pending allotment should be re-characterized as loan till the period it is allotted after a reasonable time. Accordingly, we do not find any reason to interfere in the finding of the learned CIT (A), thus the ground of appeal raised by the Revenue is dismissed. TDS u/s 195 - Disallowances u/s 40(a)(ia) - non deduction of TDS u/s 194C - CIT (A) in light of new fact that the amount was paid to non resident assessee confirmed the addtion by holding that assessee failed to comply with the provision of section 195 (2) - HELD THAT:- The income earned by the non-resident payee cannot be deemed to be accrue or arise in India. Regarding applicability of section 195 of the Act, we observe that once the income is not taxable in India, there is no liability of deduction of tax. Therefore, it was not applicable for the assessee to deduct tax, therefore, there was no violation of provisions of section 195 of the Act. 1. ISSUES PRESENTED and CONSIDEREDThe legal judgment involves several issues related to tax assessments, deductions, and transfer pricing adjustments. The core legal questions include:Whether the disallowance of deductions claimed under various sections of the Income Tax Act, such as Section 10B, 36(1)(iii), and 14A, was justified.Whether the corporate guarantee provided to associated enterprises constitutes an international transaction under transfer pricing provisions.Whether the adjustments made to the book profits under Section 115JB were appropriate.Whether the disallowance of foreign commission expenses due to non-deduction of TDS was valid.Whether the penalty imposed under Section 271(1)(c) for furnishing inaccurate particulars of income was justified.2. ISSUE-WISE DETAILED ANALYSISDisallowance under Section 10B:Legal Framework: Section 10B provides deductions for profits derived from export activities by 100% Export Oriented Units (EOUs).Court's Interpretation: The court examined whether the income from DEPB, Duty Drawback, and other sources should be included in the eligible profits for deduction under Section 10B.Findings: The court found that these incomes were not directly derived from export activities and thus not eligible for deduction under Section 10B.Conclusion: The court upheld the disallowance of these incomes from the eligible profits for deduction.Corporate Guarantee as International Transaction:Legal Framework: Transfer pricing provisions require that international transactions be at arm's length price.Court's Interpretation: The court considered whether the corporate guarantee provided to associated enterprises falls under the definition of an international transaction.Findings: The court referred to precedents and concluded that corporate guarantees do not constitute international transactions if they do not have a bearing on profits, income, losses, or assets.Conclusion: The court ruled that the corporate guarantee in question was not an international transaction for transfer pricing purposes.Disallowance under Section 14A:Legal Framework: Section 14A disallows expenses incurred in relation to exempt income.Court's Interpretation: The court evaluated whether the disallowance was justified based on the interest-free funds available to the assessee.Findings: The court found that the assessee had sufficient interest-free funds, and therefore, the disallowance of interest expenses was not warranted.Conclusion: The court directed the deletion of the disallowance under Section 14A.Penalty under Section 271(1)(c):Legal Framework: Section 271(1)(c) imposes penalties for concealment of income or furnishing inaccurate particulars.Court's Interpretation: The court considered whether the assessee's claim of deduction was based on a genuine difference of opinion.Findings: The court found that the claim was not made with any dishonest intention and was based on a bona fide belief.Conclusion: The court directed the deletion of the penalty imposed under Section 271(1)(c).3. SIGNIFICANT HOLDINGSOn Section 10B: 'The entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business.'On Corporate Guarantee: 'When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee... such an assistance or accommodation does not have any bearing on its profits, income, losses, or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act.'On Section 14A: 'Where own interest-free fund of the assessee is sufficient enough to meet the investment then no any disallowances on account of interest is warranted under section 14A r.w.r. 8D of the Act.'On Penalty under Section 271(1)(c): 'The claim made by the assessee was based on genuine difference of opinion related to taxability of the rental income which cannot be made to subject to penalty under section 271(1)(c) of the Act.'The judgment provides clarity on the application of various sections of the Income Tax Act concerning deductions, transfer pricing adjustments, and penalties. The court emphasized the importance of the factual matrix and the bona fide belief of the assessee in determining the applicability of these provisions.