2005 (12) TMI 212 - AT - Income Tax

Tribunal Allows Section 80-IB Claim, Overturns CIT(A); Upholds Rs. 25,000 Disallowance for Subscription Expenses.

The Tribunal partially allowed the appellant's appeal, directing the AO to permit the claim under Section 80-IB of the IT Act, 1961, thereby overturning ... Deduction u/s 80IB - Profits derived from Unit-I i.e., the NH coke unit - Goods exports to sister concern - 'market value' - 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 market value in terms of the Explanation appended to s. 80-IA(8) for the purpose of deduction u/s 80-IB - HELD THAT:- The price at which it actually exported goods to MCCP can in no way be termed as indicative 'market value' in terms of the Explanation to s. 80-IA(8). The price at which the goods were actually exported to MCCP was dictated/imposed by the latter. It is not the price which the impugned product would ordinarily fetch on sale in the 'open market' between a willing buyer and a willing seller. The impugned export transactions were not effected 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 in earlier years. After considering all the circumstances and the principles of consistency, we decide the appeal in favour of the assessee on the first ground. The AO is directed to, allow the assessee's claim under s. 80-IB. The order of the learned CIT(A) is set aside and the claim of the assessee is allowed on the first ground. The assessee has also raised the second ground against the order of the learned CIT(A) in confirming a disallowance made by the AO. We find no merit in this ground of assessee's appeal. The order of the learned CIT(A) is confirmed and the appeal of the assessee on the second ground is dismissed. In the result, the assessee's appeal is partly allowed. Issues Involved:1. Disallowance of the appellant's claim under Section 80-IB of the IT Act, 1961.2. Disallowance of subscription expenses amounting to Rs. 25,000.Issue-wise Detailed Analysis:1. Disallowance of the appellant's claim under Section 80-IB of the IT Act, 1961:The appellant, a public limited company engaged in the manufacture of electrical carbon and mechanical products, challenged the disallowance of its claim under Section 80-IB to the extent of Rs. 1,82,10,073. The appellant operates three units, with Unit-I and Unit-II located in Guwahati and Unit-III in Andhra Pradesh. Unit-I, set up in 1993-94, produces NH coke, an intermediary product primarily used by Unit-II.The appellant argued that the NH coke, being an import substitute, should be valued at the landed cost for the purpose of Section 80-IB deduction. The landed cost was based on a proforma invoice from Morganite Electrical Carbon Ltd., UK, at Rs. 357.32 per kg. However, the AO contended that the export price to the sister concern at Rs. 137.45 per kg should be used, alleging the appellant used a colorable device to inflate profits from Unit-I.The Tribunal examined the facts and noted that the appellant's earlier claims under Section 80-IA were allowed. The Tribunal agreed with the appellant that the open market price should reflect the landed cost of NH coke, as no other unit in India produced it, making it an import substitute. The Tribunal also observed that the Revenue had accepted similar claims in previous years without contesting them at the Tribunal level.The Tribunal concluded that the appellant's valuation method was justified and directed the AO to allow the claim under Section 80-IB, setting aside the CIT(A)'s order on this ground.2. Disallowance of subscription expenses amounting to Rs. 25,000:The appellant also contested the disallowance of Rs. 25,000 under the head subscription. The Tribunal found no merit in this ground and confirmed the order of the CIT(A), upholding the disallowance made by the AO.3. General Ground:The third ground raised by the appellant was general in nature and did not require adjudication.Conclusion:The Tribunal partly allowed the appellant's appeal, directing the AO to allow the claim under Section 80-IB while dismissing the appeal concerning the disallowance of subscription expenses.