THE issues before the Bench are - Whether interest income cannot be said to be an income derived from an industrial undertaking and, therefore, Section 80-IB deduction is not allowable in respect of interest income; Whether Duty Drawback is refund of taxes paid and is thus eligible for deduction u/s 80IB and Whether sales commission paid by the assessee on its total sales is allowable u/s 37 of the Act. And the verdict partly goes in favour of the assessee.
Facts of the case
A) The assessee company is engaged in the business of manufacturing wind turbine generators (WTGs) at Daman & Pondicherry. During the year under consideration, the assessee claimed sales commission expense in the sum of Rs.9,77,76,800/- on total sales of Rs.1917.50 crores. The appellant has paid commission to 27 parties on 137 transactions of
A) The assessee company is engaged in the business of manufacturing wind turbine generators (WTGs) at Daman & Pondicherry. During the year under consideration, the assessee claimed sales commission expense in the sum of Rs.9,77,76,800/- on total sales of Rs.1917.50 crores. The appellant has paid commission to 27 parties on 137 transactions of
sales out of total 451 wind mills sales. The A.O. called six customer for personal verification by issuing summons u/s 131 of the act, who were examined and their statements were recoded. The A.O. concluded that there is no evidence that the assessee company received inbound services and its claim of payment of commission is not justified, as no services were rendered by the agents. Hence, he A.O. disallowed the entire sales commission expenses of Rs.9,77,76,800/- and added the same to the total income of the assessee. The CIT(A) deleted the part disallowance to the extent of Rs.9,54,95,200/- and confirmed the balance disallowance of Rs.42,81,600/-.
B) The AO denied the deduction u/s. 80IB of the Act on interest on FDR and ICD amounting to Rs. 5,07,48,207/-. Alternatively, it was contended by the assessee that only net interest and not the gross interest as has been done, can be reduced from the profits of the business. The CIT(A) upheld the order of the AO.
C) The AO did not grant deduction u/s. 80IB on duty draw back amounting to Rs. 2,66,698/-. Alternatively, the assessee contended without prejudice, that if the duty draw back is to be excluded, core spending payment of the duty may kindly be allowed to be taken out from the calculation of the profit of the business. Similar issue arose in earlier years, i.e. 2003-04 & 2004- 05, where the issue was decided-in favour of the assessee, vide CIT(A)'s order dt: 29-3-2006 & 19-06-2006 by following the decision of Gujarat High court in the case of India Gelatine & Chemicals Ltd.
The assessee carried the matter in appeal before CIT(A) who has decided this issue in favour of the assessee by following the order of his predecessor in assessee’s own case for the assessment year 2003-04 and 2004-05 in which the judgment of Gujarat High Court rendered in the case of India Gelatine & Chemicals Ltd. was followed.
On cross appeals by the assessee and the Revenue, held that,
++ Allowability of Sales commission paid u/s 37 of the Act - a clear finding is given by CIT(A) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realize and, therefore, payment of commission is justified except for 6 parties. In respect of these 6 parties, it is noted by CIT(A) that the A.O. after inquiry has brought on record in respect of these 6 customers, the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions. The income of all the units of the assessee is eligible for deduction u/s 80-IB of the Act. The A.O. has allowed additional deduction u/s 80-IB in respect of various additions made by him in the assessment and hence, this contention of the assessee is supported by facts on record that there is no motive to save taxes by paying commission since the units of the assessee are eligible for deduction @ 100% u/s 80-IB. In respect of 6 parties which were not introduced by the commission agent, it was the submission of the AR that the agents had furnished other information such as report about reputation, status, financial standings etc. Regarding these 6 parties, he also submitted that they have also helped in realization. The AR was asked to file letters of these agents but the same are not filed by the AR and hence, in the facts of the present case, the order of CIT(A) on this issue does not call for any interference because part disallowance confirmed by him is on this basis of these 6 customers were not introduced by these agents whereas for the balance amount for which disallowance of commission is deleted by CIT(A), he has given a clear finding that these parties were introduced by the commission agents and evidence were filed regarding rendering of the services by them and these findings of CIT(A) could not be controverted by the DR. Accordingly, ground No.1 of the revenue as well as ground No.1 of the assessee’s appeals was rejected;
++ Disallowance of deduction u/s 80-IB in respect of interest on FDR and ICD - interest income cannot be said to be an income derived from an industrial undertaking and, therefore, Section 80-IB deduction is not allowable in respect of interest income. Regarding netting of interest income, issue is now covered by the judgment of Apex Court rendered in the case of ACG Associated Capsules Pvt. Ltd. wherein, it was held that only 90% of net interest included in the profits of business of the assessee has to be excluded under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of business. Although this judgment is in respect of deduction u/s 80HHC but there is no reason as to why the same logic should not be applied in respect of deduction u/s 80-IB of the Act. Therefore, net interest only should be considered for reducing from profits of business for computing deduction u/s 80-IB and for the purpose of computing net interest, only these expenditure, which are incurred for earning interest income should be considered and reduced from interest income;
++ Deduction u/s 80-IB in respect of duty drawback - the clause (a) of sub section (2) of section 75 of the Customs Act, 1962 provides that there are two types of duty drawback which can be allowed. The first category is that payment of duty drawback is equal to the amount of duty actually paid on an imported material used in a manufacturing or processing of goods or carrying out any operation of the goods. The second category is that as specified in the rule, average amount of duty paid on the material of that class or description used in a manufacturing or processing of export of goods or carrying out any operation of export goods of this case etc. In the first category, the duty drawback is arithmetically equal to the duty paid by the assessee on import of material used in the manufacture or processing of the goods. In the 2nd category, average amount of duty drawback is paid without any correlation with the actual duty paid by the assessee on import. As per rule 6 of Customs, Central Excise duty and Service Tax Duty Drawback Rules 1995, where no amount or rate of drawback has been determined in respect of any goods, any exporter of such goods may within 60 days from the date of relevant of the applicability of amount apply in writing to the Commissioner of Central Excise or Commissioner of Customs and Central Excise having jurisdiction over the manufacturing unit or manufacturer exporter or the supporting manufacturer etc to determine the amount and rate of drawback thereof stating all the relevant facts etc;
++ in the present case, the duty drawback is available to the assessee as per the first category and as per the details given by the assessee, an amount of Rs.2,72,395/- was paid by the assessee as custom duty, out of which Rs.5,697/- was deducted being @ Rs.3/kg. for 1899 Kg. being recoverable wastage and the balance amount was paid as duty drawback being Rs.2,66,698/-. Similarly, for assessment year 2006-07 also, the assessee has submitted complete details about duty drawback, as per which, duty paid by the assessee is of Rs.15,71,42,086/- and duty drawback received is Rs.15,48,64,977/-. This goes to show that in both the years, there is direct and arithmetic correlation between the duty paid by the assessee and duty drawback received by the assessee. In the present case, duty drawback received by the assessee has a direct and arithmetic correlation with the custom duty paid by the assessee and, therefore, there is no income as such on account of duty drawback received by the assessee because whatever custom duty paid by the assessee has been received back by the assessee and it leaves no income with the assessee;
++ it is established by the assessee that the duty drawback received by the assessee is arithmetically equal to the duty paid by the assessee and, therefore, in the facts of the present case, duty drawback in the present case is nothing but refund of duty paid by the assessee and, therefore, respectfully following the Tribunal decision rendered in the case of J K Aluminium Co., this issue was decided in favour of the assessee and held that in the facts of the present case, duty drawback received by the assessee is eligible for deduction u/s 80-IB.
B) The AO denied the deduction u/s. 80IB of the Act on interest on FDR and ICD amounting to Rs. 5,07,48,207/-. Alternatively, it was contended by the assessee that only net interest and not the gross interest as has been done, can be reduced from the profits of the business. The CIT(A) upheld the order of the AO.
C) The AO did not grant deduction u/s. 80IB on duty draw back amounting to Rs. 2,66,698/-. Alternatively, the assessee contended without prejudice, that if the duty draw back is to be excluded, core spending payment of the duty may kindly be allowed to be taken out from the calculation of the profit of the business. Similar issue arose in earlier years, i.e. 2003-04 & 2004- 05, where the issue was decided-in favour of the assessee, vide CIT(A)'s order dt: 29-3-2006 & 19-06-2006 by following the decision of Gujarat High court in the case of India Gelatine & Chemicals Ltd.
The assessee carried the matter in appeal before CIT(A) who has decided this issue in favour of the assessee by following the order of his predecessor in assessee’s own case for the assessment year 2003-04 and 2004-05 in which the judgment of Gujarat High Court rendered in the case of India Gelatine & Chemicals Ltd. was followed.
On cross appeals by the assessee and the Revenue, held that,
++ Allowability of Sales commission paid u/s 37 of the Act - a clear finding is given by CIT(A) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realize and, therefore, payment of commission is justified except for 6 parties. In respect of these 6 parties, it is noted by CIT(A) that the A.O. after inquiry has brought on record in respect of these 6 customers, the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions. The income of all the units of the assessee is eligible for deduction u/s 80-IB of the Act. The A.O. has allowed additional deduction u/s 80-IB in respect of various additions made by him in the assessment and hence, this contention of the assessee is supported by facts on record that there is no motive to save taxes by paying commission since the units of the assessee are eligible for deduction @ 100% u/s 80-IB. In respect of 6 parties which were not introduced by the commission agent, it was the submission of the AR that the agents had furnished other information such as report about reputation, status, financial standings etc. Regarding these 6 parties, he also submitted that they have also helped in realization. The AR was asked to file letters of these agents but the same are not filed by the AR and hence, in the facts of the present case, the order of CIT(A) on this issue does not call for any interference because part disallowance confirmed by him is on this basis of these 6 customers were not introduced by these agents whereas for the balance amount for which disallowance of commission is deleted by CIT(A), he has given a clear finding that these parties were introduced by the commission agents and evidence were filed regarding rendering of the services by them and these findings of CIT(A) could not be controverted by the DR. Accordingly, ground No.1 of the revenue as well as ground No.1 of the assessee’s appeals was rejected;
++ Disallowance of deduction u/s 80-IB in respect of interest on FDR and ICD - interest income cannot be said to be an income derived from an industrial undertaking and, therefore, Section 80-IB deduction is not allowable in respect of interest income. Regarding netting of interest income, issue is now covered by the judgment of Apex Court rendered in the case of ACG Associated Capsules Pvt. Ltd. wherein, it was held that only 90% of net interest included in the profits of business of the assessee has to be excluded under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of business. Although this judgment is in respect of deduction u/s 80HHC but there is no reason as to why the same logic should not be applied in respect of deduction u/s 80-IB of the Act. Therefore, net interest only should be considered for reducing from profits of business for computing deduction u/s 80-IB and for the purpose of computing net interest, only these expenditure, which are incurred for earning interest income should be considered and reduced from interest income;
++ Deduction u/s 80-IB in respect of duty drawback - the clause (a) of sub section (2) of section 75 of the Customs Act, 1962 provides that there are two types of duty drawback which can be allowed. The first category is that payment of duty drawback is equal to the amount of duty actually paid on an imported material used in a manufacturing or processing of goods or carrying out any operation of the goods. The second category is that as specified in the rule, average amount of duty paid on the material of that class or description used in a manufacturing or processing of export of goods or carrying out any operation of export goods of this case etc. In the first category, the duty drawback is arithmetically equal to the duty paid by the assessee on import of material used in the manufacture or processing of the goods. In the 2nd category, average amount of duty drawback is paid without any correlation with the actual duty paid by the assessee on import. As per rule 6 of Customs, Central Excise duty and Service Tax Duty Drawback Rules 1995, where no amount or rate of drawback has been determined in respect of any goods, any exporter of such goods may within 60 days from the date of relevant of the applicability of amount apply in writing to the Commissioner of Central Excise or Commissioner of Customs and Central Excise having jurisdiction over the manufacturing unit or manufacturer exporter or the supporting manufacturer etc to determine the amount and rate of drawback thereof stating all the relevant facts etc;
++ in the present case, the duty drawback is available to the assessee as per the first category and as per the details given by the assessee, an amount of Rs.2,72,395/- was paid by the assessee as custom duty, out of which Rs.5,697/- was deducted being @ Rs.3/kg. for 1899 Kg. being recoverable wastage and the balance amount was paid as duty drawback being Rs.2,66,698/-. Similarly, for assessment year 2006-07 also, the assessee has submitted complete details about duty drawback, as per which, duty paid by the assessee is of Rs.15,71,42,086/- and duty drawback received is Rs.15,48,64,977/-. This goes to show that in both the years, there is direct and arithmetic correlation between the duty paid by the assessee and duty drawback received by the assessee. In the present case, duty drawback received by the assessee has a direct and arithmetic correlation with the custom duty paid by the assessee and, therefore, there is no income as such on account of duty drawback received by the assessee because whatever custom duty paid by the assessee has been received back by the assessee and it leaves no income with the assessee;
++ it is established by the assessee that the duty drawback received by the assessee is arithmetically equal to the duty paid by the assessee and, therefore, in the facts of the present case, duty drawback in the present case is nothing but refund of duty paid by the assessee and, therefore, respectfully following the Tribunal decision rendered in the case of J K Aluminium Co., this issue was decided in favour of the assessee and held that in the facts of the present case, duty drawback received by the assessee is eligible for deduction u/s 80-IB.
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