Income Tax Appellate Tribunal - Mumbai
Schemtz India P. Ltd, Mumbai vs Department Of Income Tax on 5 January, 2010
आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'जे
जे' मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" BENCH, MUMBAI
ी आर.एस
आर एस.
एस याल,
याल लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं. / ITA no. 3604/Mum./2010
( नधारण वष / Assessment Year : 2005-06)
Schmetz India Pvt. Ltd. ....................... अपीलाथ /
E-218, Vashi International Infotech Park Appellant
2nd Floor, Vashi Railway Station, Vashi
New Mumbai 400 703
बनाम v/s
The Income Tax Officer ................... यथ /
Ward-7(2)-2, Mumbai Respondent
थायी लेखा सं./ Permanent Account Number - AAFCS7536M
आयकर अपील सं. / ITA no. 5781/Mum./2010
( नधारण वष / Assessment Year : 2005-06)
The Income Tax Officer ....................... अपीलाथ /
Ward-7(2)-2, Mumbai Appellant
बनाम v/s
Schmetz India Pvt. Ltd. ................... यथ /
E-218, Vashi International Infotech Park Respondent
2nd Floor, Vashi Railway Station, Vashi
New Mumbai 400 703
थायी लेखा सं./ Permanent Account Number - AAFCS7536M
नधा रती क ओर से / Assessee by : Mr. N.H. Gajria
राज व क ओर से / Revenue by : Mr. S.D. Srivastava
Mr. Mohit Jain
सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 22.11.2012 Date of Order - 30.11.2012
Schmetz India Pvt. Ltd.
2
आदे श / ORDER
अ मत शु ला, या यक सद य के ारा /
PER AMIT SHUKLA, J.M.
These cross appeal are directed against the impugned order dated 5th January 2010, passed by the learned Commissioner (Appeals)-XIII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for assessment year 2005-
06.
2. We first take up Revenue's appeal in ITA no.5781/Mum./2010, vide which, following grounds have been raised:-
"1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in coming to the conclusion that there was nothing on record to show that the profits arrived by the assessee in respect of the 10A unit was out of extraordinary arrangements of collusion between the assessee and the German company merely for the purpose of boosting the assessee's profit and, in that view, holding that the profits of Rs.20,53,26,910/- derived by the assessee from the export oriented unit should be considered for relief u/s 10A of the Act.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in law in holding that there was no material available with the A.O. to estimate the profits of the 10A unit eligible for deduction invoking the provisions of section 801A(1O) read with section 10A(7) of the Act was based on proper and reasonable appraisal of the material available on record.
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in holding that the deduction u/s 10A of the Act has to be computed without setting off of the loss from the trading unit against the profits of the export oriented unit entitled to deduction u/s 10A."
Schmetz India Pvt. Ltd.
33. At the outset, both the parties fairly admit before us that the issue involved is covered by the earlier year's decision of the Tribunal rendered in assessee's own case for assessment year 2004-05, which has now been affirmed by the Hon'ble Jurisdictional High Court.
4. The relevant facts, apropos grounds no.1 and 2, are that the assessee is a public limited company carrying on business of manufacture and trading in industrial sewing machine needles. The assessee has two units, one is a manufacturing unit at Kandla in the Kandla Free Trade Zone, which manufactures Industrial Sewing Machine Needles and exporting the entire production to its principals at Germany, and the other one is a trading unit located in Mumbai carrying on the business of trading in Industrial Sewing Machine Needles. It imports industrial sewing machine needles from its principals and sells the same in India and to the neighboring countries.
5. The Assessing Officer noted that the assessee had declared higher profit which is not normal as compared to the comparable cases submitted by the assessee in its transfer pricing analysis report. Before the Assessing Officer, the assessee submitted detailed reasons for showing higher profit, however, the Assessing Officer still treated the said explanation to be improper and in view of the terms of provisions of section 10A(7) and section 80IA(10) of the Act, he estimated the profit of the business for the purpose of deduction under section 10A by adopting 60% gross profit rate as against 67.91% shown by the assessee. He estimated the eligible profit of the business as done in the earlier assessment years in the following manner:-
Gross profits of the assessee adopted as above 60% Therefore G.P. rate at 60% of ` 49.92 crores Turnover of the assessee works out to 29.95 crores Less: Expenses claimed by assessee Amount in crores Schmetz India Pvt. Ltd.4
Employee Cost 1.82
Other mfg. expenses 1.59
Selling and Distribution exp. 0.06
Misc. Expenses 1.49
Interest 0.85
Depreciation 1.16
Total 6.97
Estimated profits of the assessee for the
Purpose of deduction u/s 10A 22.98
====
5. Assessee has claimed deduction under section 10A of ` 27,16,27,629 balance amount of ` 4,18,27,629 is not eligible for deduction under section 10A and is taxed under the head "income from other sources."
6. The learned Commissioner (Appeals), following the earlier years' order passed by the Tribunal for assessment year 2004-05, in ITA no.7629/Mum./2007, vide order dated 30th July 2008, allowed the assessee's ground as per the discussion appearing in Paras-2.2 to 2.4 of the appellate order.
7. After carefully considering the orders passed by the Assessing Officer as well by the learned Commissioner (Appeals) and the order passed by the Tribunal, we find that the Tribunal has decided the similar issue after discussing the facts as reproduced below:-
"l0. The assessee has two separate activities -- 1) manufacturing activity at Kandla, which is a 100% export oriented unit and 2) unit at Mumbai where industrial sewing needles are imported from Germany and sold locally as well as abroad. Industrial sewing needles imported from Germany are of different variety from those manufactured and exported from the Kandla Unit. The entire production of Kandla Unit is exported to 100% holding company Schmetz GmbH. The manufacturing unit at Kandla made a profit of about Rs.20.53 crores which was claimed exempt under Section 10A and the trading unit at Mumbai made a loss of about Rs.71,00,000. The AO felt that profit made in the manufacturing unit was excessive and applying the provisions of 10A(7) read with 801A(1O) holding that the business between the assessee and its holding company has been so arranged that the business transacted between them produces to the assessee more than the ordinary Schmetz India Pvt. Ltd.5
profits which might be expected to arise from the business of the industrial undertaking and accordingly has estimated the profit which according to him is reasonable and granted relief u/s.10A for the same. Section 801A(10) reads as under:
"Where it appears to the 'Assessing) Officer that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel or the operation of the ship (or the business of repairs to ocean-going vessels or other powered craft) to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that (he business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel or the operation of the ship (or the business of repairs to ocean-going vessels or other powered craft), the (Assessing) Officer shall, in computing the profit and gains of the industrial undertaking or the hotel Or the ship (Or the business of repairs to ocean-going vessels or other powered craft) for the purposes of the deduction under this .section, take the amount of profits as may be reasonably deemed to have been derived therefrom."
It is apparent from the above that there should be an arrangement of he business transaction which has resulted in extraordinary profits to the assessee. Whenever there is an extraordinary profit, it will not follow that the parties have so arranged the transaction among themselves to produce extraordinary profits. It would be penalizing efficient functioning. We feel, it is for the AO to prove that there is an arrangement between the parties which has resulted in an extraordinary profit to the assessee. It may be by way of higher sale price of goods, sharing of expenses when it is not required to do so or such other methods which clearly result in transfer of profits to the Assessee. But the Assessing officer has not proved that any part of the transaction is out of the ordinary. It has not hen shown that the sale price by the assessee to its holding Company is higher than the market value. He has also not proved that none of the expenditure incurred has been understated in order to increase the profitability of the export oriented unit. The assessee also submits Wt the transactions between the assessee and the German Company have been thoroughly scrutinized and accepted by the transfer pricing authorities in Germany who have accepted the pricing of export of goods as well as other transactions between the assessee and the German Company.
12. Without any specific material to show how the profit has been overstated with cogent reasoning and supporting material and evidence it is not possible to support the conclusion that any profit Schmetz India Pvt. Ltd.
6for extraordinary nature should not be accepted and only average profits made by other companies should be adopted for computing relief u/s. 10A. This would act as-a great disincentive for an efficient person making more profits than others. The AO has given a table of comparison and gross profits to sales as well as percentage of net profit to sales of about 11 companies. We find excluding the assessee the net profit to sales varies from 0.29% to 7.20% and percentage of gross profit to sales varies from 9.35% to 52.19%. The variation is wide and the highest figure is many times the lowest figure. If the reasoning of the AO is to be applied it is not clear why the profit of one of the units viz. Kitex Garments should be taken and not that of the company with the lowest profitability. There does not appear to be any specific reason on the basis of which the AO has come to the conclusion that there has been an arrangement between the assessee and the German Company so that the assessee has made extraordinary profits.
13. One of the points we observed from the table furnished is the cost of raw material for the assessee is very low compared to the raw material cost of other companies. The assessee has explained that its entire basic raw material is supplied to it by the German Company. The AO has not found anything wrong in the cost of raw material being low. Further, the assessee has also submitted that its entire production is sold to the German Company in bulk so that packing, marketing and inventory carrying costs are reduced; technical know-how will be supplied by the German Company to the assessee free of charge and without any royalty and finance was provided by the German Company to the Assessee company. These certainly do have a bearing in reducing the cost of operations of a company and this has been the position in the earlier years also. There is nothing in record to show that business transaction was so arranged so that the profits of the assessee were boosted.
14. In the circumstances we have no hesitation in holding that the AO and CIT(A) erred in concluding that there was an arrangement for boosting the profits of the Assessee. There is nothing on record to show that the profits arrived by the assessee was not in the normal course of its business and the profits was out of extraordinary arrangements or collusion between the assessee and the German Company, merely lot the purpose of bousting the assessee's profits. In the circumstances we hold that the profits derived by the assessee from the export oriented unit of Rs.20,53,26,910 should he considered for the purpose of relief u/s. 10A."
8. Against the aforesaid order passed by the Tribunal, the Revenue preferred an appeal before the Hon'ble Jurisdictional High Court under section 260A of the Act on the following substantial questions of law.
Schmetz India Pvt. Ltd.
7"Whether on the facts and in the circumstances of the case and in law the Tribunal was justified A) in coming to the conclusion that there was nothing on record to show that the profits arrived at by the assessee in respect of the 10A unit carrying on the business of manufacturing Industrial Sewing Machine Needless was not in the normal course of its business, and that the abnormally high profit was due to extraordinary arrangement between the assessee and the German company entered into only with a view to boost the profits of assessee and therefore allowing deduction of Rs.20,54,27,335/--?
B) in holding that the there was no material available with the A.O. to estimate the profits of the 10A unit eligible for deduction invoking the provisions of S.80 IA(10) read with S.10A(7) of the Act was based on proper and reasonable appraisal of the material available on record?
9. The relevant findings of the Hon'ble Jurisdictional High Court confirming the aforesaid Tribunal order are as under:-
"8. So far as questions (a) & (b) are concerned, we find that the Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the respondent-assessee is not abnormally high due to any arrangement between the respondent--assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that this is an arrangement between the parties. This would penalize efficient functioning. Further, the authorities have also recorded a finding that the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured & exported by the Kandla division. Consequently, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduction under Section 10A of the Act. These are findings one of fact. The appellant--revenue have not been able to show that the findings are perverse or arbitrary. In the circumstances, questions
(a) and (b) as formulated by the appellant/revenue do not raise substantial questions of law in the present facts and are therefore dismissed.
10. Thus, following the aforesaid decision of the Hon'ble Jurisdictional High Court, grounds no.1 and 2, raised by the Revenue are dismissed.
Schmetz India Pvt. Ltd.
811. Ground no.3, raised by the Revenue is wholly misconceived as the issue of set-off of loss of the trading unit (non 10A unit) against the profits of EOU unit (10A unit) has been decided against the assessee and in favour of the Revenue. Therefore, this ground is dismissed as infructuous.
12. नधा रती: राज व क अपील खा रज क जाती है ।
12. In the result, Revenue's appeal is dismissed.
We now take up assessee's appeal in ITA no.3604/Mum./2010, vide which, following grounds have been raised:-
"1. The learned CIT(A) has erred in confirming that the losses of the non-exempted unit (10-A unit) are required to be adjusted against the profits of the 10-A exempted unit.
2. The learned CIT(A) has erred in directing the Assessing Officer to arrive at the Gross total income before allowing deduction under section 10A of the Act."
13. As admitted by both the parties, this issue too has been decided in favour of the assessee and against the Revenue by the Tribunal in assessee's own case in earlier assessment year 2004-05, which has now been affirmed by the Hon'ble Jurisdictional High Court.
14. The Assessing Officer noted that the assessee has declared trading loss of ` 6,31,531, from its trading business from Mumbai unit (i.e., non 10A unit) and the assessee has not set-off this trading loss against manufacturing income (of 10A unit) before claiming deduction under section 10A. Before the Assessing Officer, the assessee submitted that deduction under section 10A, is to be allowed at the stage of computation of income for each eligible undertaking, regardless of whether final total income is positive or negative. The A.O. held that such an interpretation of the assessee is against the provisions of section 10A which provides Schmetz India Pvt. Ltd.
9that deduction shall be allowed on the total income of the assessee. After relying on the decision of the Tribunal, Mumbai Bench, in Navin Bharat Industries Ltd. v/s DCIT, order dated 10th March 2004, he held that the assessee has to set-off losses from 10A unit. He also noted that in the earlier years, right from the assessment years 2001-02 to 2004-05, this issue has been allowed by the Tribunal in favour of the assessee, however, the Revenue has not accepted the said decision and an appeal is subjudice before the Hon'ble Jurisdictional High Court.
15. The learned Commissioner (Appeals), primarily, upheld the conclusion drawn by the Assessing Officer.
16. After carefully considering the findings given by the Assessing Officer as well as by the learned Commissioner (Appeals), we find that this issue has been dealt with in detail by the Tribunal in assessee's own case for assessment year 2004-05 after observing and holding as under:-
"15. The next issue in the assessee's appeal is regarding computation of relief under section 10A after adjusting the loss of trading division of ` 70,29,930. The Assessing Officer relied on the various decisions, where the Courts have held that while computing the relief under section 80I etc. under Chap. VIA, carried forward losses will have to be set off. The assessee submitted that various decision relied on by the Assessing Officer relates to deduction under Chapter-VIA and are not directly applicable to the provisions of Section 10A.
16. On appeal, the Commissioner of Income-tax (Appeals relied on the Third Member decision of the Mumbai Tribunal in the case of Navin Bharat Industries Ltd Vs DCIT -- 90 lTD 1 and rejected the contention of the Assessee and held that loss from the trading unit has to be set off against the profit of the eligible unit before computing the relief under Section 10A.
17. Aggrieved, the assessee is on appeal before us. The relief under Section 10A has undergone marked change by the Finance Act 2001 with effect from 01.04.2001. Under section 10A as it stood on the first day of this Assessment Year, the relief to be granted under that Section is in the nature of deduction of the profits derived from the eligible undertaking from the total income. Whereas prior to 01.04.2001, profit and gains derived from the 100% EOU was excluded from the total income, Thus, after 01.04.2001 even though Schmetz India Pvt. Ltd.10
the Section was included under Chapter III ie., income which do not form part of the total income, the actual relief was in the nature of deduction from the total income. in any event, deduction available under Section 10A is to be determined as per sub section (4) thereof which reads as under:
(4) For The purposes of [sub-sections (1) and (IA), the profits derived from the export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking]".
18. It is clear from the above, that relief under Section 10A is to he computed only on the profit of the business of the undertaking as distinct from the profit and gains of business of the assessee as a whole.
Thus it is apparent from the wording of sub-section (4) only profit and gains of the undertaking which has to be taken for the purpose of computing relief under Section 1 OA without being increased or reduced by the profit of the any other unit of the assessee it is not the department case that if the other non eligible units make profit it will also be taken into account while computing relief under Section 10A. That being the case, losses incurred by the non eligible units cannot reduce the relief under sec 10A.
19. We therefore feel that deduction under Section 10A should be on the basis of sub-section 4 of Section 10A and computed on the profit and gains of the business of the undertaking multiplied by export turnover to the total turnover of the business carried on by the undertaking. The formula cannot be expanded by including profits (or loss), export turnover or total turnover of other units. Reliance is placed on the decision in the case of M/s. Huawel Technologies (I) Pvt. Ltd., Vs. ACIT in ITA No. 9/Bang/07 'B' Bench (unreported) wherein it has been held as under:
In the case of Naveen Bharat Industries Ltd. Supra), it was held that there is no provision in the Act by which the assessee can be forced to avail the benefit under Sec 10A for five years. In case, the assessee wants to put the income under the normal computation provision then there appears to be no bar for doing so. In view of that, it was held that loss of 10A unit can be adjusted against non 10A unit as the assessee is not claiming benefit under section 1 OA. This decision is not applicable in the instant case.
Schmetz India Pvt. Ltd.11
Keeping in view of the discussion as contained in earlier paragraphs, it is held that Ld. CIT(A) was justified in directing the AO to allow deduction u/s.10A without setting off brought forward and current year losses of non I OA Unit.
Further we find that the aforesaid view of the Tribunal is supported by the decision of Bombay High Court in the case of Siemens Information System Ltd. v/s ACIT (293 ITR 548).
Following finding has been recorded by the Hon'ble High Court -
"So far as the second contention is concerned, Ld. Counsel has drawn our attention, firstly to the provisions of Section 4 of the Act which sets out that anywhere Act enacted that income-tax shall be charged for any assessment year at any rate or rates, income- tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions, including the provisions for the levy of additional income-tax in respect of the total income for the previous year of every person. Our attention is invited to Section 2(45). "Total income" means the total amount of income referred to in Section, computed in the manner laid down in this Act. Next, our attention is invited to what is gross total income u/s. 80B(5). The gross total income has been described to be the total income computed in accordance with the provisions of the Act before making any deduction under the relevant chapter. A perusal of section 10A(1), as it stood at the relevant time, clearly sets out that subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking which the section applies shall not be included in the total income of the assessee. In other words, it is clear that the income derived from an industrial undertaking by the assessee to which Section 10A applies could not be included in the total income of the assessee. Once that is the case, the petitioner was right in filing the income by excluding the income of income in terms of Section 10A.
Ld. Counsel for the respondents has drawn our attention to the judgment of the Karnataka High Court in the case of Himatasingike Seide Ltd. (2006) 286 ITR 255 which was considering the provisions of section 10B. After perusing the facts in issue in this case and the facts before the' Karnataka High Court, in our opinion, the said case is not applicable to the facts of this case.
Schmetz India Pvt. Ltd.12
Looking to the aforesaid circumstances of the case, we are of the view that the relief u/s. 1 OA should not be restricted by allowing loss/depreciation of earlier year's and current year's Non-10A unit."
20. In the circumstances, we hold that relief under section 10A has to be computed without setting off of the loss from the trading unit and decide the issue in favour of the assessee.
17. Against the aforesaid order passed by the Tribunal, the Revenue has preferred appeal before the Jurisdictional High Court under section 260A, vide Income Tax Appeal no.4508 of 2010, on the following substantial questions of law:-
"Whether on the facts and in the circumstances of the case and in law the Tribunal was justified C) in holding that the deduction under S. 10A of the Act has to be computed without setting off of the loss from the trading unit against the profits of the export oriented unit entitled to deduction under S.10A of the Act?"
18. The Hon'ble Jurisdictional High Court dediced the issue in favour of the assessee and against the Revenue after observing and holding as under:-
"9. So far as, question (C) is concerned, both the respondent-- assessee and appellant--revenue agree that the issue is covered in favour of the respondent--assessee by the decision of this court in ITA (Lodging) No. 1237 of 2011 in CIT v. Black & Veatch Consulting Pvt. Ltd. dated 09.04.2012. Therefore, question (c) is answered in the affirmative i.e. in favour of the respondent assessee and against the appellant revenue."
19. Thus, respectfully following the aforesaid decision of the Tribunal which has been affirmed by the Hon'ble Jurisdictional High Court, the ground raised by the assessee stands allowed.
Schmetz India Pvt. Ltd.
1320. प रणामतः नधा रती क अपील वीकत ृ क जाती है ।
20. In the result, assessee's appeal is allowed.
21. नणय के सारांश व प, राज व क अपील खा रज क जाती है एवं नधा रती क अपील वीकत ृ क जाती है ।
21. To sum up, Revenue's appeal is dismissed and assessee's appeal is allowed.
आदे श क धोषणा खले
ु यायालय म दनांकः 30th November 2012 को क
गई ।
Order pronounced in the open Court on 30th November 2012 Sd/- Sd/-
आर.
आर.एस.
एस. याल अ मत शु ला
लेखा सद य या यक सद य
R.S. SYAL AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
मंुबई MUMBAI, दनांक DATED: 30th November 2012
आदे श क त ल प अ े षत / Copy of the order forwarded to:
(1) नधा रती / The Assessee;
(2) राज व / The Revenue;
(3) आयकर आयु (अपील) / The CIT(A);
(4) आयकर आयु / The CIT, Mumbai City concerned;
(5) वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6) गाड फाईल / Guard file.
स या पत त / True Copy
आदे शानसार
ु / By Order
द प जे. चौधर / Pradeep J. Chowdhury
वर नजी स चव / Sr. Private Secretary
उप / सहायक पंजीकार / (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai Schmetz India Pvt. Ltd.
14Date Initial Original dictation paid is enclosed with ITA no.3604/M/2010
1. Draft dictated on 22.11.2012 Sr.PS
2. Draft placed before author 23.11.2012 Sr.PS
3. Draft proposed & placed 23.11.2012 JM/AM before the second member
4. Draft discussed/approved 23.11.2012 JM/AM by Second Member
5. Approved Draft comes to 23.11.2012 Sr.PS the Sr.PS/PS
6. Date of pronouncement 30.11.2012 Sr.PS
7. File sent to the Bench 30.11.2012 Sr.PS Clerk
8. Date on which file goes to the Head Clerk
9. Date of dispatch of Order