Income Tax Appellate Tribunal - Chennai
Ravikumar Distilleries Ltd., ... vs Department Of Income Tax on 5 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND SHRI GEORGE MATHAN, JUDICIAL MEMBER]
I.T.A.No.81/Mds/2011
Assessment year : 2007-08
The ACIT vs M/s Ravikumar Distilleries Ltd
Circle I No.17, Kamaraj Salai
Puducherry - 605 003 Puducherry - 605 001
[PAN :AABCR4195D]
(Appellant) (Respondent)
C.O.No.58/Mds/2011
Assessment year : 2007-08
M/s Ravikumar vs The ACIT
Distilleries Ltd Circle I
No.17, Kamaraj Salai Puducherry - 605 003
Puducherry - 605 001
(Cross objector) (Respondent)
Department by : Shri A.C.Joseph, Jt. CIT
Assessee by : Shri V.S.Jayakumar
Date of Hearing : 05-03-2012
Date of Pronouncement : 09-03-2012
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the Revenue and cross objection filed by the assessee against the order of the ld.CIT(A)-XII, Chennai, datxed 21.10.2010.
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2. Ground No.1 and 4 of the appeal are general in nature and hence, requires no adjudication by us.
3. Ground No.2 of the appeal is directed against the order of the ld.CIT(A) in allowing deduction of ` 47,36,690/- u/s 80IB of the Act.
4. The brief facts of the case are that the Assessing Officer has observed that the assessee-company has purchased concentrated form of rectified spirit of ENA which was diluted to the low level so as to be fit for human consumption. The raw material and the finished products are the same. The rectified spirit ENA remains as a diluted spirit only without undergoing a change. The rectified spirit ENA made of grain or grapes or malt was mixed with demineralized water in the required proportion to reduce the concentration of the ENA alongwith other ingredients such as caramel, sugar, etc. to bring out different drinks, i.e Whisky, Brandy, Rum, etc. for human consumption. The above blending was allowed to fermentation and filtration for a required time. Then these blendings are bottled and marketed as human consumption IMFL drinks. As the above blending does not constitute manufacture, the deduction u/s 80IB is not allowable. Manufacturing is the process by which the raw material was subjected to change and a new finished product of commercial value was obtained. In view of the above, the claim of deduction u/s 80IB was not allowable.
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5. The Assessing Officer further observed that the ld. A.R of the assessee has relied upon the order of the Hon'ble Madras High Court in the case of M/s Vinbros & Co. vs ITO, Ward I(1), Pondicherry, where the IMFL production was allowed as manufacturing eligible for deduction u/s 80IB of the Income-tax Act, 1961. Therefore, the assessee had submitted that in view of the Jurisdictional High Court's order, assessee was eligible for deduction u/s 80IB of the Act. The Assessing Officer further observed that in the above case, as the Assessing Officer has recommended for further Departmental appeal before the Hon'ble Supreme Court against the Hon'ble Madras High Court's decision and as the matter is still pending without any finality reached, in order to maintain uniform standing in the IMFL cases by the Department with due respect to the Hon'ble Jurisdictional High Court's order, the assessee's claim for deduction u/s 80IB of the Act is rejected.
6. Being aggrieved against the said order, the assessee filed appeal before the ld.CIT(A).
7. The ld.CIT(A) accepted the appeal of the assessee and directed the Assessing Officer to allow deduction u/s 80IB of the Act as claimed by the assessee in the return of income by observing as under:
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"Ground No.1: Regarding the claim of deduction u/s 80 IB of the appellant to the tune of ` 47,36,690/- and disallowed by the Assessing Officer, the AR of the appellant had submitted that the Hon'ble ITAT, Bench 'B', Chennai in ITA No.50/Mds/ 2010, Asst. Year 2005- 06, vide its order dt. 3.03.10, had dismissed the appeal of the Revenue after having heard the rival submissions, considering the facts and materials available on record including the decision of the Hon'ble High Court in the case of CIT vs. Vinbros & Co. in Tax Case Appeal No. 1361 and 1362 of 2007 dt. 29.10.07, stating the following:-
"..... As regards the second issue as to whether the assessee had engaged itself in the manufacturing or producing of an article or thing by the act of blending, it is seen that the assessee does not just add water and sells the final product. It is an admitted fact that quite apart from water, the assessee had to add several items to make it fit for human consumption. The Tribunal held that what was purchased by the assessee was not a potable one and but for the blending, the commodity could not have become a saleable commodity. Consequently, the raw amterials, even though are not manufactured by the assesse, yet there is nexus of the process by blending to make it a saleable commodity totally different from that of the original obtained. The Tribunal also pointed out that the end product is totally different and is commercially different commodity than the major input rectified spirit, which is not fit for human consumption. Hence, the changes made to the original product results in a new different commodity, which is recognized in the trade. The decision of the Tribunal is in accordance with the law laid down by the supreme Court on the interpretation of the concept 'manufacture' and therefore, the appeals do not deserve admission, as no interference is called for by this Court.
In view of the decision of the Hon'ble jurisdictional ITAT in the appellant's own case for the Asst. Year 2005-06 and in consonance with the decision of the Hon'ble High Court of Judicature at Madras, Chennai, in the case of M/s. Vinbros & Co., Pondicherry, cited supra, it is held that the blending of the raw material in the appellant's unit amount to manufacturing activity and the Assessing Officer is hereby directed to delete the addition made on account of disallowance of claim of deduction u/s 80 IB of the :- 5 -: I.T.A.No. 81/Mds/11 CO 58/Mds/11 Income-tax Act, 1961. Accordingly, appellant succeeds on this ground."
8. The ld. DR relied on the order of the Assessing Officer whereas the ld. A.R of the assessee filed before us a copy of the order of the Chennai 'B' Bench of the Tribunal in assessee's own case for assessment year 2005-06 in I.T.A.No.50/Mds/2010, order dated 3.3.2010, and submitted that the Tribunal has allowed the claim for deduction u/s 80IB of the Act in the similar facts and circumstances of the case in assessment year 2005-06. He prayed that following the aid order, the order of the ld.CIT(A) should be confirmed.
9. We have heard the rival submissions and perused the orders of the authorities below and materials available on record. In the instant case, the assessee is engaged in the business of manufacturing and trading in Indian Made Foreign Liquor (IMFL) and for the assessment year under consideration, the assessee filed return of income showing income of ` 1,06,74,516/- after claiming deduction u/s 80IB for ` 47,36,690/-. The assessee submitted before the Assessing Officer that the Hon'ble Madras High Court in the case of CIT vs Vinbros & Co in Tax Case Appeal No.1361 and 1362 of 2007 dated 29.10.2007 has held that the activity of making liquor from rectified spirit is manufacturing and accordingly, the assessee is eligible for deduction u/s 80IB of the Act. The Assessing Officer did not accept the claim of :- 6 -: I.T.A.No. 81/Mds/11 CO 58/Mds/11 the assessee only on the ground that the Department has not accepted the decision of the Hon'ble Madras High Court in the case of M/s Vinbros & co. (supra) and has filed an appeal before the Supreme Court there against. The ld.CIT(A) has allowed the claim for deduction u/s 80IB of the Act to the assessee by following the decision of Hon'ble Madras High Court in the case of M/s Vinbros & Co. (supra) and the order of the Tribunal in assessee's own case in assessment year 2005-06. The ld. DR has merely supported the order of the Assessing Officer. He has not filed any material before us to show that the order of the Hon'ble Madras High Court has been varied in appeal by the Hon'ble Supreme Court. Further, we find that the Chennai 'B' Bench of the Tribunal in assessee's own case in assessment year 2005-06 has allowed the claim for deduction u/s 80IB of the Act to the assesse. We, therefore, do not find any good and justifiable reason to interfere with the order of the ld.CIT(A). It is confirmed. The ground of appeal of the Revenue is dismissed.
10. Ground No.3 of the appeal is directed against the order of the ld.CIT(A) in directing the Assessing Officer to restrict the disallowance u/s 40(a)(ia) of the Act to ` 12,20,575/- out of ` 5,45,19,462/-. In the cross objection of the assessee, the grievance of the assessee is that the ld.CIT(A) erred in confirming the disallowance u/s 40(a(ia) of the Act of ` 12,20,575/- out of ` 5,45,19,462/-.
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11. Since both the issues arise out of same facts, for the sake of convenience, they are being disposed of together.
12. The brief facts of the case are that the Assessing Officer observed from the return of income that the assessee has not deducted TDS from royalty payment of ` 5,45,19,462/-. The assessee contended before the Assessing Officer that operational support cost was not an expenditure subject to TDS and filed before the Assessing Officer a certificate from the Chartered Accountant who had opined that the agreement embodies a conducting arrangement in respect of liquor manufacture and the payment was a composite and indivisible whole in consideration of the company being permitted to conduct the business and that it is not a payment warranting deduction of TDS. The assessee also placed reliance on the decision of Hon'ble Supreme Court in the case of M/s Hindustan Coca Cola Beverages (P) Ltd vs CIT (2007) 293 ITR 226(S.C) and CBDT Circular on provisions of TDS reported in 276 ITR (St) 151 to 165. The assessee further submitted that in any event it is a direct cost and hence, section 40(a)(ia) cannot be invoked. The Assessing Officer did not accept the contention of the assessee on the ground that it was a payment for royalty and the assessee ought to have deducted TDS. Since the TDS was not deducted, the expenditure was disallowed u/s 40(a)(ia) of the Act and added to the income of the assesse.
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13. In appeal before the ld.CIT(A), the assessee has submitted as under:
"Regarding royalty payment disallowed u/s 40(a)(ia) of the Act by the Assessing Officer for non-deduction of TDS, the AR had furnished detailed written submission, wherein it was mentioned that the disallowance of ` 5,45,19,462/- was relating to the operating support cost by way of payment made to 4 resident assessees/ companies. In this regard, the AR submitted that there were agreements with the above parties and these agreements embody a conducting arrangement in respect of liquor manufacture and the payment is composite and indivisible whole in consideration of the company being permitted to conduct the business. Further, the AR of the appellant submitted that the assessee company has necessary governmental permissions and all infrastructural facilities to manufacture IMFL and that in any event, it was a direct cost and hence, Sec 40(a)(ia) of the Income Tax Act, 1961 cannot be invoked.
The AR of the appellant brought to the notice of the undersigned that notwithstanding anything contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession' and that the operational support cost is a direct expenditure allowable u/s 28 of the Act and hence, does not fall within the mischief of Sec. 40(a)(ia) of the Act, which is restricted in its operation to expenditure referred to in Sections 30 to 38 only.
The AR also relied on the following Apex Court's decisions wherein it had been discussed in detail about profits and gains from business or profession as per the provisions of the Income-tax Act and held that profit - and gains should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purpose of earning the receipt is deducted therefrom.
1. Calcutta Co. Ltd. v. CIT - 37 ITR 1 (SC)
2. Madras Ind. Inv. Corpn. Ltd. v. CIT - 225 ITR 802 (SC)
3. CIT v. Bilahari Inv. P. Ltd. - Civil Appeal dt. 27.02.08.
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Thus, the AR had contended that the operational support cost forms part of direct cost and hence, the invoking of provisions of Sec. 40(aj(ia) of the Act by the Assessing Officer was not in accordance with law and requested that the addition made by the Assessing Officer may please be deleted.
Further, at the time of hearing, the AR was asked to submit the components of Royalty paid, if any, included in the direct cost. In this connection, the AR of the appellant had filed alongwith the written submissions, the details of label values amounting to ` 12,20,579/- and submitted that the same form part of 'Direct Cost'.
Finally, the AR of the appellant had furnished a copy of the decision of the Hyderabad Bench of the Hon'ble ITAT, in the case of Teja Constructions vs. ACIT in ITA No.308/Hyd/2009 dt. 23.10.09, wherein it was observed by the Hyderabad bench of the ITAT that all the expenditure, just as labour charges in the instant case, which represents direct cost and therefore adjustable against revenue for the purpose of determining the profit u/s 28(i) of the Act, do not come within the provisions u/s 40(a)(ia). It was further observed by the Hyderabad Bench of the ITAT that it is only the deduction referred to in Sections 30 to 38 which would definitely fall for consideration of disallowance u/s 40 and they cannot be claimed as deduction u/s 28. Thus it was reasoned by the AR of the appellant that the provisions of Sec. 40(a)(ia) are applicable only to items covered by sec. 30 to 38 and not to items covered u/s 28 as direct cost. Hence, it was contended by the AR of the appellant that not only the payments made to the above 4 parties do not fall within the mischief of sec. 40(a)(ia), but also _ the label values, included in the direct cost component, too will not fall within the purview of Sec. 40(a)(ia) of the Act".
14. The ld.CIT(A), after considering the submissions of the assesse, has allowed the appeal of the assessee by observing as under:
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"Ground No.2 - a perusal of the details filed by the AR of the appellant, regarding the addition of ` 5,45,19,462/- made on account of disallowance u/s 40(a)(ia) on Royalty Payment made by the Assessing Officer in the impugned order, it is seen that this amount is a composite payment to the appellant's principals. In view of the above cited facts, it has elements of royalty (being label value) and direct costs like operational support cost. The direct costs are incurred by the principals of RKDL and reimbursed by RKDL. The payments made to the tie-up companies of RKDL i.e. ` 5,32,98,887/- (` 5,45,19,462/- less ` 12,20,575/-) are only direct costs i.e. operational support cost, which goes into the actual manufacture of IMFL for the tie-up companies. In this connection, the observation of the Hyderabad Bench of the Hon'ble ITAT, in the case of Teja Constructions vs. ACIT in ITA NO.308/HYD/2009 dt. 23.10.2009 is reproduced as under:-
"Further, 'notwithstanding anything to the contrary in Sections 30 to 38' with which the provisions. of Sec. 40 begin, take the items of expenses covered by the provisions of Sections to 30 to 38 along within the ambit of Section 40, and any item of expenditure allowable under the provisions of the Act, preceding Sec. 30, is not covered by the said statutory disallowances envisaged u/s 40. It may also be observed that if an assessee claims any expenditure as necessary to earn the business income and, as such, the same is allowable u/s 28 and not u/s 37, because Sec. 28 taxes profits of the business which can be worked out only after allowing expenditure, such expenditure goes out of the clutches of the disallowance in terms of the provisions of Sec. 40. In this view of the matter, an assessee may claim all his expenditures except for those which are clearly covered by some other sections e.g., Sec. 30 covering rent, rates, taxes, insurance etc., as allowable u/s 28. It may further be observed that all the expenditure, just as labour charges in the instant case, which represents direct costs and, therefore, adjustable against revenue for the purpose of determining the profit u/s 28(i) do not come within the provisions of Sec. 40(a)(ia)..... . .. all the direct cost/expenditure covered by Sec.28 are beyond the scope of disallowance u/s 40(a)(ia).
In view of the aforesaid, the impugned order passed by the Commissioner (Appeals) upholding the action of Assessing Officer making disallowance u/s 40(a)(ia), was to be set aside."
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Thus, ` 5,32,98,887/- is reimbursed by RKDL to its principals being operational support cost and the balance `12,20,575/- pertains to brand/label value, i.e. 'Royalty Payment'. It is also seen that for the Asst. Years 2008-09 and 2009-10, the appellant has entered" into specified agreement with its principals for Royalty which works to Rs.1.50p per bottle and the payments made by RKDL to its principals are ` 12,16,919/- and ` 11,92,783/- for the Asst. Years 2008-09 and 2009-10 respectively. And hence, the payment of ` 5,32,98,887/- as per the Hon'ble Hyderabad Tribunal's decision and facts cited above are not attracted by the provisions of Sec 40(a)(ia) of the Income-tax Act 1961.
The payment of Royalty is covered within Sections 30 to 38 of the Income-tax Act, 1961 and hence, falls within the ambit of Sec. 40(a)(ia) of the Income-tax Act, 1961 and TDS should have been deducted, which the appellant had squarely failed to do so.
And hence, addition to the tune of ` 12,20,575/- is sustained and accordingly, appellant partly succeeds on this ground."
15. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the Assessing Officer observed that ` 5,45,19,462/- was paid by the assessee to its principals which was royalty and on which the assessee was liable to deduct tax. As the assessee failed to deduct tax thereon, the Assessing Officer disallowed the amount by invoking the provisions of section 40(a)(ia) of the Act.
16. On appeal, the ld.CIT(A) observed that out of ` 5,45,19,462/-, ` 12,20,575/- was the payment of royalty and the balance amount of ` 5,32,98,887/- was reimbursement of operational support expenses.
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Therefore, the ld.CIT(A) deleted the disallowance of ` 5,32,98,887/- and confirmed the disallowance of ` 12,20,575/-.
17. Before us, the Revenue is in appeal in respect of deletion of ` 5,32,98,887/- and the assessee is in cross objection against confirmation of ` 12,20,575/-.
18. The ld. DR submitted that the ld.CIT(A) has admitted fresh evidences for allowing the claim of the assessee which was not filed before the Assessing Officer and also contended that the evidences relied upon by the ld.CIT(A) were not for the relevant assessment year. He also contended that the finding of the ld.CIT(A) that ` 5,32,98,887/- was reimbursement of operational support expenses is not based on any relevant material and thus, perverse. He argued that the issue should be set aside to the file of the Assessing Officer for fresh adjudication.
19. On the other hand, the ld. A.R of the assessee also admitted that fresh evidences were filed before the ld.CIT(A) and he has no objection on sending the issue back to the file of the Assessing Officer for fresh adjudication.
20. In respect of ` 12,20,575/- confirmed by the ld.CIT(A), the ld. A.R of the assessee did not put any serious arguments and submitted :- 13 -: I.T.A.No. 81/Mds/11 CO 58/Mds/11 that as new evidences were admitted, the ground of cross objection is liable to be dismissed.
21. We find that no material relevant to the assessment year under consideration has been brought on record by the ld.CIT(A) on the basis of which it can be concluded that the amount of ` 5,32,98,887/- paid by the assessee-company to its principals were reimbursement of actual operational support expenses incurred by the principals and no element of income of principal was embedded therein. The ld.CIT(A) has estimated it as reimbursement of expenses only on the basis of agreements of subsequent years. Copy of agreement between the assessee and its principals were not filed before us by either of the parties. In absence of the agreement and in absence of relevant materials brought on record, we are not in a position to adjudicate the issue completely. In the circumstances, in our opinion, it shall be fair and in the interest of justice, to restore the issue relating to ` 5,32,98,887/- to the file of the Assessing Officer for fresh adjudication after verifying the actual material of relevant payments and after allowing reasonable opportunity of hearing to the assesse.
22. In respect of ` 12,20,575/-, we find no force in the cross objection of the assessee and accordingly, the same is liable to be dismissed. We order accordingly.
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23. The ground of appeal of the Revenue is allowed for statistical purposes and the ground of cross objection of the assessee is dismissed.
24. In the result, the appeal of the Revenue is partly allowed for statistical purposes whereas the cross objection of the assessee is dismissed.
Order pronounced in the open court on 09-03-2012.
Sd/- Sd/- (GEORGE MATHAN) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 9th March, 2012 RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR