Income Tax Appellate Tribunal - Ahmedabad
Sintex Industries Ltd.,, Ahmedabad vs Department Of Income Tax on 21 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD
"C" BENCH
Before: Shri D.K. Tyagi, Judicial Member and
Shri Anil Chaturvedi, Accountant Member
ITA No.2542/Ahd/2009
A.Y. 2008-09
Sintex Industries Limited The A.C.I.T.(OSD),
701-2, Ab hijeet-1, Circle-8 (OSD)
Mithakali Six Roads, Ellisbridge, Ahmed ab ad
Ahmed ab ad - 380 009 Vs.
PAN-AADCS0858E
Appellant Respondent
with
ITA No.2553/Ahd/2009
A.Y. 2008-09
The D.C.I.T.(OSD), Sintex Industries Limited
Circle-8 Abhijeet-1, 7 t h Floor,
Ahmedabad Mithakali Six Roads,
Vs. Ahmed ab ad
PAN-AADCS0858E
Appellant Respondent
Department by : Shri Devendra Singh Kalyan, CIT- D.R.
Assessee by : Shri Sanjay R. Shah, A.R.
Date of hearing : 21.11.2012
Date of p ronouncement : 31.12.2012
आदे श/ORDER
PER : D.K. TYAGI, JUDICIAL MEMBER
These cross appeals against the order of ld. CIT(A)-XIV, Ahmedabad, dated 25.06.2009 were heard together and are being disposed of by this consolidated order.
2. Ground No.1 in assessee's appeal is general in nature and does not require any adjudication.
ITA No.2542/Ahd/2009, A.Y. 2008-09 2
with ITA No.2553/Ahd/2009, A.Y. 2008-09
3. Ground No.2 of assessee's appeal reads as under:-
"2. The ld. CIT(A) has erred in confirming allocation of director's remuneration, directors' traveling expenses, audit fees, computer expense and security charges for calculating profit eligible for deduction u/s 80-IA of the Income Tax Act, 1961."
This ground is similar to ground No.1 of Revenue's appeal which reads as under:-
"The ld. CIT(A)-XIV, Ahmedabad erred in law and on facts in directing to allow general office charges and miscellaneous expenses of Rs.2789490/- out of the assessee's claim for deduction u/s 80IA.
4. Brief facts of the case are that the A.O. has reduced the claim of the assessee regarding deduction u/s 80IA by Rs.27.89 lacs by allocating various headquarters expenses in the ratio of the turn over. Ld. CIT(A) has granted relief to the assessee in respect of general charges of the corporate office i.e. Rs.306.39 lacs and miscellaneous expenses of Rs.97/- lacs following the previous order of his predecessor in assessment year 2006-07 and 2007-08. Against the relief granted by ld. CIT(A) Revenue is in appeal before us while against the reduction of the claim of the assessee u/s 80IA of the Act assessee has come in appeal before us.
5. At the time of hearing it was fairly conceded by ld. counsel of the assessee that the issue is covered against the assessee by the Tribunal's order in assessee's own case for the A.Y. 2004-05 and also by the Tribunal's order in assessee's own case for the A.Y. 2006-07, the copies of these orders were also filed but also submitted that these common headquarters expenses were not even indirectly related to Section 80IA and should not have been allocated by CIT(A) and also placed reliance on the Tribunal's decision in the case of DCW Ltd. vs. Addl. C.I.T. 132 TTJ 442. Ld. D.R. relied on the order of the A.O. ITA No.2542/Ahd/2009, A.Y. 2008-09 3 with ITA No.2553/Ahd/2009, A.Y. 2008-09
6. After hearing both the parties and perusing the record we find that this issue is covered against the assessee by the Tribunal's order in assessee's own case for the A.Y. 2004-05 wherein on identical facts following was held:-
"We have considered the rival sub missions and perused the material on record and have gone through the orders of the authorities below. After considering the nature of expenses comprised in common Head-quarter expenses of Rs.461.79 lakhs, we feel that the same were rightly allocated by the A.O. to CPP unit because Directors and Head-quarter also have imp9ortant role in the working of CPP unit and hence these expenses are to be apportioned to CPP unit also and hence, we decline to interfere in the order of the Ld. CIT(A) on this issue and accordingly this part of ground No.1 and 1.1 of C.O. are rejected."
7. In view of the above, ground No.2 of assessee's appeal is dismissed while ground No.1 of Revenue's appeal is allowed.
8. Ground No.2.1 and 2.2 of assessee's appeal reads as under:
"2.1 Ld. CIT(A) has erred in confirming allocation of salary of Rs.88.31 lacs paid to Mr. S. B. Dangayach, Managing Director & In-charge of Plastic Division and salary of Rs.125.18 lacs paid to Mr. Rahul Patel, Managing Director & looking after sales of Textile Division to Captive Power Plant for calculation of profit eligible for deduction u/s 801A of the Act who are dedicatedly working on the respective divisions and have nothing to do with operation of the CPP units. It is submitted to be held so now.
2.2 The ld. CIT(A) has erred in confirming allocation of Director's remuneration totaling to Rs.577.00 lacs instead of Rs.363.51 lacs without appreciating the facts of the case and the submissions of the appellant. It is submitted to be held so now.
9. At the time of hearing ld. counsel of the assessee in respect of these grounds submitted that Directors' remuneration included remuneration of the two Directors of the Textile and Plastic divisision which are not related to the working of the CPP unit. The role and responsibilities of the Directors are different and specifically assigned and hence the expenses which are not related to the CPP units should not be apportioned.
ITA No.2542/Ahd/2009, A.Y. 2008-09 4
with ITA No.2553/Ahd/2009, A.Y. 2008-09
10. After hearing both the parties, we find that this is the new contention raised by the assessee during the year under appeal. However, since total Directors' remunerations were considered for disallowance as mentioned in ground No.2, this is also covered against the assessee by the order of the Tribunal for A.Y. 2004-05.
11. In the result, these grounds of assessee are dismissed.
12. Ground No.3 and 3.1 of assessee appeal read as under:-
"3. The ld. CIT(A) has erred in confirming allocation of salary expenses of employees' of Plastic division in the ratio of sales of Baddi Unit for the purpose of computation of profit eligible for deduction u/s 80IC of the Act.
3.1 Without prejudice to above, the ld. CIT(A) has erred in confirming allocation of salary of all employees of entire Plastic division instead of salary of employees of plastic division who are managing affairs of the entire division as against allocating salary of employees of separately identified units of Plastic division, in the ratio of sales relating to Baddi Unit for the purpose of computation of profit eligible for deduction u/s 80IC of the act. It is submitted to be held so now."
13. The A.O. has allocated total salary of company in the ratio of sales. Ld. CIT(A) has granted relief by confirming the allocation of salary of Plastic division only on the basis of sale of said unit to sales of Plastic division sales only and not total salary of the company.
14. At the time of hearing ld. counsel of the assessee submitted that assessee is entitled for further relief for the salary of only those employees of the Plastic division who are managing the affairs of the entire division should only be allocated as against the salary of the employees of the entire Plastic division. Ld. D.R., on the other hand, relied on the order of the A.O.
15. After hearing both the parties and perusing the record, we are of the considered opinion that in view of the principle adopted in the earlier grounds ITA No.2542/Ahd/2009, A.Y. 2008-09 5 with ITA No.2553/Ahd/2009, A.Y. 2008-09 that all the salaries are to be allocated, assessee is not entitled to relief beyond what is granted by the ld. CIT(A). Therefore, these grounds of the assessee are dismissed.
16. Ground Nos.4 and 4.1 of the assessee read as under:-
"4. The ld. CIT(A) has erred in confirming allocation of total administrative and general expenses of the appellant company as a whole on the basis of ratio of sales instead of allocating administrative and general expenses of Plastic Division of the appellant company (under which Baddi Unit works) on the ratio of investments as made by the appellant for the purpose of computation of profit eligible for deduction u/s 80IC of the Act. It is submitted to be held so now.
4.1 Without prejudice to above and in the facts and circumstances of the case, if at all any administrative and general expenses are to be allocated, then only expenses of the Plastics division of the Company pertaining and relatable to the Baddi units can only be allocated. It is submitted it be so held now."
17. Brief facts of the case are that the A.O. has allocated Rs.810.72 lacs i.e. 18% of Rs.4504/- lacs towards administrative and general charges to Baddi unit in the ratio of sales for calculating the claim for deduction u/s 80IC of the Act. This action of the A.O. has been confirmed by ld. CIT(A).
18. At the time of hearing it was submitted by ld. counsel of the assessee that out of total general charges amounting to Rs.4504/- lacs a sum of Rs.2470.71/- lacs is related to Plastic division. It was further submitted that company has already allocated Rs.100.89/- lacs towards such expenses and hence no further allocation is called for. However, he conceded that the issue is broadly covered against the assessee by the order of the ITAT for the A.Y. 2005-06 in assessee's own case vide para 15 to 17 of that order. Ld. D.R. relied on the order of the lower authorities.
ITA No.2542/Ahd/2009, A.Y. 2008-09 6
with ITA No.2553/Ahd/2009, A.Y. 2008-09
19. After hearing both the parties and perusing the record we find that the issue under this appeal is covered against the assessee by the Tribunal's order for the A.Y. 2004-05 in assessee's own case. However, we feel that matter be sent back to the file of the A.O. only for verification of the calculation mistake to the extent of Rs.100.89/- lacs pointed out by the assessee before us. This ground of the assessee is allowed for statistical purpose.
20. Ground No.5 of the assessee is consequential in nature and does not require any adjudication.
21. In the result, assessee's appeal is partly allowed for statistical purpose.
22. Now we are coming to the Revenue's appeal (ITA No.2553/Ahd/2009)
23. Ground No.1 of the Revenue's appeal has already been allowed by us while deciding Ground No.2 of assessee's appeal.
24. Ground No.2 of the Revenue reads as under:-
"The Ld. CIT(A) has erred in directing to allocate interest expenses on the basis of investment instead of turnover for the purpose of deduction u/s 80IC on Baddi Unit."
25. At the time of hearing ld. counsel of the assessee submitted that the issue is covered in favour of the assessee by the Tribunal's decision in assessee's own case for the A.Y. 2003-04 vide para 8 of that order and similar order was followed in subsequent A.Ys. 2005-06 to 2007-08. Ld. D.R. relied on the order of the A.O.
26. After hearing both the parties and perusing the record we find that ld. CIT(A) has followed his earlier orders in A.Ys. 2003-04, 04-05, 05-06 and 06-07 ITA No.2542/Ahd/2009, A.Y. 2008-09 7 with ITA No.2553/Ahd/2009, A.Y. 2008-09 while granting relief to the assessee and in those years the order passed by him have been upheld by the Tribunal. Therefore, the matter is covered in favour of the assessee. Respectfully following the earlier orders of the Tribunal in assessee's own case, this ground of the Revenue is dismissed.
27. Ground No.3 of the Revenue reads as under:-
"The Ld. CIT(A) has erred in directing to allocate salary expenses on the basis of investment instead of turnover for the purpose of deduction u/s 80IC on Baddi Unit."
28. At the time of hearing, at the very outset, it was submitted by ld. counsel of the assessee that salary allocation has been made by ld. CIT(A) in the ratio of turnover and not in the ratio of investment. Thus the ground taken by the Revenue is incorrect and misconceived and deserves to be dismissed. Ld. D.R., however, relied on the order of ld. CIT(A).
29. After hearing both the parties and perusing the record we find that ld. CIT(A) in para 6.2 of his order has clearly mentioned that allocation is made on the basis of sales of Baddi unit and nowhere there is a reference to make allocation on the basis of investment. Therefore, this ground of the Revenue is against the facts of the case and therefore, the same is dismissed.
30. Ground No.4 of the Revenue reads as under:-
"4. The ld. CIT(A) has erred in directing to delete the addition of Rs.34023375/- on a/c of adjustment made in connection with international transaction u/s 92CA(3)."
31. This ground of the Revenue relates to addition of Rs.3,40,23,375/- made by the A.O. on account of adjustment made in connection with interest to transaction u/s 92CA(3) on the basis of the order passed by the Addl. Commissioner of Income Tax (TPO)-1, Ahmedabad. On a reference made by the ITA No.2542/Ahd/2009, A.Y. 2008-09 8 with ITA No.2553/Ahd/2009, A.Y. 2008-09 A.O. in respect of international transaction of advancing loan of Euro17328380 to the assessee subsidiary company M/s Sintex Holding BV @ 1%, the TPO has by adopting the average Euribor rate of 4.5% plus 0.5 i.e. 5% worked out the interest on the international interest transaction of loan of Euro 173228380 at Euro 674103.96 and made addition of Rs.3,40,23,375/-. Assessee's sub mission before the TPO was that the amount advanced was not for the purpose of lending but was for expansion of business. This arrangement was for the business/economic need of the group, not for earning interest income and the assessee company has received the interest @ 1% as per the agreement entered into and such interest has been offered for taxation during the year under appeal. This explanation of the assessee was not acceptable and the transaction was treated as loan to the subsidiary company and the addition of Rs.3,40,23,375/- was made by the TPO. The addition made by the TPO was adopted by the A.O. in his order and the amount of Rs.3,40,23,375/- was added to the income of the assessee. The assessee carried the matter before ld. CIT(A) who after taking into consideration the submissions of the assessee deleted this addition. Aggrieved by this deletion by ld. CIT(A) now the Revenue is in appeal before us.
32. At the time of hearing ld. D.R., relying on the order of the T.P.O. submitted that ld. CIT(A) has completely ignored the provisions of Chapter-X of the Act while giving relief to the assessee by simply accepting the submissions of the assessee before him. For making this submission he relied on a note in which reliance was placed on the following decisions:-
(i) Aihent Technologies Pvt. Ltd. Vs. ITO (Delhi)
(ii) Perot Systems TSI Vs. DCIT (ITAT, Delhi) ITA No.2542/Ahd/2009, A.Y. 2008-09 9 with ITA No.2553/Ahd/2009, A.Y. 2008-09
(iii) LMN India Ltd., AAR, 769 of 2007
(iv) DCIT vs. Tech. Mahindra Ltd., 46 SOT 141 (Mumbai) Ld. counsel of the assessee, on the other hand, reiterated the same submissions as made before ld. CIT(A) in response to the note filed by ld. D.R. A rejoinder was filed by ld. counsel of the assessee in which the case laws relied by ld. D.R. were distinguished and reliance was placed on another decision of Banglore Tribunal in the case of Wipro Ltd., the copy of which was also enclosed with that rejoinder.
33. After hearing both the parties and perusing the record, we find that before ld. CIT(A) assessee placed reliance on the following written submissions:-
"Please note that the leaned Addl. Commissioner of Income-tax (TPO)-I has grossly erred in law and on facts of the case in making addition of Rs.3,40,23,375/- by invoking the provisions of Section 92CA(3) in respect of international transaction of advancing loan of Euro 17328380 to the appellant's subsidiary company M/s. Sintex Holding BV. The appellant submits that on the facts and circumstances of the case, there is no justification for adopting the average Euribor rate of 4.5% plus 0.5% and thereby making the impugned addition of Rs.3,40,23,375/-.
It is further submitted that during the year under appeal the appellant company had entered into an international transaction of advancing loan of Euro 17328380 to its subsidiary company M/s. Sintex Holding BV on which interest @ 1% is received as per the agreement entered into. On a reference made u/s. 92CA the learned Addl. Commissioner of Income-tax (TPO)-I, Ahmedabad determined income on the loan so advanced at Euro 674103.96. Accordingly, the ACIT (OSD) made addition of Rs. 34023375/- on the basis of the order u7s. 92CA (3) dated 27/3/2009 passed by the Addl. CIT (TPO)-I, Ahmedabad.
In connection with above, with regard to the loan transaction between the Appellant and its associated enterprise, Sintex Holdings BV, the following points merit consideration:
• It is submitted that the amount was given to Sintex Holdings BV out of funds raised through issue of FCCB (which is also an optionally ITA No.2542/Ahd/2009, A.Y. 2008-09 10 with ITA No.2553/Ahd/2009, A.Y. 2008-09 convertible bonds). FCCBs were issued at '0%' coupon rate and therefore the company did not incur any cost in raising the funds. • We may further mention that the Bonds were redeemable at a premium of 5% (i.e. 1% p.a. for 5 years) and therefore 1% p.a. was the highest costs that the company would have borne if the bonds were to be redeemed. In view thereof, charging 1% interest p.a. is justified. • Your goodself would appreciate that all the FCCBs have been later on converted into equity at significantly high premium and no premium has been paid on redemption of FCCB. Thus, in fact the company has earned spread of 1% over the amounts granted to Sintex Holdings BV. • Without prejudice to above, it is submitted that the amount advanced is not for the purpose of lending but is for expansion of the business. This arrangement is for the business / economic need for the group, not for merely earning interest income.
• For the purpose of Transfer Pricing, any comparison must be made with the transactions having similar underlying set of circumstances. Euribor is a benchmark rate used by the international banks and financial institutions for lending in Euro currency. It must be noted that these banks borrow from other agencies/public/banks, etc. and they have to pay interest on such borrowings. Further, these banks and institutions are in the business of money-lending only and therefore they need to earn spread which would effectively meet their operating costs and leave a margin for profits.
• It is settled principle of Transfer Pricing that before comparison with any transaction, it must be concluded that the transactions are comparable.
o In the present case, the assessee does not have any cost while raising the funds (as opposed to significant interest cost incurred by banks for onward lending at Euribor).
o The banks are in the business of lending and therefore they need to meet operating costs out of the spread over and above interest paid on their borrowing. Whereas the assessee is not in the business of money- lending and therefore no such expenses are to be met. • The circumstances in both the cases are highly different and therefore they cannot be compared at all. We further submit that the cost of funds to the banks lending at Euribor is significantly high and therefore as a corollary they need to lend at higher rates. What effectively, these banks get is nominal spread which is their income. If the transaction is looked at from these perspective, the assessee has also earned 1% spread on the transaction (since its costs is Nil). It is therefore submitted that the transaction is justified. • Without prejudice to above, it is submitted that Sintex Holdings BV, our associated enterprise has issued Optionally Convertible Debentures (OCB) @ 1%. It is not a loan simplicitor where only intention is to earn interest income. As submitted above, this is quasi-equity whereby the company gets option to convert the same into equity over a period of time at par only. Thus, when it is quasi equity it cannot be bench-
marked with Euribor where as stated its only intention is to have interest income.
ITA No.2542/Ahd/2009, A.Y. 2008-09 11
with ITA No.2553/Ahd/2009, A.Y. 2008-09 • The appellant provided financial assistance to Sintex Holdings BV for making business investment in respect of acquisition of two operating companies. Thus, it is evident that the appellant has granted financial assistance to Sintex BV for acquiring operating companies to expand its operations globally pursuant to its strategy for inorganic growth. The appellant would certainly be benefited from the growth and earnings of the aquiree companies. Hence, there is no apparent comparison with Euribor rate more so when the assessee is entitled to it is to be converted at par.
• The Indian Transfer Pricing Regulations require determining arm's length price considering the functions performed, risks assumed and assets employed in respect of the international transactions between associated enterprises. The appellant does not perform any significant functions or bear any significant risks in respect of its transactions with Sintex BV. The appellant has given loan to rts wholly owned subsidiary Sintex BV for making business investments. Sintex BV being the wholly owned subsidiary, the Appellant does not bear any significant risk (e.g. contract risk and bad debt risk) in respect of Financial assistance extended by it to Sintex BV.
• The financial assistance provided by the appellant is in the form of optionally convertible debentures, whereby, the appellant has an irrevocable right to convert the loan into equity share capital at any time during the tenure of the loan. On exercising the right of conversion, the Appellant would be entitled to its share in the distributable profits of Sintex Holdings BV which in turn holds operating companies. The appellant will also be benefit in term of higher valuation of acquiree companies.
• Further, it is also submitted that so long as the financial assistance extended by the appellant to Sintex BV is quasi equity, in the form of optionally convertible debentures, the instrument cannot be considered as loan and cannot be compared with Euribor rate and hence 1% contractual rate charged is duly justified.
In view of the above and having regard to the economic and commercial factors, it is reasonable to conclude that the interest rate of 1 percent charged by the Appellant in respect of optionally convertible loan to Sintex BV appears to be consistent with the arm's length standard from an Indian transfer pricing perspective. It is therefore prayed that the unjustified addition may please be removed/deleted."
34. After taking into consideration the submissions of the assessee ld. CIT(A) deleted the addition made by the A.O. by observing as under:-
"I have carefully considered the facts of the case and the submissions of the appellant. I find that the appellant has advanced the amount to its subsidiary out of funds raised through Foreign currency convertible bonds issued to private investors at 0% coupon/ interest ITA No.2542/Ahd/2009, A.Y. 2008-09 12 with ITA No.2553/Ahd/2009, A.Y. 2008-09 rate .Thus there is no cost of borrowings to the appellant. The appellant has no operating cost in the said advance, still the appellant has added profit margin or spread of 100 basis points and has charged interest @1 % from the subsidiary. Further the advance to subsidiary is not a loan or debt rather it is in form of quasi-equity and convertible bonds. Further as contended by the appellant the Euribor rate is the rate applicable for inter bank lendings and it is not applicable to the appellant. In view of the above facts I do not find any justification for comparing with Euribor rate as has been done by the TPO. In the above facts and circumstances, I hold that the addition ordered by the TPO is not justified, hence I direct the addition to be deleted."
35. It is clear from the above that ld. CIT(A) has simply accepted the submissions of the assessee and has not passed a speaking order while giving relief to the assessee. We are, therefore, of the considered opinion that matter requires fresh adjudication on his part by passing a speaking order in the light of case laws cited by both the parties before us. This ground of the Revenue is allowed for statistical purpose.
36. In the result, Revenue's appeal is partly allowed for statistical purpose.
37. In the combined result, assessee's appeal as well as Revenue's appeal are partly allowed for statistical purpose.
Order pronounced in open Court on 31.12.2012
Sd/- Sd/-
(Anil Chaturvedi) (D.K. Tyagi)
Accountant Member Judicial Member
N.K. Chaudhary, Sr. P.S.
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals) By order
5. The DR, Ahmedabad
6. The Guard File
A.R., ITAT, Ahmedabad