Hexagon Nutrition P.Ltd, Mumbai vs Assessee

M/s. Hexagon Nutrition Pvt. Dy. Commissioner of Income Ltd., Tax-8(2), 404/A, Global Chambers, Marine Lines, Adarsh Nagar, Vs. Mumbai - 400 020 Off. New Link Road, Andheri (W), Mumbai - 400 053 PAN: AAACH 2359E (Appellant) (Respondent)

Present for: Assessee by : Shri Rakesh Joshi, A.R. Revenue by : Shri Jeetendra Kumar, D.R.

Date of Hearing : 10.02.2015 Date of Pronouncement : 08.05.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order dated 01.03.2012 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2008-09.

2. The concise grounds of appeal taken by the assessee are reproduced as under:

"1. On the facts and circumstances of the case as well as in law, the Learned Assessing Officer as well as Commissioner of Income Tax (Appeal) erred in allocating following expenses from Non-SEZ unit to SEZ units:-

1.1. Salary & Bonus Expenses to the extent of Rs.99,48,894/- in the ratio of turnover of both the units, as against a sum of Rs.6,15,508/- as ITA No.4035/M/2012 2 M/s. Hexagon Nutrition Pvt. Ltd.

proposed by the appellant in addition to the salary expenses of Rs.5,32,172/- already debited to the SEZ unit.

1.2. Interest expenses of Rs.6,78,872/- in the ratio of turnover of both the units, in addition to the 11,53,974/- already debited to the SEZ unit.

2. On the facts and circumstances of the case as well as in law, the Learned Assessing Officer as well as Commissioner of Income Tax (Appeal) erred in disallowing a sum of Rs.12,44,050/- U/s 40(a)(ia) of the Income Tax Act, 1961, paid to Star India Pvt. Ltd. on account of advertisement, without considering the fact that no TDS is required to be deducted on the said sum.

3. On the facts and circumstances of the case as well as in law, the Learned Assessing Officer as well as Commissioner of Income Tax (Appeal) erred in setting-off the losses of non SEZ unit with the profit of SEZ unit for the purpose of determining deduction U/s 10A of the Income Tax Act, 1961.

4. On the facts and circumstances of the case as well as in law, the Learned Assessing Officer as well as Commissioner of Income Tax (Appeal) erred in not reducing deduction available u/s 10A of the Income Tax Act, 1961 from the book profit for the purpose of determining total income U/s 115JB of the Income Tax Act, 1961.

The appellant craves leave to add, amend, alter or delete the said ground of appeal."

Ground No.1

3. During the course of assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) observed that the assessee is engaged in the business of manufacturing and export of micronutrient premixes, veterinary feed supplement etc. The assessee was having two manufacturing units, one at Nasik which was not eligible for section 10A benefits/exemption and the other at Chennai which was eligible for benefits under section 10A of the Income Tax Act (hereinafter referred to as the Act). The AO observed that the turnover of both the units was almost equal whereas the expenditure at Non- 10A unit was shown as a higher side and the total income of the Non-10A unit was in losses. On the other hand, the 10A unit had earned profit at the rate of 31.90% of the turnover. The AO further observed that sum of the expenditure ITA No.4035/M/2012 3 M/s. Hexagon Nutrition Pvt. Ltd.

viz. auditors' remuneration, salaries and bonus etc. were either not apportioned or were disproportionately apportioned among both the units. The AO observed that no expenditure was claimed in respect to auditors' remuneration in respect of 10A unit. The telephone expenditure of Non-10A unit was claimed at Rs.12,30,166/- whereas that of 10A unit was shown a very much less at Rs.70,041/- only. Similarly, the expenditure in respect of Non-10A unit was shown at Rs.1,83,30,717/- and that of 10A unit was at a very low figure of Rs.5,32,172/-. Expenditure in relation to interest on cash credit was shown in respect of Non-10A unit at Rs.13,76,463/- and in respect of 10A unit at Nil. The AO further observed that when the sales of both the units were more or less same, it was not probable that the expenditure of the unit whose income was taxable would be so high and whereas the expenditure relating to the unit which was eligible for deduction under section 10A of the Act was shown so low. When the AO asked the assessee to explain in this respect, the assessee accepted that it had not allocated sum of the expenditure to both the units. The assessee thereafter accepted to allocate the auditors' remuneration between both the units. In respect of telephone and communication expenses, the assessee company submitted that it had no objection of transferring 20% of telephone expenses from Nasik unit to Chennai unit. The AO accordingly allocated the sum of Rs.51,038/- out of the auditors' remuneration towards 10A unit out of the total expenditure claimed of Rs.1,03,483/- with respect to Non-10A unit. The AO further allocated a sum of Rs.246033/- towards 10A unit out of the telephone expenditure claimed with respect to Non-10A unit. The AO further held that in respect of salaries and bonus that one of the directors i.e. Shri Vikram Kelkar was designated as director-cum-international business who was incharge of international market and was fully occupied with export business. Similarly, another director Shri Subhash Kelkar was also active in export business. Besides that some staff members were also involved ITA No.4035/M/2012 4 M/s. Hexagon Nutrition Pvt. Ltd.

in the business of activity of 10A unit. However, from the salary registered furnished by the assessee, it revealed that the salaries of all the staff were debited in the P&L Account of Non-10A unit. When asked as to why the salaries of above persons be not allocated to 10A unit, the assessee replied that the salary of Rs.4,31,196/- paid to Shri Vikram Kelkar be allocated at the rate of 100% whereas out of salary amount of Rs.4,31,196/- paid to Shri Subhash Kelkar, director 20% of the said amount be allocated. The assessee further submitted that the salary paid of Rs.98,073/- to M/s. Shefali Telang, Executive Quality Controller be also allocated to 10A unit at the rate of 100%. The AO, however, observed that the allocation of 20% of the salary in relation to Shri Subhash Kelkar, director was not appropriate as the company had not furnished any basis of allocation. The AO further observed that the turnover of both the 10A unit and Non-10A unit was more or less same. The production activity was carried out at both the units. Shri Subhash Kelkar being technical director was allocating his time towards both the units. He, therefore allocated the salary of Shri Subhash Kelkar in the turnover ratio i.e. at the rate of 49.32% to the 10A unit amounting to Rs.2,12,666/- The AO further analysed the working pattern of both the units. He also made a chart indicating that which of the works were related to 10A unit and which were done by Non-10A unit and concluded that it was an interrelated integrated activity. The AO observed that the work carried out at head office and Non-10A unit was not a job of only three persons as claimed by the assessee. The head office at Mumbai and Non- 10A unit at Nasik where major staff was employed and substantial activity pertaining to 10A unit was also carried out which fact was also admitted too by the assessee company. The AO observed that work cannot be done without the involvement of other staff members in the whole chain of work flow. He therefore observed that allocation out of the salaries and bonus of other staff members was also needed to be done to the 10A unit. He, after analysing the ITA No.4035/M/2012 5 M/s. Hexagon Nutrition Pvt. Ltd.

overall facts and circumstances the working/manufacturing activity of the assessee and the chain of events involved, held that it would be most appropriate and logical method to apportion the balance salary of Non-10A unit to the 10A unit on the basis of turnover ratio and further allocated a sum of Rs.86,74,787/- in relation to salaries and bonus of the employees towards the 10A unit.

The AO further observed from the P&L account of Non-10A unit that the assessee had debited an amount of Rs.13,76,463/- towards interest on cash credits. The AO further observed that the assessee had maintained the current account of Chennai Unit (1OA unit) in the books of non-10A unit (i.e. Nasik Unit). The cash credit facility was only appearing in the balance sheet of Nasik Unit and so was the interest paid thereon appearing in the Profit & Loss A/c. of the Non-10A unit. The Ld. AO further observed that throughout the year funds had been transferred from non-10A unit to 10A unit, which showed that the cash credit facility had been utilized to transfer the funds to 10A unit. However, the interest paid on the said cash credit had not been bifurcated between Nasik and Chennai Unit. The Ld. AO further held that the funds transferred from Non-10A unit to 10A unit were interest bearing funds and that the interest paid on such funds had not been allocated to Chennai unit. The Ld. AO therefore allocated the interest in the ratio of turnover, which was accepted by the AR of the assessee. Accordingly, the interest on cash credit amounting to Rs.13,76,463/- was allocated according to sales ratio i.e. 50.68% for Non-10A unit and 49.32% for 10A unit. Being aggrieved by the above stated additions, the assessee preferred appeal before the Ld. CIT(A).

4. The Ld. CIT(A), however, held that the assessee during the course of assessment proceedings itself had agreed in principle regarding the allocation ITA No.4035/M/2012 6 M/s. Hexagon Nutrition Pvt. Ltd.

of expenses of Non-10A unit to 10A unit. The AO had apportioned the expenses between the Non-10A unit and 10A unit on the basis of turnover ratio. The findings of the Ld. AO were well reasoned and the apportionment was also on very scientific basis. He therefore upheld the apportionment of expenses made by the AO.

5. Before us, the Ld. A.R. of the assessee has submitted that the allocation of expenditure by the AO from Non-10A unit to 10A unit was excessive. He has further submitted that in respect of cash credit the interest expenditure has already been debited in the P&L Account of 10A unit. On the other the Ld. D.R. has relied upon the findings of the lower authorities.

6. We have considered the rival contentions and have also gone through the record. As discussed above, the Ld. AO has very scientifically allocated the expenditure of the Non-10A unit to the 10A unit. The assessee had also agreed for allocation of expenditure of Non-10A unit to 10A unit on proportionate basis. The grievance of the assessee that the allocation was on higher side does not seem to be justified. However, so far the contention of the Ld. A.R. that the assessee had already debited the interest expenditure allocable to the 10A unit and that the further apportionment of interest expenditure from that of Non-10A unit was not justified is concerned, we restore this issue to the file of the AO for this limited purpose with a direction to examine as to whether the assessee has itself allocated the interest expenditure towards 10A unit out of the interest expenditure allocated by the AO from Non-10A unit to 10A unit, if found correct, then to take it into consideration and decide accordingly.

Ground No.2

7. The assessee, vide ground No.2, has agitated the disallowance of sum of ITA No.4035/M/2012 7 M/s. Hexagon Nutrition Pvt. Ltd.

Rs.12,44,050/- u/s 40(a)(ia) of the Income Tax Act, 1961, paid to Star India Pvt. Ltd. on account of advertisement. At the outset, the Ld. A.R. of the assessee while drawing our attention to the page 76 of the paper book, has submitted that a certificate dated 31.05.07 u/s 197 of the Income Tax Act has been issued in favour of Star Ltd., therefore there was no requirement of deduction of TDS for the sums paid by the assessee to the Star Ltd. Admittedly, the above stated document was not presented by the assessee before the AO at the time of assessment proceedings. This document is the shape of additional evidence and is required to be examined by the AO. We accordingly, restore this issue to the file of the AO for verification as to whether the assessee was not required to deduct TDS for the payments made to Star Ltd. and if found correct, the AO to give relief accordingly.

Ground No.3

8. The assessee, vide ground No.3, has agitated the action of the AO in setting-off the losses of non SEZ unit with the profit of SEZ unit for the purpose of determining deduction U/s 10A of the Income Tax Act, 1961. The Ld. A.R. of the assessee, at the outset, has stated that this issue is squarely covered with the decision of Hon'ble Bombay High Court in the case of "CIT vs. Black & Veatch Consulting Pvt. Ltd." (2012) 348 ITR 72 (Bom) wherein the Hon'ble Bombay High Court has categorically held that the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance and thus the brought forward unabsorbed depreciation of the unit which is not eligible for deduction u/s 10A cannot be set off against current profit of the eligible unit for computing the deduction under section 10A. The Ld. D.R. has not brought any decision contrary to the above decision of the Hon'ble Bombay High Court. Hence, respectfully following the decision of the Jurisdictional High Court, this issue ITA No.4035/M/2012 8 M/s. Hexagon Nutrition Pvt. Ltd.

is accordingly decided in favour of the assessee.

Ground No.4

9. The assessee, vide ground No.4, has agitated the action of the lower authorities in not reducing deduction available u/s 10A of the Income Tax Act, 1961 from the book profit for the purpose of determining total income U/s 115JB of the Income Tax Act, 1961.

The Ld. A.R. of the assessee, at the outset, has stated that this issue is also covered by the decision of the co-ordinate Bench of the Tribunal in the case of "Genesys International Corpn. Ltd. vs. ACIT" (2012) 80 DTR (Mumbai) (Tri) 4 wherein the Tribunal, while adjudicating the identical issue, has observed as under:

"20. We have considered submissions of ld representatives of parties and orders of authorities below. We have also carefully considered the relevant provisions of the Act. There is no dispute to the fact that assessee's unit in Mumbai is located in SEZ. Section 10A provides deduction of profits derived by the undertaking in respect of units which are located not only in SEZ but also in the following areas:

"*Free Trade Zone (FTZ) • Electronic Hardware Technology Park (EHTP) • Software Technology Par (STP) • Export Oriented Units (EOUs) By Special Economic Zone Act, 2005 w.e.f 10.2.2006, a new section 10AA has been inserted which provide exemption to the units located in SEZ. Section 2 of SEZ Act, defines SEZ as under:

"(za) Special Economic Zone - means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4(including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone"

21. It is evident from above that an existing SEZ unit will also be governed by Special Economic Zones Act, 2005. Therefore, we are of the considered view that the benefits which are to be provided to the newly established unit in SEZ as per section 10AA of the Act will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the ITA No.4035/M/2012 9 M/s. Hexagon Nutrition Pvt. Ltd.

provisions of Special Economic Zones Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, sub-section (6) to section 115JB was also inserted providing that provisions of section 115JB shall not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be. Hence, income of units located SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6) of the Act. In view of above, we are of the considered view that there is merit in the contention of ld A.R. that irrespective of the fact that amendment has been made in clause (f) of Explanation (1) to section 115JB(2) of the Act to apply the provisions of MAT in respect of units which are entitled to deduction u/s.10A or 10B but the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of sub-section(6) of the Act. The contention of ld D.R. that assessee will not be entitled to get the benefit u/s.115JB(6) of the Act as assessee has claimed deduction u/s.10A of the Act is to be rejected for the reason that section 115JB (6) does not refer section 10A or section 10AA but it only refer that provisions of section 115JB will not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on in an unit located in SEZ. Hence, we are of the considered view that the unit in SEZ will be covered by sub-section(6) to section 115JB of the Act irrespective of the fact that those units were claiming deduction u/s.10A of the Act. We also observe that benefit given to SEZ unit from the applicability of provisions of section 115JB has been withdrawn by the Finance Act, 2011 by inserting a proviso to section 115JB(6) of the Act, which reads as under:

"Section 15JB(6)...........

Provided that the provisions of this sub-section shall cease to have effect in respect of an previous year relevant to the assessment year commencing on or after the 1st day of April, 2012."

** ** **

22. Hence, we hold that authorities below were not justified to include the book profit in respect of SEZ unit at Mumbai of the assessee while computing book profit u/s.115JB of the Act for assessment year 2008-09. Therefore, we reverse the orders of authorities below by holding that income relating to SEZ unit at Mumbai is to be excluded while computing book profit u/s.115JB of the Act for assessment year 2008-09. Hence, Ground No.4 of appeal taken by the assessee for assessment year 2008-09 is allowed."

10. Respectfully, following the above observation of the Tribunal and in view of the principle of consistency, this issue is also accordingly decided in favour of the assessee.

ITA No.4035/M/2012 10 M/s. Hexagon Nutrition Pvt. Ltd.

11. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 08.05.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 08.05.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.