Radiant Polymers Pvt. Ltd., New Delhi vs Department Of Income Tax

1 ITA 3913/Del/11 & 1478/D/13

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "F" NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI H.S. SIDHU: JUDICIAL MEMBER

ITA no. 3919/Del/2011 A.Y. 2008-09 DCIT, Circle 15(1), Vs. Radiant Polymers Pvt. Ltd., New Delhi. 17, Vijaya Building, Barakhamba Road, New Delhi. PAN: AAACR 3788 B AND ITA no. 1478/Del/2013 A.Y. 2009-10 Radiant Polymers Pvt. Ltd., Vs. DCIT, Circle 15(1), 17, Vijaya Building, New Delhi. Barakhamba Road, New Delhi.

( Appellant ) ( Respondent )

Department by : Shri Vikram Sahay Sr. DR Respondent by : Shri Y.R. Jagia Adv.

Date of hearing : 05-01-2015 Date of order : _______-02-2015.

ORDER

PER S.V. MEHROTRA, A.M:-

The department has preferred appeal against CIT(A)'s CIT(A)'s order dated 20-05-2011, relating to A.Y. 2008-09 and the assessee is in appeal against CIT(A)'s order dated 03-12-2012, relating to A.Y. 2009-10. Both these appeals were heard together and are being disposed of by this consolidated order, for the sake of convenience.

2 ITA 3913/Del/11 & 1478/D/13

Department's appeal (ITA no. 3919/Del/2011):

2. Brief facts are that the assessee in the relevant assessment year was in the business of manufacturing of moulded plastic components and dies. Its unit located at Rudrapur, specialized in injection molding of engineering plastic components for-

(i) Automotive application - 2 & 4 wheelers; (ii) Electrical & lighting application.

(iii) Industrial & miscellaneous application.

2.1. It had filed its return of income, declaring income of Rs. 17,46,659/- after claiming deduction u/s 80IC in respect of profits of the unit at Rudrapur. The AO show caused the assessee as to why deduction u/s 80IC of the I.T. Act be allowed as the articles manufactured by assessee were classifiable as 'plastic and articles thereof', as mentioned at sl. No. 20 of schedule XIII, being list of article or thing not eligible for deduction u/s 80IC and, thus, assessee did not fulfill the eligibility condition for availing deduction u/s 80IC. The assessee stated as under:

"That the articles manufactured by the assessee do to fall under the excise classification 39-09 to 39.15.

That the assessee is eligible for excise exemption vide notification no. 49/03-CE dated 10-06-2003 and all his invoices for sale mentioning the excise classification is approved by the excise inspector.

He has stated that the provision of Central Excise and Income tax Act are the same vis a vis eligibility condition for claim of exemption."

3 ITA 3913/Del/11 & 1478/D/13

2.2. As regards the AO's query with reference to classification of the products manufactured by assessee, as per Circular no. 6/86-CX 4, dated 25- 9-1986 of Central Excise Act, the assessee pointed out that t he said circular merely laid down Broad guidelines and was not based on technical details. The assessee had relied on circular no. 335/69/97-CX dated 12/11/97.

2.3. The AO, after considering the assessee's submissions, held that since the assessee manufactured plastic components from 'dana', therefore, it comes within the ambit of entry no. 20 of part B of Schedule XIII. The assessee's contention that it is not classifiable under Chapter 39 of the Central Excise Tariff Act, is not acceptable. He, accordingly, denied the deduction claimed by the assessee u/s 80IC.

2.4. Ld. CIT(A) allowed the assessee's appeal on this count, inter alia, observing that Central Excise authorities, who are expert in implementation and adjudication of provisions of Central Excise Act, have accepted the classification of the goods manufactured under the chapters other than Chapter 39. Aggrieved, the revenue is in appeal before the Tribunal.

3. Ld. counsel for the assessee submitted that Chapter 39 of the Central Excise Tariff Act stipulates provision for plastics and articles thereof. As per Note 1 to Chapter 39 of this Act, the expression 'plastic' means those materials of heading no. 39.01 to 39.14 which are or have been capable either at the moment of polymerization or at some subsequent stage of being formed under external influence (usually heat and pressure, if necessary with a solvent or plasticizer) by molding, casting, extruding, rolling or other process into shapes which are retained on the removal of the external 4 ITA 3913/Del/11 & 1478/D/13

influence. With reference to this note ld. counsel submitted that Chapter 39 primarily deals with raw-material of plastic goods. Ld. counsel further referred to note 2 to Chapter 39 and pointed out that this chapter, inter alia, does not cover -

(o) Articles of section XVI (machines and mechanical or electrical appliances); and

(p) parts of aircrafts or vehicles (Section XVII).

3.1. Ld. counsel further referred to page 70 & 71 of the PB, wherein sections XVI and XVII of the Central Excise Tariff Act is reproduced, entry no. 85 and 87 thereof are reproduced hereunder:

"85. Electrical machinery and equipment and part s thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles .... 1007.

87. Vehicles other than railway or tramway rolling stock and parts and accessories thereof .... 1058.

3.2. Ld. counsel further pointed out that entry 39.09 to 39.15 are with reference up to the stage of preparation of dana and the assessee's manufacturing starts thereafter. Ld. counsel further referred to page 92 onwards wherein invoices are contained to demonstrate that the assessee's classification under entry nos. 85 & 87 has been accepted by the Excise authorities and, therefore, assessee's case cannot be brought under entries 39.01 to 39.14. He also referred to page 115 of the PB, wherein the copy of return in form ER-1 is contained to demonstrate that assessee's CETSH number starts with 85 and 84. Only waste and scrap of plastic was classified u/s 39.15, which was very meager and the assessable value was 5 ITA 3913/Del/11 & 1478/D/13

only Rs. 17400 as against the total assessable value of Rs. 269.50 lskhs and the quantity manufactured was 2900 kg.

4. We have considered the rival submissions and have perused the record of the case. Note no. 1 of Chapter 39 of the Central Excise Tariff Act reads as under:

"Throughout this schedule, the expression plastic means those material of heading no. 39.01 to 39.14 which are or have been capable, either at the moment of polymerization or at some subsequent stage of being formed under external influence (usually heat and pressure, if necessary with a solvent or plasticizer) by moulding, casting, extruding, rolling or other process into shapes which are retained on the removal of the external influence."

4.1. Note 2 of Chapter 39 stipulates the articles on which chapter 39 has no application and as per clause 2(p) & (q) chapter 39 of Tariff Act has no application on the articles mentioned in Section XVI & XVII. There is no dispute that assessee's articles have been classified under entry 85 of section XVI and entry 87 of Section XVII as assessee is manufacturing electric automobile parts and radiator parts. Therefore, the articles manufactured by assessee could not be classified under entry no. 20 of Part B of Schedule 13. The assessee's articles were cleared under the Tariff entries nos. 85 & 87. Ld. DR pointed out that assessee was generating scrap which was classified under entry no. 39.15 as is evident from the return filed by assessee. We are in agreement with the ld. counsel for the assessee that keeping in view the meager amount assessable under Chapter 39 (entry 39.15), the assessee's claim for deduction u/s 80IC cannot be denied. Further, we find substance in the submission of ld. counsel for the assessee that in AY 2006-07 and 2007-08 the assessee has been granted deduction u/s 6 ITA 3913/Del/11 & 1478/D/13

80IC in scrutiny assessment u/s 143(3). Therefore, we confirm the order of ld. CIT(A) in directing the AO to allow deduction u/s 80IC of the Act for Rudrapur unit of the assessee company.

5. In the result department's appeal is dismissed.

Assessee's appeal (ITA no. 1478/Del/2013 - AY 2009-10):

6. In this year the assessee continued to carry on the same activity as in AY 2008-09 considered earlier. The assessee had filed its return of income declaring income of Rs. 91,920/- and assessment was completed at a total income of Rs. 36,55,233/-. In regard to the assessee's claim u/s 80IC, the AO denied the claim on the ground that the articles manufactured by assessee were covered under entry no. 20 of part B under Schedule 13. He further pointed out that without prejudice to its finding that the assessee was not entitled for deduction u/s 80IC, the assessee was to furnish a note on losses for non-80IC units. The assessee pointed out that in respect of Sahibabad unit (Corporate office) the assessee had incurred following expenses which resulted into loss for non-80IC units.

(a) Directors Remuneration

(b) Corporate staff salary

(c) Travelling expenses

(d) Professional expenses

(e) Depreciation on vehicles inclusive of commercial vehicles

(f) Running and maintenance of vehicles inclusive of commercial vehicles

(g) Business promotion

(h) Interest in term loans

(i) Repaid & maintenance (Mould & Dies)

Also the expenses in regard to interest on unsecured term loan from bank and NBFC have been considered only in Sahibabad unit.

7 ITA 3913/Del/11 & 1478/D/13

6.1. After considering the assessee's reply, the AO proposed following allocation of expenses:

Total Rudrapur Proportionate Difference

expense on

turnover

Sale 31,04,66,702/- 19,50,27,837/- - -

Directors Remuneration 87,00,000/- 21,60,000/- 41,89,788/- 20,29,788/- .

Corporate Staff Salary 2,57,91,924/- 1,70,05,126/- 1,70,67,643/- 62,517/- Travelling Expenses 22,88,090/- 1,00,104/- 9,21,3651- 8,21,2611-

. Professional Expenses 6,57,654/- 43,000/- 2,53,723/- 2,10,723/-

Depreciation on vehicles inclusive 12,06,275/- 54,314 4,65,380/- 4,11,066/-

of commercial vehicles

Running and maintenance of 22,88,090/- 11,95,992 882058/- (-)313934/- vehicles inclusive of commercial vehicles ._-

Business promotion 53,446/- 8,388/- 20603/-

Interest in term loans 62,35,097/- - 24,03,629/- 24,03,629/-

Repaid & Maintenance (Mould & 1,16,73,757/- - 45,00,233/- 45,00,233/- Dies)

6.2. The AO after considering the provisions of section 80IC(7) read with section 8 ITA 3913/Del/11 & 1478/D/13

80IA(5) inferred that all expenses of 80IA business are to be claimed against that business only and then profits are to be determined. He observed that profits eligible for deduction u/s 80IC have to be computed as if it was a separate unit. He observed that the expenses considered above have also been incurred towards earning the profit of the 80IC unit and has to be deducted while computing the correct profits of the unit. He, accordingly, apportioned the expenses in proportion to the turnover of these units and apportioned Rs. 1,97,30,184/- out of the expenses claimed as having been incurred in the unit eligible for deduction u/s 80IC. The AO further made addition of Rs. 15,07,387/- being receipt on account of foreign exchange fluctuation on the ground that the same was not derived from manufacturing activity and there was no direct and immediate connection of the manufacturing activity with this income.

6.3. The AO further made addition of Rs. 9677/- which was a credit entry in the bank account with HDFC. Ld. CIT(A) dismissed the assessee's appeal.

6.4. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal:

"1. That in the facts and circumstances of the case and in law the order passed by Commissioner of Income Tax (Appeal)- XVIII, New Delhi, hereinafter referred as "CIT(A)" is against the settled principles and provisions of law therefore the addition made are liable to be deleted and appellant company is entitled to be assessed at its returned income with consequential relief.

2. That in the facts and circumstances of the case and in law the ld. CIT(A) erred in disallowing the claim of deduction under section 80IC of Act for the unit located in Pantnagar, Rudrapur (Uttranchal).

9 ITA 3913/Del/11 & 1478/D/13

3. That in the facts and circumstances of the case and in law the ld. CIT(A) erred in not following the rule of consistency though admittedly there is no change in facts over the previous year.

4. That in the facts and circumstances of the case and in law the ld. CIT(A) erred in making apportionment of few of the expenses on the basis of sales of 80IC units and other units and thereby allocating a further sum of Rs. 1,97,30,184/- as expenses pertaining to the unit eligible for 80IC deduction without any basis and finding.

5. That in the facts and circumstances of the case and in law the ld. CIT(A) erred in treating the foreign exchange fluctuation income of 80IC unit as income from other than manufacturing activity of 80IC units.

6. That in the facts and circumstances of the case and in law the ld. CIT(A) erred in treating bank credit of Rs. 9,677/- as unexplained credit.

7. The appellant craves leave of this Hon'ble Court to amend, alter and add the grounds of appeal before hearing."

7. Ground nos. 1 and 7 are general in nature and require no adjudication.

8. Ground nos. 2 & 3 deal with the issue relating to eligibility for deduction u/s 80IC, which we have considered in earlier appeal of assessee for AY 2008-09 and, therefore, these grounds are allowed.

9. Ground no. 4 deals with the issue regarding apportionment of expenses to the unit eligible for deduction u/s 80IC on the basis of sales into two unit.

9.1. Ld. counsel referred to the synopsis filed in this regard and submitted that 10 ITA 3913/Del/11 & 1478/D/13

AO made disallowance of expenses by allocating expenses to units enjoying deduction u/s 80IC, for the first time, area based benefit of tax. He submitted that while apportioning the expenses, the AO wrongly adopted turnover of Sahibabad unit as total turnover and on being pointed out before CIT(A), he in para 8.1 while upholding the apportionment of expenses, directed the AO to look into the error in computation of apportionment of expenses. He submitted that after giving effect to clerical error, as directed by ld. CIT(A) , dispute of apportionment of expenses is restricted to Rs. 9,23,733/-. He submitted that the AO's finding that the amount should have been debited to Pantnagar unit based on apportionment of total expenses to three units on the basis of turnover without bringing on record any evidence of having incurred such expenses for Pant Nagar unit. He submitted that assessee was maintaining separate books of account. He submitted that AO has apportioned director's remuneration based on turnover without appreciating the fact that assessee was having three working directors at its Board and each director was responsible for each unit. Therefore, remuneration pertaining to director managing Pantnagar unit had been debited to Pantnagar. Similarly, apportionment of corporate staff salary was made on turnover basis without appreciating that assessee had been maintaining complete records of employees as prescribed under PF and ESIC and list of employees had been placed on record. The salary had been accounted for, on head count basis. Similarly, travelling expenses, profession expenses, business expenses, depreciation of commercial vehicles and maintenance thereof was wrongly apportioned on the basis of turnover.

9.2. Ld. DR referred to section 80IC(7) and pointed out that provisions of section 80IA(10) are applicable to section 80IC. In view of sub-section (7) he referred to section 80IA(10) and pointed out that the issue relating to apportionment of expenses is to be examined by AO. He referred to page 5 of assessment order and 11 ITA 3913/Del/11 & 1478/D/13

pointed out that interest on term loans of Rs. 62,35,097/- and repair & maintenance of Rs. 1,16,73,757/- was not at all apportioned in Rudrapur unit. He, therefore, submitted that t he AO apportioned Rs. 24,03,629/- out of interest on term loans of Rs. 45,00,233/- out of repair and maintenance.

9.3. We have heard rival contentions and perused the relevant material available on record. We find that AO has clearly demonstrated that the assessee's mode of allocation of expenses solely to non 80IC unit was not correct. The basis adopted for allocating the expenses is quite reasonable. We are in agreement with the following finding of ld. CIT(A):

"The perusal of trading and profit & loss a/c of Rudrapur unit vis a vis other unit shows that the various expenses like interest on term loans, repair & maintenance, director's remuneration and other expenses mentioned by the Assessing Officer have been charged to the other units and the quantum of charge to the Rudrapur unit is disproportionately lower. Thus it cannot be said that Rudrapur unit is a totally independent unit and the profit and gain earned by the unit is only on account of the expense incurred by the specific unit. In fact the entire business of the appellant is a closely knit inter- dependent units. The main directors are based at Delhi and decision making is being carried out from the head office. The entire interest expenses, administration and management expenses, business promotion expenses, expenses on commission and even the salaries of employees such as engineer etc. are debited to the accounts of the head office. The Rudrapur unit for a turnover of Rs. 19.50 crores is incurring salary expenses of only Rs. 1.7 crores as against total salary expenses of Rs. 4.42 crores. Similarly, the director's remuneration for Rudrapur unit is only Rs. 21.6 lacs as against total expenses of Rs. 108.6 lacs. Similar is the case in regard to depreciation of vehicles and other expenses. The above analysis clearly shows that the appellant has grossly reduced the expenses debited to the Rudrapur unit to inflate the profit from this unit. There is thus no reason to interfere with 12 ITA 3913/Del/11 & 1478/D/13

the decision of the AO who has reallocated the expenses on the basis. of turnover. However, the appellant has pointed out certain error in computation which may be looked into by the Assessing Officer. This ground of appeal is disposed off accordingly.

9.4. In view of above discussion we do not find any reason to interfere with the order of ld. CIT(A) on the issue in question.

10. Ground no. 5: The AO treated the foreign exchange fluctuation income of Rs. 15,07,387/- being not eligible for deduction u/s 80IC. Ld. CIT(A) observed that AO relying upon the decision of Liberty India held that income earned on account of foreign exchange fluctuation could not be said to be derived from manufacturing activity but was incidental income which had no relationship with manufacturing activity. He confirmed the AO's action observing as under:

"The appellant has relied upon the decision of Hon'ble Supreme court in Woodward Governors India P Ltd and has claimed that the foreign exchange fluctuation is part of income of Pant Nagar Unit and is on revenue account. It should, therefore, be treated as part of income of Pant Nagar unit.

Since the appellant has accepted that foreign exchange fluctuation are not part of income of Rudrapur Unit, therefore, the appellant is not entitled to deduction under section 80IC on this income and the same would form part of income of Pant Nagar Unit. The disallowance made by the Assessing Officer is therefore, confirmed."

10.1. Ld. counsel submitted that ld. CIT(A) was confused between Pant Nagar and Rudrapur unit and did not consider this issue at all.

10.2. Having heard both the parties, we find that ld. CIT(A) has not considered the issue in right perspective and has wrongly concluded that 13 ITA 3913/Del/11 & 1478/D/13

asesssee accepted that foreign exchange fluctuation were not part of income of Rudrapur unit. We, accordingly, restore this issue to the file of ld. CIT(A) to decide this issue de novo after affording reasonable opportunity of being heard to the assessee.

11. Ground no. 6: This issue is in regard to treatment of Rs. 9,677/- as unexplained credit. This addition was made on the basis that assessee failed to prove the credit in its bank account with HDFC. Nothing has been brought on record to take a contrary view. Accordingly, we see no reason to interfere with the order of ld. CIT(A) on the issue in question.

12. In the result, assessee's appeal is partly allowed for statistical purposes.

Order pronounced in open court on 25-02-2015.

Sd/- Sd/- (H.S. SIDHU ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 25-02-2015. MP: Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR 14 ITA 3913/Del/11 & 1478/D/13

Date

Initial 1. Draft dictated on 23.02.2015 PS 2. Draft placed before author 24.02.2015 PS 3. Draft proposed & placed before the second JM/AM member 4. Draft discussed/approved by Second JM/AM Member. 5. Approved Draft comes to the Sr.PS/PS PS/PS 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.