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Citation Codes
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citation codes
Case Number
Attorney(S)
  • R. Sivaramna
Judges
  • N.R.S. GANESANA. MOHAN ALANKAMONY
Acts
  • provisions of Parts II and III of Schedule VI to the Companies Act in section
  • section 11 or section 12 apply; (g) To (j) ----------------------------------------------------- ITA Nos.2110,2188 /Mds/2014 12
  • ITA Nos.2110,2188 /Mds/2014 18 Section.9(1)9vii),
  • INCOME TAX ACT 1961
  • Companies Act. Sub-section (1A) of section
  • U/s.14A r.w.Rule 8D
  • Income Tax Act. 5.(a)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • R. Sivaramna
Judges
  • N.R.S. GANESANA. MOHAN ALANKAMONY
Acts
  • provisions of Parts II and III of Schedule VI to the Companies Act in section
  • section 11 or section 12 apply; (g) To (j) ----------------------------------------------------- ITA Nos.2110,2188 /Mds/2014 12
  • ITA Nos.2110,2188 /Mds/2014 18 Section.9(1)9vii),
  • INCOME TAX ACT 1961
  • Companies Act. Sub-section (1A) of section
  • U/s.14A r.w.Rule 8D
  • Income Tax Act. 5.(a)
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Smart Summary

Structured Summary of the Tribunal Opinion (Chennai) — Dated 06 August 2015

Factual and Procedural Background

The matter concerns two appeals before the Income Tax Appellate Tribunal (ITA Nos.2110/Mds./2014 filed by the assessee, and 2188/Mds./2014 filed by the Revenue) arising from the assessment for the assessment year 2010-11. The assessee is a company engaged in manufacturing, processing and exporting pulverised garnet abrasive grit. The assessee filed its return of income on 18.09.2010 declaring nil income. The return was selected for scrutiny and a survey was conducted at the assessee's premises on 23.03.2010. The assessment was completed on 28.03.2013 under section 143(3) of the Income-tax Act, 1961, and the Assessing Officer (AO) made certain additions. The assessee appealed to the Learned Commissioner of Income Tax (Appeals) [CIT(A)] who, by order dated 26.05.2014, confirmed several of the AO's additions. Both parties appealed to the Tribunal. The Tribunal pronounced its order on 06 August 2015.

Legal Issues Presented

  1. Whether expenditures claimed under the heads "mining" and "production and processing" (aggregating Rs. 1,18,14,359 and Rs. 4,12,843 respectively) could be disallowed for want of evidence.
  2. Whether proportionate interest of Rs. 1,03,98,313 should be disallowed under section 36(1)(iii) on account of interest-free loans advanced to a sister concern.
  3. Whether an addition of Rs. 3,11,34,630 under section 14A (expenditure in relation to exempt income) was maintainable for investments of Rs. 71,55,33,570.
  4. Whether the entire claim of depreciation of Rs. 10,64,87,188 could be disallowed because the assessee furnished depreciation computed under the Companies Act rather than under the Income-tax Act.
  5. Whether disallowances (including those under section 14A) made under normal provisions should be given effect to while computing book profit for section 115JB purposes.
  6. Whether the assessee was entitled to the benefit of exemption under section 10B even if profits increased because of disallowances under the normal provisions.
  7. Revenue's issue: Whether disallowance under section 40(a)(ia) (non-deduction of tax at source) was justified in respect of payments of commission and inspection charges in foreign currency to non-residents for services rendered outside India.

Arguments of the Parties

Assessee's Contentions (as reflected in the opinion)

  • The assessee challenged the disallowances made by the AO and confirmed by the CIT(A) across multiple grounds (mining/production/processing expenses; interest attributable to interest-free advances; section 14A disallowance; depreciation; computation of book profit under section 115JB; entitlement to section 10B).
  • The assessee contended entitlement to exemption under section 10B in respect of profits of the 100% export oriented undertaking, including where profit increased due to disallowances made by the Revenue under normal provisions (as argued before the Tribunal and accepted in part by the CIT(A)).
  • The assessee relied on judicial authority (notably M/s. Apollo Tyres Ltd. v. CIT, 255 ITR 273) to contend that the AO's power in computing book profits under the relevant provision is limited.

Revenue / AO's Contentions (as reflected in the opinion)

  • The AO disallowed mining and production/processing expenses because the assessee failed to produce supporting evidence despite repeated opportunities.
  • The AO disallowed proportionate interest under section 36(1)(iii) (Rs. 1,03,98,313) on the basis that the assessee had extended interest-free loans to a related concern while having paid interest on secured loans.
  • The AO invoked section 14A to disallow Rs. 3,11,34,630 as expenditure attributable to exempt income arising from investments of Rs. 71,55,33,570.
  • The AO disallowed depreciation of Rs. 10,64,87,188 in full because the assessee supplied depreciation computed under the Companies Act instead of under the Income-tax Act.
  • Revenue argued (in its appeal) that payments of commission and inspection charges made in foreign currency to non-residents for services rendered outside India attracted disallowance under section 40(a)(ia) due to failure to deduct tax at source.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Dabur India Ltd., ITAT Mumbai (reported at 37 taxmann.com 289) Held (as relied upon by CIT(A)) that amounts disallowable under section 14A can be added back while computing book profit under Explanation to section 115JB. CIT(A) relied on this decision to uphold addition to book profit; the Tribunal discussed and declined to follow this approach in the present case after statutory analysis of Explanation-1(f) to section 115JB.
RBK Share Broking P. Ltd., ITAT Mumbai (ITA Nos.6678 & 7546/Mum/2011 dated 24.7.2013) Similar proposition as Dabur that disallowance under section 14A may be added back for computing book profit under Explanation to section 115JB. CIT(A) relied on this decision; the Tribunal analysed Explanation-1(f) and held that such superimposition of one "fiction" upon another is not warranted, and thus did not follow this approach for the present case.
M/s. Apollo Tyres Ltd. v. CIT, 255 ITR 273 (Apex Court) Explains the limited powers of the Assessing Officer while computing book profits under section 115J (analogous reasoning referenced for section 115JB): AO cannot go behind books except to the extent provided in the Explanation; AO's role is limited to accepting certified accounts and making specified increases/reductions. The Tribunal invoked the reasoning in Apollo Tyres to support the conclusion that disallowances made under normal provisions cannot automatically be given effect to for arriving at book profit under section 115JB.
GE India Technology Centre Pvt. Ltd. (327 ITR 456) (Supreme Court) Held that TDS provisions (section 195) are not applicable where the payment in question is not chargeable to tax in India. CIT(A) relied on this decision to hold that commission payments to non-resident agents that are not chargeable to tax in India do not attract TDS, and thus disallowance under section 40(a)(ia) is not called for. The Tribunal affirmed that approach.
CIT v. Fazian Shoes Pvt. Ltd., 367 ITR 155 (Madras High Court) Held that commission paid to non-resident agents does not fall within "fees for technical services" under section 9(1)(vii), particularly where commission is paid for procuring orders and related incidental services; such commission simpliciter is not technical fees attracting TDS. The Tribunal relied on the Madras High Court decision to confirm deletion of disallowance under section 40(a)(ia) for commission and related payments made to foreign agents, concluding that TDS provisions did not apply because the payments were not chargeable to tax in India.

Court's Reasoning and Analysis

The Tribunal examined each ground in sequence and applied statutory provisions, facts on record, and cited judicial pronouncements where relevant. The analysis and conclusions are summarized below by issue.

Ground No.1 — Disallowance of mining and production/processing expenses

The AO disallowed the claimed expenditures (Rs. 1,18,14,359 and Rs. 4,12,843) because the assessee failed to produce any evidence despite several opportunities. The CIT(A) confirmed the disallowance for the same reason. At the Tribunal, no evidence was produced by the assessee's authorised representative to substantiate the expenditures. Having no evidence before it, the Tribunal confirmed the disallowance and dismissed this ground of the assessee.

Ground No.2 — Disallowance of proportionate interest under section 36(1)(iii)

The AO disallowed Rs. 1,03,98,313 by attributing proportionate interest to interest-free advances to a sister concern, on the basis that the assessee had paid interest on secured loans. The CIT(A) had agreed with the AO. The Tribunal analysed the assessee's capital structure and noted that, as on 31.03.2010, the assessee had reserves & surplus of Rs. 87.72 crores and equity capital of Rs. 10 crores aggregating to Rs. 97.72 crores — representing the assessee's own interest-free funds. The Tribunal reasoned that the advances of Rs. 5,60,45,897 and investments aggregating Rs. 71,55,33,570 (totaling Rs. 77,15,79,467) flowed from these own funds that did not bear any cost. Because the funds did not bear interest cost, the Tribunal concluded that the AO's disallowance of proportionate interest was unsustainable and deleted the addition.

Ground No.3 — Disallowance under section 14A for investments earning exempt income

The AO invoked section 14A to add Rs. 3,11,34,630 on the basis that investments of Rs. 71,55,33,570 were held for earning exempt income. The Tribunal noted that those investments were funded out of the assessee's own funds (which bore no cost) and the investments were made with sister companies such that no cost could be attributed to management of the funds. On this factual basis the Tribunal deleted the section 14A addition, allowing the assessee's ground.

Ground No.4 — Disallowance of depreciation for failure to furnish Income-tax Act schedule

The AO disallowed the entire depreciation claim (Rs. 10,64,87,188) because the assessee submitted only a depreciation schedule computed under the Companies Act and not under the Income-tax Act. On appeal CIT(A) remitted the matter to the AO with direction to allow depreciation in accordance with law. The Tribunal found the CIT(A)'s action justified, observed that the AO should have given the benefit of depreciation as per the Income-tax Act rather than disallowing the entire claim (noting that Income-tax Act rates are normally higher than Companies Act rates), and directed the assessee to furnish a proper Income-tax Act depreciation schedule to the AO. The Tribunal therefore accepted the remand and allowed the ground for statistical purposes.

Ground No.5(a) — Whether disallowances (including under section 14A) should be given effect in computing book profit under section 115JB

The AO had increased book profit under section 115JB by giving effect to disallowances made under normal provisions, including an amount computed under section 14A read with Rule 8D. CIT(A) confirmed the addition relying on Explanation-1(f) to section 115JB and the ITAT Mumbai decisions (Dabur; RBK). The Tribunal closely examined Explanation-1(f) which refers to "the amount or amounts of expenditure relatable to any income to which section 10 (other than clause 38) or section 11 or section 12 apply." The Tribunal reasoned that Explanation-1(f) does not refer to a disallowance made under section 14A. Further, the Tribunal emphasised that section 14A is a statutory fiction disallowing deemed expenditure attributable to exempt income, while section 115JB is itself a separate provision with a fiction for deemed income. The Tribunal held that one statutory fiction (section 14A disallowance) cannot be superimposed on another (the computation under section 115JB) and therefore disallowances under section 14A should not automatically be given effect while computing book profit under section 115JB. The Tribunal also relied on the principle from Apollo Tyres Ltd. that the AO's power in computing book profits is limited and cannot go behind the net profits except as permitted by the Explanation. Because the Tribunal had already deleted the section 14A addition on merits (see Ground No.3), the question of increasing book profit did not arise in any event. The Tribunal therefore allowed the assessee on this ground.

Ground No.5(b) — Entitlement to Section 10B relief where profit increases due to disallowance

The Tribunal reviewed section 10B, which grants deduction for profits and gains derived by a 100% export-oriented undertaking from exports for a specified period. The Tribunal concluded that nothing in the statute restricts the assessee's entitlement to section 10B benefits merely because profits have increased due to certain disallowances under the normal provisions of the Act. Therefore, the Tribunal held that the assessee would be entitled to the benefit of section 10B on the entire profit arrived at by the AO. The Tribunal clarified, however, that a provision with a statutory fiction cannot be superimposed upon another fiction (for example, disallowances under section 40(a)(ia) or other such fiction cannot be given effect in a manner that conflicts with section 10B). The Tribunal observed that this point was not material in the present case because it concluded elsewhere that section 40(a)(ia) could not be invoked for the foreign commission payments.

Revenue's Ground — Disallowance under section 40(a)(ia) for payments to foreign agents/non-residents

The AO had added Rs. 15,72,434 for failure to deduct tax at source on payments of sales commission (Rs. 9,73,594 and Rs. 5,98,840) and Rs. 10,22,649 for inspection charges paid in foreign currency to non-residents for services rendered outside India, invoking section 40(a)(ia). CIT(A) deleted these additions. The Tribunal reviewed the facts and relevant case law. It observed that the payments were in the nature of commission simpliciter to overseas agents for procuring orders and related incidental services provided outside India and did not constitute "fees for technical services" or any other income chargeable to tax in India. The Tribunal relied on the Supreme Court decision in GE India Technology (327 ITR 456) that TDS provisions do not apply if the payment is not chargeable to tax in India, and the Madras High Court decision in CIT v. Fazian Shoes Pvt. Ltd. (367 ITR 155) which held that commission paid to non-resident agents for procuring orders is not fees for technical services under section 9(1)(vii). Applying these authorities to the facts, the Tribunal confirmed CIT(A)'s deletion of the section 40(a)(ia) additions and dismissed the Revenue's appeal on this point.

Holding and Implications

DISPOSITION OF APPEALS:

  • Assessee's appeal (ITA No.2110/Mds./2014): Partly allowed for statistical purposes in accordance with the detailed findings (disallowance confirmed for mining/production expenses; deletion of additions for proportionate interest under section 36(1)(iii) and section 14A; depreciation remitted to AO with directions; book profit computation issue decided in favour of assessee as explained; entitlement to section 10B upheld subject to statutory constraints).
  • Revenue's appeal (ITA No.2188/Mds./2014): Dismissed — the Tribunal confirmed deletion of additions under section 40(a)(ia) relating to commission and inspection payments to non-resident foreign agents.

Direct consequences for the parties (as recorded):

  • The disallowance of Rs. 1,18,14,359 (mining) and Rs. 4,12,843 (production/processing) was confirmed because the assessee failed to substantiate the claims.
  • The addition of Rs. 1,03,98,313 (proportionate interest) made by the AO was deleted by the Tribunal on the basis that the advances and investments were funded from the assessee's own interest-free funds.
  • The addition of Rs. 3,11,34,630 under section 14A was deleted because the investments concerned were funded from cost-free own funds and no cost could be attributed to their management.
  • The disallowance of depreciation was set aside and remitted to the AO to allow depreciation in accordance with the Income-tax Act once the assessee furnishes the appropriate schedule; the Tribunal directed the assessee to produce the Income-tax Act schedule.
  • The Tribunal ruled that disallowances under section 14A / other statutory fictions are not to be automatically given effect to while computing book profit under section 115JB; it relied on the statutory language of Explanation-1(f) and authorities including Apollo Tyres.
  • The assessee was held entitled to section 10B relief on the profits of the export undertaking even if the profit increased due to certain disallowances under normal provisions, subject to the caveat that one statutory fiction cannot be superimposed on another.
  • The Revenue's challenge under section 40(a)(ia) in respect of payments to non-resident agents was rejected; the Tribunal found such payments not chargeable to tax in India and thus not attracting TDS/disallowance on the facts presented.

The Tribunal's order is a case-specific application of statutory provisions and precedents. The opinion records statutory interpretation (notably of Explanation-1(f) to section 115JB) and reliance on higher court decisions; it does not purport to lay down a novel legal principle beyond the statutory analysis and its factual findings in this appeal.

Order pronounced on 06 August 2015 at Chennai. Bench: (N.R.S. Ganesan) Judicial Member; (A. Mohan Alankamony) Accountant Member.

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    Beach Minerals Company Pvt. Ltd., CHENNAI v. ACIT, CHENNAI

    PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: This appeal in ITA No.2110/Mds./2014 is filed by the Assessee, and the other appeal in ITA No.2188/Mds./2014 is filed by the ITA Nos.2110,2188 /Mds/2014 2 Revenue for the assessment year 2010-11, aggrieved by the order of the Learned Commissioner of Income Tax (A)-I, Chennai, dated 26.05.2014 in ITA No.342/13-14/A-1 passed under section 143(3) read with section 250 of the Act. 2.1 The Assessee has raised Six grounds in its appeal, however, the cruxes of the issues are concised as follows:-

    1. The Ld. CIT (A) erred in upholding the order of the Ld. Assessing Officer who had disallowed expenses claimed under the head mining, production and processing for want of evidence.

    2. The Ld. CIT (A) erred in upholding the order of the Ld. Assessing Officer who had disallowed proportionate interest expenditure incurred on bank loan for `1,03,98,313/- since the assessee company had extended interest free loan to its sister concerns M/s.Bharat Mines Pvt Ltd., `5,60,45,897/-.

    3. The Ld. CIT (A) erred in upholding the order of the Ld. Assessing Officer who had disallowed expenditure of `3,11,34,630/- invoking provisions of section 40(a)(ia) of the Act ITA Nos.2110,2188 /Mds/2014 3 since the assessee company had made investment of `71,55,33,570/- for earning exempt income.

    4. The Ld. CIT (A) erred in upholding the order of the Ld. Assessing Officer who had disallowed the claim of depreciation of `10,64,87,188/- being depreciation worked out under Companies Act since the assessee had not submitted the depreciation schedule as per the Income Tax Act. 5.(a) The Ld. CIT (A) erred in upholding the order of the Ld. Assessing Officer who had enhanced the book profit for computing the tax payable U/s.115JB of the Act, by giving effect to the disallowance of expenditure made by the Ld. Assessing Officer while computing the profit under the normal provisions of the Act. 5.(b) The Revenue had erred in not giving the benefit of exemption under Section-10B of the Act for the increase in profit arising out of the disallowance of expenditures viz., Mining and production and processing charges of `1,22,27,202/-, Disallowance of Interest attributable to interest free advance U/s.36(1)(iii) of `1,03,98,313/-, Disallowance of expenditure for ITA Nos.2110,2188 /Mds/2014 4 earning exempt income U/s.14A of `3,11,34,630/-, & Disallowance of depreciation `10,64,87,188/-. 2.2 The Revenue has raised three grounds in its appeal, however, the crux of the issues is concised as follows:- The Ld. CIT (A) had erred in deleting the addition made by the Ld. Assessing Officer being payment made towards sales commission for `15,72,434/- (Payment made to M/s.Titanic Sands consulting `9,73,594 & Global Commodity Trading `5,98,840/-) and `10,22,649/- being payment made for inspection charges, both the payments paid in foreign currency to non-residents outside India and for services rendered outside India.

    3. The brief facts of the case are that the assessee is a company, engaged in the business of manufacturing, processing and exporting of Pulvarised Garnet Abrassive Grit, filed its return of income on 18.09.2010, admitting Nil income. Subsequently, the case was taken up for scrutiny and survey was also conducted in the assessees premises on 23.03.2010. Thereafter, the assessment was ITA Nos.2110,2188 /Mds/2014 5 completed on 28.03.2013 U/s.143 (3) of the Act wherein the Ld. Assessing Officer made certain additions. Now the assessee is in appeal before us against the order of the Ld. CIT (A) who had confirmed the additions made by the Ld. Assessing Officer. 4.1. Ground No.1 Disallowance of expenses claimed under head Mining, `1,18,14,359/- & Production/Processing `4,12,843/-. During the course of assessment proceedings, the assessee had not produced any evidence towards the expenditure incurred towards mining and production/processing for `1,18,14,359/- & `4,12,843/- respectively inspite of several opportunities provided, therefore, Ld. Assessing Officer disallowed the afore-stated expenses. Even before the Ld. CIT (A) the assessee did not come out with any evidence for the afore-stated expenditure, therefore the Ld. CIT (A) confirmed the order of the Ld. Assessing Officer. Before us also, nothing was produced by the Ld. A.R to substantiate the claim of these expenses, therefore we have no other option but to confirm the addition. Accordingly, we hereby confirm the disallowance of expenditures made by the Ld. Assessing Officer towards mining ITA Nos.2110,2188 /Mds/2014 6 and production/processing of `1,18,14,359/- & `4,12,843/- respectively. Thus, the ground No.1 of the assessee is dismissed. 5.1. Ground No. 2 - Disallowance of the proportionate interest due to interest free loan advanced to sister concern U/s.36(1)(iii) of the Act for ` 1,03,98,313/-. The Ld. Assessing Officer observed that the assessee had extended interest free loan to its subsidy M/s.Bharat Marines Co. Pvt Ltd., for `5,60,45,897/-. It was also revealed that the assessee had paid ` 6,20,12,327/- as interest towards secured loans. Therefore, the Ld. Assessing Officer disallowed the proportionate interest of `1,03,98,313/- by invoking the provisions of section 36(1)(iii) of the Act. The Ld. CIT (A) confirmed the order of the Ld. Assessing Officer by agreeing to his view. At the outset we find that the addition made by the Ld. Assessing Officer is not sustainable because from the order of the Ld. CIT (A) it is clearly revealed in para 6.2.1 that the assessee had `87.72 crores of Reserves & surplus and equity share capital of `10 crores aggregating to `97.72 crores as on 31.03.2010 being the assessees own interest free funds. In this situation, it is ITA Nos.2110,2188 /Mds/2014 7 evident that `5,60,45,897/- advanced by the assessee to its sister concern and the investments made by the assessee company for `71,55,33,570/- aggregating to `77,15,79,467/- has flowed from the assessees own fund of `97.72 crores which does not bear any cost. Therefore, we hereby delete the addition made for `1,03,98,313/- made by the Ld.A.O toward the proportionate interest attributable to the interest free loan advanced by the assessee to its sister concern because the funds advanced by the assessee does not bear any cost as it is assessees own funds. This ground raised by the assessee is allowed in its favour. 6.1. Ground No.3 Disallowance of expenditure by invoking the provisions of section 14A of the Act for `3,11,34,630/- since the assessee had made investments of `71,55,33,570/- for earning exempt income. At the outset, we find that there is no merit for the Revenue to make addition of `3,11,34,630/- invoking the provisions of section 14A of the Act because the investment made of `71,55,33,570/-, bears no cost in the form of interest or whatsoever, since the funds by ITA Nos.2110,2188 /Mds/2014 8 which the investment is made is assessees own funds. Further, these investments are made only with sister companies of the assessee and no cost can be attributed for the management of such funds. Therefore, we hereby delete the addition of Rs. `3,11,34,630/- made by the Ld. Assessing Officer invoking the provisions of section 14A of the Act. This ground raised by the assessee is allowed in its favour. 7.1. Ground No.4 Disallowance of depreciation of `10,64,87,188/- since the assessee had only submitted the depreciation schedule computed under the Companies Act and not under the Income Tax Act. The Ld. Assessing Officer had disallowed the entire claim of the assessee towards depreciation of `10,64,87,188/- because the assessee has not submitted before him the schedule of depreciation computed under the Income Tax Act but had only produced the schedule of depreciation computed under the Companies Act. On appeal the Ld. CIT (A) remitted the matter back to the file of Ld. Assessing Officer with a direction to allow the same in accordance with law. Since the action of the Ld. CIT (A) is justified, we do not ITA Nos.2110,2188 /Mds/2014 9 find it necessary to interfere with his order. However, it is pertinent to mention that the Ld. Assessing Officer ought to have given the benefit of depreciation to the assessee as provided under the Income Tax Act instead of disallowing the entire claim of depreciation because the details of the items on which the depreciation is claimed is before him and normally rate of depreciation allowable as per the Income Tax Act is higher than the rate of depreciation prescribed under the Companies Act. Further to simplify the proceedings of the Revenue, we hereby direct the assessee also to furnish the schedule of depreciation computed as per the Income Tax Act before the Ld.Assessing Officer. Accordingly this ground raised by the assessee is allowed for statistical purposes as indicated herein above. 8.1. Ground No.5.(a) Computation of book profit U/s.115JB of the Act by giving effect to the disallowance of expenditure made invoking the provisions of the Section-14A of the Act for `3,11,34,630/- and also the disallowance of expenditure under the normal provisions of the Act. ITA Nos.2110,2188 /Mds/2014 10 8.1.1 The Ld. Assessing Officer while computing the tax as per provisions of section 115JB of the Act made additions to the book profit with respect to the disallowance made U/s.14A of the Act read with Rules-8D of the Income Tax Rules. On appeal, the Ld. CIT (A) citing the provisions of clause (f) of Explanation-1 to Section-115JB, confirmed the order of the Ld. Assessing Officer. The relevant portion of the order of the Ld. CIT (A) is reproduced herein below for reference:- 10.2 I have gone through the facts and circumstances of the case. The Assessing Officer has taxed the income U/s.115JB since the tax on book profits is more than the tax under normal computation. While doing so, she made disallowance of the amount relatable to exempt income on the basis of the amount worked out U/s.14A r.w.Rule 8D under normal computation. The provisions of clause (f) of Explanation-1 to s.115JB makes it abundantly clear that the amount of expenditure relatable to any exempt income, other than s.10(38), is liable to be added back to the amount of net profit as shown in the P&L A/c. Reliance is placed on the latest decision of the ITAT Mumbai in the case of Dabur India Ltd., 37 taxmann.com 289. Reliance is also placed on the latest decision of the ITAT Mumbai in the case of RBK Share Broking P. Ltd in ITA No.6678 & 7546/Mum/2011 dated 24.7.2013 wherein it was held that the amount ITA Nos.2110,2188 /Mds/2014 11 disallowable U/s.14A can be added back while computing book profit under Explanation-1 to s. 115JB(para 6). Respectfully following the above decisions, I uphold the addition made by the Assessing Officer. This ground is dismissed. However, on perusing the Explanation-1(f) of Section-115JB(2) of the Act, we do not find merit in the contention of the Ld. CIT (A). The relevant provision of the Act is extracted herein below for reference:- Section.115JB Explanation-[1] For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section(2), as increased by (a) To (e) ---------------------------------------------------- (f) the amount or amounts of expenditure relatable to any income to which [Section-10 (other than the provisions contained in clause (38) thereof] or section 11 or section 12 apply; (g) To (j) ----------------------------------------------------- ITA Nos.2110,2188 /Mds/2014 12 From the above it is apparent that the aforesaid provision of the Act does not refer to any disallowance made U/s.14A of the Act while arriving at the Book Profit for the purpose of Section-115JB(2) of the Act. Further Section 14A of the Act is a provision with fiction disallowing the deemed expenditure attributable to exempt income viz., dividend income U/s. 10 of the Act and Section 115JB of the Act is also a provision with fiction for payment of tax in respect of deemed income. Therefore while computing the profit for the purpose of Section 115JB of the Act another provision with fiction cannot be superimposed. Hence the question of increasing the Book Profit due to the disallowance U/s.14A of the Act will not arise. However, in the instant case of the assessee, since we have already deleted the addition made U/s.14A, increasing the book profit will not arise. Further the decision of Honble Apex Court cited by the assessee in the case M/s.Apollo Tyres Ltd. Vs. CIT reported in 255 ITR 273 is also squarely applicable to the case of the assessee. The gist of the same is reproduced herein below for reference:- The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of ITA Nos.2110,2188 /Mds/2014 13 examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J . The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. From the above decision it is clear that while computing the Book Profit of the company under the provisions of section 115JB of the Act; any disallowance made under the normal provisions of the Act also cannot be given effect to for arriving at the Book Profit for the ITA Nos.2110,2188 /Mds/2014 14 purpose of Section 115JB of the Act. Accordingly, this ground raised by the assessee is allowed in its favour. 8.1.2 Ground No.5(b) - Not giving the benefit of exemption under Section-10B of the Act for the increase in profit arising out of the disallowance of expenditures. It appears that the Ld. Assessing Officer had denied the benefit of Section-10B of the Act with respect to the increase in profit arising out of the disallowance made according to the normal provisions of the Act. However on reading the provisions of the Act it is evident that Section-10B of the Act provides that profits and gains derived by 100% export oriented undertaking from the export of article of things or computer software shall be allowed for a period of 10 consecutive years beginning with the assessment year in which the undertaking beings to manufacture or produce articles or things or computer software as the case may be from the total income of the assessee. Therefore, even if there are some disallowances of expenditure under the normal provisions of the Act due to which the profit of the export ITA Nos.2110,2188 /Mds/2014 15 undertaking increases, the assessee will be entitled for the benefit of Section-10B on the entire profit arrived by the Ld.A.O because there are no provisions in the Act to restrict the benefit of Section-10B of the Act for such increase in profits. From the order of the Ld. CIT (A) we find that he has held the appellant to be eligible for the benefit of Section-10B of the Act, therefore as discussed herein above we hereby hold that the assessee will be entitled for the benefit of Section 10B of the Act even for the increase in profit arising out of any disallowances of expenditure made by the Revenue. However we also make it clear that while computing the profit of the 100% export orientated Undertaking for the purpose of deduction under Section 10B of the Act, any disallowance based on any fiction of the provisions of the Act like Section 40(a)(ia) of the Act etc., cannot be given effect because Section 10B is also a provision with fiction and a provision with fiction cannot be superimposed on any other provision with fiction. However in this case this observation will not be relevant because we have held in the following paragraph with respect to payments made to foreign agents for services rendered outside India in foreign currency provisions of Section 40(a)(ia) of the Act cannot ITA Nos.2110,2188 /Mds/2014 16 be invoked. Therefore, the prayer of the assessee on this issue is also allowed in its favour. Revenues Appeal 9.1 Ground Deletion of addition made by invoking the provisions of section 40(a)(ia) of the Act for non-deduction of tax towards commission paid to foreign agents outside India in foreign currency and for services rendered outside India. During the course of assessment proceedings, it was noticed by the Ld. Assessing Officer that the assessee has paid sales commission of `9,73,594/-, and `5,98,840/- to M/s.Titanic Sand Consultations and M/s.Global Commodity trading respectively. Since the assessee had not deducted tax at source on the aforesaid amount paid to non-residents, invoking the provisions of section 40(a)(ia) of the Act, the Ld. Assessing Officer added the aggregate amount of `15,72,434/- to the income of the assessee. On appeal, the Ld. CIT (A) held the issue in favour of the assessee by observing as under:- 9.2. I have gone through the facts and circumstances of the case. With regard to the ground raised regarding disallowance U/s.40(a)(ia) the ITA Nos.2110,2188 /Mds/2014 17 dispute is only with respect to payments made to overseas parties who have rendered service the appellant under various headings. As seen from the details of expenditure made by the pat in foreign currency to the foreign concern is only in the nature of commission and other payments. It is no way falling under the categories of interest, royalty and technical fee to attract charging section as per the amended provisions of section 9 The Assessing Officer has failed to establish how commission payment to non-resident will attract disallowance U/s.40(a)(ia). Therefore, I am of the view that the decision in the case GE India Technology is squarely applicable (327 ITR 456)(SC) which says that the TDS provisions U/s.195 are not applicable if the amount in question is not chargeable to tax in India, is squarely applicable. Therefore, the question of making TDFS does not arise and disallowance u/s.40(a)(ia) is not called for. Accordingly the addition is deleted. The ground raised by the appellant is allowed. From the facts of the case, it is evident that the Ld. Assessing Officer has invoked the provisions of section 40(a)(ia) of the Act because the assessee had not deducted tax at source towards the sales commission paid to foreign agents outside India in foreign exchange and for the services rendered outside India. At the outset we find that this issue is squarely covered by the decision of Honble Jurisdictional High Court in the case CIT Vs. Fazian Shoes Pvt. Ltd. reported in 367 ITR 155(Mad.) wherein it is held that on a reading of ITA Nos.2110,2188 /Mds/2014 18 Section.9(1)9vii), commission paid by the assessee to the non- resident agents would not come under the term fees for technical services. For procuring orders for leather business from overseas buyers, wholesalers or retailers, as the case may be, the non-resident agent was paid 2.5%, commission on free on board basis. This was a commission simpliciter. What was the nature of technical services that the non-resident agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing the export obligation was an incident of export and, therefore, the non-resident agent was under an obligation to render such services to the assessee, for which commission was paid. The non resident agent did not provide technical services for the purpose of running of the business of the assessee in India. Therefore, the commission paid to the non- resident agents would not fall within the definition of fees for technical services and the assessee was not liable to deduct tax at source on payment of commission. Since the facts are identical in the case of the assessee to the case decided by the Honble ITA Nos.2110,2188 /Mds/2014 19 Jurisdictional High Court supra, we hereby confirm the order of the Ld. CIT (A).

    10. In the result, the appeal of assessee is partly allowed for statistical purposes as indicated hereinabove and the appeal of Revenue is dismissed. Order pronounced on 06th August, 2015 at Chennai. Sd/- Sd/- (... ) (N.R.S.GANESAN) (. ) (A.MOHAN ALANKAMONY) Judicial Member Accountant Member Chennai, Dated the 06th August, 2015. K s sundaram. ' #./ 0//Copy to:

    1. &/Appellant 2. #$&/Respondent

    3. 1 ()/CIT(A) 4. 1/CIT

    5. / #5/DR 6. ! /GF

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