1. This appeal, filed by the Revenue is directed against the order of CIT(A), Central-1, Mumbai dt. 31st Oct., 2003 for asst. yr. 2002-03.
2. We have heard both the parties and have also perused the material on record.
3. In ground No. 1, the Revenue is aggrieved by the deletion of disallowance of Rs. 1,18,630 incurred by the assessee on foreign travel expenses of Rs. 1,18,630.
4. The facts, in brief, are that the AO disallowed these expenses mainly for the reason that assessee firm was not engaged in export of jewellery and it was a business leader, hence, there was no requirement for such foreign travel. On appeal, the learned CIT(A), following the appellate order for asst. yr. 2001-02, deleted the disallowance.
Aggrieved by this, the Revenue is in appeal before us.
5. The learned Departmental Representative placed strong reliance on the order of AO whereas the learned Counsel for the assessee placed strong reliance on the order of learned CIT(A).
6. We have considered the submissions made by both sides, material on record and orders of authorities below. Admittedly, these expenses have been incurred on the employees of the assessee firm in regard to foreign travel undertaken by them in connection with the business of the assessee firm. This ground of the Revenue deserves to be dismissed for the reason that even though the assessee is a business leader in this line, but the same position cannot be maintained unless the assessee is aware of latest technologies and designs for jewellery manufacturing. Further, merely (because) other sister concern is engaged in the export, no adverse inference can be drawn only on that basis without bringing any cogent material on record to show that these foreign travels were, in fact undertaken to promote the interests of that firm. In view of the forgoing, we hold that there is no infirmity in the order of the learned CIT(A). Accordingly, the same is confirmed.
Thus, this ground of the Revenue stands dismissed.
7. In ground No. 2, the Revenue is aggrieved by the decision of learned CIT(A) in granting deduction under Section 80-IB to the Hyderabad branch of the assessee. The Revenue has also raised an alternate contention that the GP and net profit shown at Hyderabad was much higher as compared to GP and net profit shown at Mumbai branch.
8. The facts, in brief, are that the assessee company claimed a deduction of Rs. 20,85,592 under Section 80-IB of the IT Act, 1961. The AO required the assessee to justify its claim. The assessee gave detailed submissions to support its claim which have been summarized by the AO as under: The sum and substance of assessee's submissions on the issue is summarized as under: (i) The branch office located at Hyderabad (classified by the assessee as "unit") is engaged in manufacture and sale of jewellery (gold ornaments and diamond ornaments).
(ii) The branch office has got manufactured jewellery by Mumbai office.
(iii) The Mumbai office manufactures jewellery through various Kangars on behalf of branch office under the supervision of the employees of Hyderabad unit.
(iv) The jewellery for branch office is manufactured by head office as per the designs given by the designers employed by branch office.
(v) Designers of Hyderabad unit give the designs of jewellery required at Hyderabad considering the market there. Designing is the most important step in ultimate manufacture of ornaments.
(vi) The purchase of raw materials for Hyderabad unit are made at Mumbai office and then the same are given to the Karigars for making different types of ornaments.
(vii) The branch office has reimbursed making charges to Mumbai office.
(viii) Activities necessary for manufacture and sale of jewellery namely canvassing of orders, preparation of design, placement of order, supervision of manufacturing process, monitoring of quality etc. has been done by Hyderabad unit. For the sales made to the customer by branch office Hyderabad unit is responsible. Therefore, Hyderabad unit is industrial undertaking.
(ix) Hyderabad unit is registered as small-scale industrial unit (SSI unit).
(x) Assessee has relied upon decision of the Bombay High Court in the case of CIT v. Penwalt India Ltd. .
The AO analysed the provisions of law and distinguished the decision of Hon'ble jurisdictional High Court in the case of CIT v. Penwalt India Ltd. (supra) and held that the assessee was not entitled for deduction under Section 80-IB of the Act. The conclusions given by the AO read as under: After taking into consideration rationale, objectives and scope of Section 80-IA (as stated in para 7 above), condition precedent for eligibility under Section 80-IA (as mentioned in para 8 above) and also for facts flowing from the assessee's case [as found in para 6(vi) above] and for detailed reasons recorded in above paras 9 and 10, it is held that assessee's branch office located at Hyderabad is not "industrial undertaking". It is branch office of the assessee trading in the ornaments. It is not engaged in manufacturing of ornaments.
Without admitting but presuming that goods were manufactured for branch office as claimed by the assessee, even the goods manufactured by head office for branch office cannot be regarded as "goods manufactured by branch office" for the following reasons: (iii) Payment for raw material as well as making charges are paid by head office (iv) Even goods sent to branch office are accounted for by the head office as "sales to branch office".
Accordingly, assessee's claim under Section 80-IB is not found to be legally and factually sustainable and is, therefore, rejected.
Aggrieved by this, the assessee carried the matter into appeal before the learned CIT(A). In the appellate proceedings, detailed submissions were made. The learned CIT(A) noted that jewellery was manufactured in Mumbai through third party artisans on behalf of assessee's Hyderabad unit and such activity was undertaken under the control and supervision of the employees of its Hyderabad unit who were stationed at Mumbai. It was also noted that designs were provided by the Hyderabad unit. The learned CIT(A) also noted that other conditions of Section 80-IB were also met by the Hyderabad unit. The learned CIT(A) also held that distinction made by the AO in the facts of the present case with that of facts of the case of M/s Penwalt India Ltd. (supra) was also misplaced. Accordingly, the learned CIT(A) held that Hyderabad unit, which was a registered small-scale industrial unit, was to be treated as the real manufacturer of jewellery and, therefore, it was entitled for deduction under Section 80-IB of the Act. Aggrieved by this, Revenue is in appeal before us.
9. The learned Departmental Representative narrated the factual matrix of the case and placed strong reliance on the order of AO. The learned Departmental Representative also drew our attention to the provisions of Section 80-IB(2)(iii) to contend that existence of plant and machinery was presupposed. The learned Departmental Representative also placed strong reliance on the decision of Hon'ble Allahabad High Court in the case of Mahendra Kumar Agarwal v. CIT in this regard and also contended that the decision of the Hon'ble Bombay High Court in the case of Penwalt India Ltd. (supra) had also been considered by the Hon'ble Allahabad High Court.
10. The learned Counsel for the assessee, on the other hand, narrated the factual matrix of the case, reiterated the submissions made before the Revenue authorities. The learned Counsel drew our attention to the headnotes in the case of Penwalt India Ltd. (supra) and based upon that contended that the activities undertaken by the assessee were identical to the activities carried on by the assessee in that case, hence, the ratio of that decision was squarely applicable to the facts of the case. It was also contended that the decision of Penwalt India Ltd. (supra) being of the jurisdictional High Court was binding on the Mumbai Benches of the Tribunal. The learned Counsel also pointed out that in the case of Mahendra Kumar Agarwal (supra), the assessee was not employing 10 or more persons as required under Section 80-I of the Act whereas in the present case all other conditions have been satisfied, therefore, that decision of the Hon'ble High Court in the case of Mahendra Kumar Agarwal (supra) was also distinguishable on facts. The learned Counsel also placed reliance on the decision of Tribunal in the case of Film Shoppe v. Asstt. CIT (2005) 95 TTJ (Mumbai) 1056 and Sunrise Metal Industries v. ITO (2004) 86 TTJ (Mumbai) 298 : (2004) 89 ITD 406 (Mumbai). The learned Counsel also submitted that Mumbai office was merely a facilitation centre for the Hyderabad unit which was a registered small-scale industry. In respect of alternate ground, the learned Counsel contended that it was not coming out of assessment order and it also required enquiry to the facts, hence, it was not admissible.
11. We have considered the submissions made by both sides, material on record and orders of authorities below. Admittedly, assessee has established a new unit at Hyderabad. The assessee is in the business of jewellery manufacturing. The pattern and designs of jewellery change in accordance with the customers' choices in different regions. The assessee's unit situated at Hyderabad is accordingly getting its manufacturing of jewellery at Mumbai under the supervision and control of its employees through the help of Mumbai office. Thus, mere involvement of Mumbai office cannot be so dominant so as to ignore the actual nature of operations carried on by the Hyderabad unit. It is also not in dispute that assessee's unit is maintaining separate books of account and it is a part of the same assessee, hence, internal entries made in the books of account of head office and this unit cannot overshadow the nature of operations. We also find that the facts of the case are identical to the facts of Penwalt India Ltd. (supra), hence, the ratio of the decision of the Hon'ble jurisdictional High Court in that case is binding on us. It is further noted that all other conditions have been satisfied and particularly, the artisans are external parties. In this view of the matter, we hold that assessee is entitled to the deduction under Section 80-IB of the Act in respect of its Hyderabad unit. Accordingly, the order of learned CIT(A) is confirmed. We further hold that the alternate contention regarding GP and net profit shown by the Hyderabad unit is also not maintainable because it does not emerge from the orders of the Revenue authorities and it will require fresh investigation into the facts. Thus, this ground of the Revenue also fails.