2011 (8) TMI 620 - AT - Income Tax

Tribunal grants relief on deduction and losses, upholds Transfer Pricing Officer's adjustments.

The appeal was partly allowed by the Tribunal. Relief was granted concerning the deduction under section 80-IB and the benefit of brought forward losses ... Deduction under section 80-IB - appointed date of amalgamation - application of amalgamation provisions to transfer of undertaking and rollover of benefits - applicability of section 72A to amalgamation - triggering of shareholding continuity provisions (section 79) - internal Cost Plus method as most appropriate method for transfer pricing - proviso to section 92C(2) and +/-5% safe harbour - mandatory levy of interest consequent to assessment - prematurity of penalty and prosecution proceedingsDeduction under section 80-IB - appointed date of amalgamation - application of amalgamation provisions to transfer of undertaking and rollover of benefits - Allowability of deduction claimed under section 80-IB after amalgamation of Joyco India Pvt. Ltd. with Wrigley India Pvt. Ltd. - HELD THAT: - The Tribunal held that the amalgamation sanction by the High Court specified an appointed date of 1.4.2005 and, following Marshall Sons principle, the scheme operates with effect from that appointed date so that the business carried on by the transferor during the intervening period is deemed to have been carried on for and on behalf of the transferee. Consequently a Form No.10CCB issued in the name of the amalgamated company (filed after sanction) is to be considered for the claim. The Tribunal rejected the Revenue's reliance on corporate existence until filing with ROC and other grounds raised by the AO/DRP, observed that units in backward states are not caught by the Eleventh Schedule by virtue of section 80IB(4), and noted previous allowance of 80IB in earlier years and relevant Board instruction on the undertaking-attaching nature of the benefit. On these bases the Tribunal allowed the grounds of appeal relating to the 80-IB claim for the relevant units (noting the dispute was in substance confined to the gum-base unit). [Paras 8]Deduction under section 80-IB allowed in respect of the claim challenged on amalgamation grounds; Form No.10CCB in the name of the amalgamated company is admissible and the appointed date governs the amalgamation for tax purposes.Carry forward of losses and unabsorbed depreciation - applicability of section 72A to amalgamation - triggering of shareholding continuity provisions (section 79) - applicability of succession provisions (section 78) - Whether brought forward losses and unabsorbed depreciation of the amalgamated company are disallowable on account of sections 72A, 79 or 78. - HELD THAT: - The Tribunal found that section 72A applies only where the amalgamating company has carried forward losses/unabsorbed depreciation to be carried forward by the amalgamated company; here the amalgamating company was profit-making and did not have such losses, so section 72A did not apply. The Tribunal accepted that shareholding continuity (section 79) was not attracted because more than 51% of shareholding remained in the same hands. Section 78 (succession provisions applicable to firms) was inapposite as the case involved companies. The Tribunal therefore disagreed with the AO/DRP's characterization of the amalgamation as a colourable device and set aside their disallowance on this issue. [Paras 13]Disallowance of carry forward losses and unabsorbed depreciation set aside; provisions of sections 72A, 79 and 78 not applicable on the facts.Internal Cost Plus method as most appropriate method for transfer pricing - proviso to section 92C(2) and +/-5% safe harbour - Validity of the transfer pricing adjustment of Rs. 2,70,35,000 determined by comparing export margins with domestic margins and the appropriate ALP/PLI and effect of the proviso to section 92C(2). - HELD THAT: - The Tribunal examined facts that exports (largely to related parties) and domestic sales were manufactured in the same factory from largely the same raw materials (imports 14%). It held that an internal uncontrolled domestic segment provided a proximate comparable and that the Cost Plus (CPM) approach using GP/Direct Cost of production as the PLI was a justifiable and appropriate method on these facts. The Tribunal rejected the assessee's contentions on market/geographic differences, marketing expenditure and OECD semi-finished goods argument as insufficient to displace the internal CPM comparability, while permitting limited adjustments under Rule 10B(1)(c)(iii) for differences such as credit risk. On the proviso to section 92C(2) the Tribunal held that the +/-5% safe harbour is available only where the taxpayer's price falls within +/-5% of the ALP mean; where variation exceeds 5% no benefit arises. Applying the relevant factors the Tribunal directed adoption of a 60% profit mark-up on direct cost as the correct PLI, and accordingly allowed the appeal partly. [Paras 19, 20, 21]Transfer pricing adjustment sustained in principle but revised on the Tribunal's directions: internal Cost Plus method upheld as appropriate and a 60% mark-up on direct cost directed to be adopted, resulting in a partial allowance of the assessee's grounds.Mandatory levy of interest consequent to assessment - Challenge to levy of interest under sections 234A, 234B and 234C. - HELD THAT: - The Tribunal observed that levy of interest is consequential and mandatory upon the assessment, having regard to precedent (Anjum Ghaswala), and therefore the assessee's challenge must fail. [Paras 22]Challenge to interest dismissed; interest levied under sections 234A, 234B and 234C upheld as mandatory.Prematurity of penalty and prosecution proceedings - Maintainability of challenge to initiation of penalty under section 271(1)(c) and prosecution under sections 276C, 277A and 278B. - HELD THAT: - The Tribunal treated challenges to penalty and prosecution as premature at the assessment/appeal stage and accordingly declined to entertain them. [Paras 23, 24]Grounds attacking initiation of penalty and prosecution proceedings dismissed as premature.Final Conclusion: The appeal is partly allowed: deduction under section 80-IB in respect of the amalgamation claim is allowed; disallowance of brought forward losses and unabsorbed depreciation is set aside; transfer pricing adjustment is sustained in principle but the Tribunal directs adoption of an internal Cost Plus approach with a 60% mark-up on direct cost (resulting in partial allowance); challenges to interest are dismissed and objections to initiation of penalty and prosecution are held premature and dismissed. Issues Involved:1. Validity of the order passed under section 143(3) read with section 144(C) of the Income-tax Act.2. Assessment of returned income at Rs. 186,681,654.3. Confirmation of additions/disallowances by the Dispute Resolution Panel (DRP).4. Disallowance of deduction under section 80-IB.5. Disallowance of brought forward losses and unabsorbed depreciation.6. Adjustment of arm's length price for international transactions.7. Levy of interest under sections 234A, 234B, and 234C.8. Initiation of penalty proceedings under section 271(1)(c).9. Initiation of prosecution proceedings under sections 276C, 277A, and 278B.Detailed Analysis:1. Validity of the Order:The appellant challenged the validity of the order passed under section 143(3) read with section 144(C) of the Income-tax Act, but these grounds were dismissed as they were general in nature and did not require adjudication.2. Assessment of Returned Income:The appellant contested the assessment of returned income at Rs. 186,681,654, but this issue was not separately adjudicated as it was intertwined with other specific grounds.3. Confirmation by DRP:The appellant argued that the DRP erred in confirming the additions/disallowances made by the Assessing Officer (AO). This issue was addressed in the context of specific grounds related to section 80-IB and transfer pricing adjustments.4. Disallowance of Deduction under Section 80-IB:- The AO disallowed the deduction under section 80-IB amounting to Rs. 5,75,01,364 on the grounds that the certificate in Form 10CCB was in the name of Joyco India Private Limited (JIPL), which ceased to exist after the amalgamation with Wrigley India Private Limited.- The DRP upheld the AO's decision, noting that the deduction was also denied because the company was manufacturing items listed in the Eleventh Schedule and that the amalgamation resulted in the transfer of more than 20% of assets, violating section 80-IB(2).- The appellant argued that the amalgamation was effective from 13.10.2006 and that the deduction should be allowed based on the revised Form 10CCB submitted in the name of Wrigley India Private Limited.- The Tribunal held that the amalgamation was effective from 1.4.2005 as per the appointed date in the High Court order and that the business carried on by JIPL during the intervening period was deemed to be on behalf of Wrigley India Private Limited.- The Tribunal concluded that the revised Form 10CCB should be considered and allowed the deduction under section 80-IB, noting that the deduction is undertaking specific and should be allowed to the amalgamated company as per section 80-IB(12).5. Disallowance of Brought Forward Losses and Unabsorbed Depreciation:- The AO denied the benefit of brought forward losses and unabsorbed depreciation, citing sections 72A, 78, and 79.- The DRP agreed with the AO, stating that the amalgamation was a colorable device to evade taxes and that the scheme was approved for the purpose of the Companies Act, not the Income-tax Act.- The appellant argued that section 72A applies only when the amalgamating company has losses, which was not the case here, and that more than 51% of the shareholding remained the same, fulfilling section 79.- The Tribunal held that section 72A was not applicable as the amalgamating company was profit-making, and section 79 was not triggered as more than 51% shareholding remained unchanged. Section 78 was also not applicable as it pertains to firms and succession, not companies.- The Tribunal set aside the orders of the authorities below and allowed the benefit of brought forward losses and unabsorbed depreciation.6. Adjustment of Arm's Length Price:- The Transfer Pricing Officer (TPO) adjusted the international transactions to bring them to arm's length price, resulting in an addition of Rs. 2,70,35,000.- The appellant argued that the TPO erred in selecting the Cost Plus Method (CPM) and that the transactions were not comparable due to differences in domestic and export segments.- The DRP upheld the TPO's decision, stating that the internal CPM was justified as the products were manufactured in the same factory with the same raw materials.- The Tribunal upheld the method adopted by the TPO, noting that the internal CPM was appropriate given the circumstances. However, it directed a slight adjustment to the profit margin mark-up to 60% to account for market and credit risks.- The Tribunal also dismissed the appellant's plea for the benefit of +/- 5% under the proviso to section 92C(2), stating that this benefit is only available if the value of the international transaction is within +/- 5% of the arithmetical mean.7. Levy of Interest:The Tribunal dismissed the ground challenging the levy of interest under sections 234A, 234B, and 234C, citing that the levy is mandatory and consequential to the assessment.8. Initiation of Penalty Proceedings:The Tribunal dismissed the ground challenging the initiation of penalty proceedings under section 271(1)(c) as premature.9. Initiation of Prosecution Proceedings:The Tribunal dismissed the ground challenging the initiation of prosecution proceedings under sections 276C, 277A, and 278B as premature.Conclusion:The appeal was partly allowed, with the Tribunal granting relief on the issues related to the deduction under section 80-IB and brought forward losses and unabsorbed depreciation, while upholding the adjustments made by the TPO and dismissing the grounds related to the levy of interest and initiation of penalty and prosecution proceedings.