2012 (7) TMI 147 - AT - Income Tax

Tax Appeals Decision: Partial success for assessee on PF/ESIC, research expenses; foreign exchange disallowance upheld.

The appeals for assessment years 2002-03 and 2003-04 were partly allowed. The tribunal ruled in favor of the assessee on the disallowance of contributions ... Disallowance towards contribution to P.F. ESIC - Held that:- As decided in CIT Versus M/s. Alom Extrusions Limited [2009 (11) TMI 27 (SC)]the payment of PF/ESI within grace period as allowable as per the provisions of P.F. Act has to be accepted as the payment made within due date. Even if the payment is made after the grace period, but before the due date of filing of the return of income, no disallowance can be made - in favour of assessee. Disallowance toward weighted deduction u/s.35(2AB)in respect of Scientific Research expenses - as these expenses are not incurred for in-house R & D facility and the payment to institutes are sponsored research and that for the clinical trials undertaken etc., R & D is not covered by weighted deduction provisions - Held that:- The rational interpretation of the provisions of section 35(2AB) and its explanation should be this that these expenses which are included in explanation being expenditure for clinical drug trial and for approval of regulatory authority etc., should be in relation to scientific research carried out in-house Research & Development facility and the said expenses should not be in relation to research result which is not obtained from in-house research and development facility and it is not necessary that the expenditure itself on clinical drug trial should be incurred in-house - the disallowance made by the A.O for allowing weighted deduction in respect of clinical drug trial is unwarranted. Dis allowing weighted deduction u/s. 35(2AB) i.e. for ₹ 68,60,981/- being the payment to various institutions the order of the CIT (A)is set aside and restore back the matter to the file of the A.O. for a fresh decision taking into consideration that if it is found that the same is not in respect of full research but only in respect of procuring of some material or service then the same should also be considered for weighted deduction. Disallowance towards Foreign Exchange Rate fluctuation - Held that:- As decided in CIT Versus WOODWARD GOVERNOR INDIA PVT. LTD [2007 (4) TMI 118 - DELHI HIGH COURT] that it is an admitted fact in the present case that this expenditure was incurred by the assessee in respect of loan from the bank which were used for acquisition of certain plant and machinery - as it was observed from the details filed by the appellant that this loss has arisen because of repayment of principal amount and on conversion of IOB FCNRB loan to Union Bank of India Ltd decided against assessee. Disallowance in calculating Arms Length Price in respect of International transaction with Associate Enterprises - Held that:- As CIT(A) has not passed speaking and reasoned order, in the interest of justice, this matter should go back to him for fresh decision. Disallowance towards claim u/s. 80HHC - Held that:- The issue of inclusion of Excise Duty and sales tax in total turnover is decided in favour of the assessee considering the case of CIT Versus Sri Jayajothi And Company Limited [2006 (1) TMI 121 (HC)] whereas for reduction of 90% of Misc. Income from the business profit as per Explanation (baa) to section 80HHC assessee objected to this treatment given by the authorities below to the Misc. income but he could not bring on record any material to show that this misc. income is not covered by clause (baa) of section 80HHC and set off of negative profit against positive profit is squarely covered against the assessee as decided in Ipca Laboratory Ltd. Versus Deputy Commissioner of Income-Tax [2004 (3) TMI 9 (SC)]- partly allowed in favour of assessee. Dis allowing MAT Credit before charging interest u/s. 234B & 234C - Held that:- For the purpose of computation of interest payable by the assessee u/s. 234B and 234C, the credit of tax allowable in terms of section 115JAA has to be set off against the advance tax payable before calculating such interest as decided in CIT Versus Tulsyan NEC Ltd.[2010 (12) TMI 23 (SC)]- in favour of assessee. Disallowing a sum towards Prior Period expenses - Held that:- On account of advertisement expenses assessee, cost audit fee and raw material purchased do not find any force because it could not be shown that the payment of these invoices was in dispute and as there is no evidence that these expences was carried out after the end of these years i.e. in the present year - even if the bill was not received in the previous year, expenses should have been considered in the respective year and hence deduction is not allowable in the year under consideration - thus the assessee could not make out a case for deduction - against assessee. Issues Involved:1. Legality of the assessment order.2. Disallowance of contributions to PF/ESIC.3. Disallowance of weighted deduction under Section 35(2AB) for scientific research expenses.4. Disallowance of foreign exchange rate fluctuation.5. Calculation of Arms Length Price in respect of international transactions with Associate Enterprises.6. Disallowance under Section 80HHC.7. Allowance of MAT credit before charging interest under Sections 234B and 234C.8. Levy of interest under Sections 234B and 234C.9. Disallowance of prior period expenses.Detailed Analysis:1. Legality of the Assessment Order:The appellant contended that the assessment order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] was bad in law and deserved to be canceled. However, the tribunal did not specifically address this ground, implying no substantial discussion or decision was made on this point.2. Disallowance of Contributions to PF/ESIC:The tribunal noted that the issue of disallowance towards contributions to PF/ESIC was covered in favor of the assessee by the Supreme Court's decision in CIT vs. Alom Extrusions Ltd. The tribunal held that payments made within the grace period or before the filing of the return should be allowed. Consequently, the disallowance made by the Assessing Officer (AO) was deleted, and the appeal on this ground was allowed.3. Disallowance of Weighted Deduction under Section 35(2AB):The tribunal noted that the AO disallowed the weighted deduction for scientific research expenses on the basis that the expenses were not incurred on in-house R&D facilities. The tribunal referred to previous decisions, including the case of ACIT vs. Torrent Pharmaceuticals Ltd., and concluded that clinical trials and certain research expenses, even if not conducted in-house, are eligible for weighted deduction under Section 35(2AB). The tribunal directed the AO to reconsider the deduction for payments to various institutions and allowed the deduction for clinical trial expenses. The matter was partly remanded for fresh consideration.4. Disallowance of Foreign Exchange Rate Fluctuation:The tribunal upheld the disallowance of foreign exchange rate fluctuation expenses, agreeing with the AO that such expenses related to the acquisition of plant and machinery and should be treated as part of the block of assets, allowing only depreciation. This decision was based on the precedent set by the Delhi High Court in CIT vs. Woodward Governor India Pvt. Ltd.5. Calculation of Arms Length Price:The tribunal found that the CIT(A) did not provide a speaking and reasoned order regarding the calculation of Arms Length Price for international transactions with Associate Enterprises. The issue was remanded back to the CIT(A) for a fresh decision with a detailed and reasoned order.6. Disallowance under Section 80HHC:The tribunal addressed three aspects of the deduction under Section 80HHC:- Inclusion of excise duty and sales tax in total turnover was decided in favor of the assessee, following the Supreme Court's decision in CIT vs. Sri Jaya Jothi and Co. Ltd.- Reduction of 90% of miscellaneous income from business profit was upheld against the assessee.- Set-off of negative profit against positive profit was also decided against the assessee, following the Supreme Court's decision in IPCA Laboratory Ltd. vs. DCIT.7. Allowance of MAT Credit:The tribunal directed the AO to allow MAT credit before charging interest under Sections 234B and 234C, in line with the Supreme Court's decision in CIT vs. Tulsyan NEC Ltd.8. Levy of Interest under Sections 234B and 234C:This ground was deemed consequential to the decision on MAT credit and was not independently analyzed.9. Disallowance of Prior Period Expenses:For the assessment year 2003-04, the tribunal rejected the claim for prior period expenses, finding no merit in the assessee's arguments and insufficient evidence to support the claim. The tribunal upheld the disallowance of expenses related to advertisement, cost audit fees, and raw material purchases.Conclusion:The appeals for assessment years 2002-03 and 2003-04 were partly allowed, with specific issues remanded for fresh consideration and others decided based on existing legal precedents. The tribunal provided detailed reasoning for each decision, ensuring compliance with relevant judicial decisions and statutory provisions.