2014 (5) TMI 882 - AT - Income Tax

Tribunal upholds full deduction under Income Tax Act for joint venture company

Income Tax Officer Versus M/s Zydus Nycomed Healthcare Pvt. Ltd.

Income Tax Officer Versus M/s Zydus Nycomed Healthcare Pvt. Ltd. - TMI Issues Involved:1. Disallowance of deduction under Section 10B read with Section 80IA(10) of the Income Tax Act.2. Transfer Pricing (TP) adjustments for clinical trial services.3. Validity of reassessment under Section 143(3) read with Section 147 of the Act.Detailed Analysis:1. Disallowance of Deduction under Section 10B read with Section 80IA(10):The main issue in the appeals was the disallowance of the assessee's claim for deduction under Section 10B of the Income Tax Act, 1961, which was restricted by the Assessing Officer (A.O.) by invoking the provisions of Section 80IA(10). The assessee, a joint venture company, claimed deductions for its export sales to its joint venture partner, APAG, Germany. The A.O. alleged that the profits shown were more than ordinary profits due to the close connection between the assessee and APAG, leading to an arrangement that produced more than ordinary profits. The A.O. compared the profits of the years under consideration with the base year (A.Y. 2002-03) and found substantial increases, which he attributed to deliberate underreporting of costs and overstatement of profits.The assessee challenged this, pointing out several errors in the A.O.'s calculations, including incorrect computation of raw material costs and failure to account for increased capacity utilization and cost reductions. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, noting that the A.O.'s conclusions were based on erroneous appreciation of facts and incorrect calculations. The CIT(A) found that the increase in profits was due to legitimate factors such as higher capacity utilization, reduced raw material costs, and better production processes. Consequently, the CIT(A) directed the A.O. to allow the full deduction under Section 10B.2. Transfer Pricing Adjustments:For the assessment years 2004-05 and 2005-06, the A.O. made TP adjustments related to the remuneration received by the assessee for rendering clinical trial services to APAG, Germany. The A.O. referred the matter to the Transfer Pricing Officer (TPO), who identified a comparable company with a higher profit margin and proposed adjustments. The CIT(A) deleted these additions, following his own order for A.Y. 2002-03, where similar adjustments were deleted. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's functions were more of a coordinator/facilitator, and the profits were exempt under Section 10B, negating any benefit from charging higher mark-ups.3. Validity of Reassessment:The Revenue challenged the CIT(A)'s action of canceling the reassessment made by the A.O. under Section 143(3) read with Section 147 for A.Y. 2003-04. However, given the Tribunal's decision to uphold the deletion of the entire addition on merits, the issue of the validity of reassessment became academic and was not adjudicated.Conclusion:The Tribunal upheld the CIT(A)'s orders, deleting the additions made by the A.O. by restricting the claim of the assessee for deduction under Section 10B and also deleting the TP adjustments. The appeals of the Revenue were dismissed.