2018 (4) TMI 1985 - HC - Income Tax

Gujarat HC allows Section 80IB deduction on excise duty reimbursement following Supreme Court precedent in Meghalaya Steels Ltd case

PRINCIPAL COMMISSIONER OF INCOME TAX-1, Versus CADILA PHARMACEUTICALS LTD.

The Gujarat HC upheld the Tribunal's decision allowing deduction u/s 80IB on excise duty reimbursement received by a manufacturer, following SC precedent ... Deduction u/s 80IB - excise duty reimbursement granted by the Government to the assessee is not a profit derived from the assessee's manufacturing activity for which deduction u/s 80­IB is recognized - HELD THAT:- Assessee is a manufacturer and receives excise duty reimbursement which is waived by the Government of India under a scheme. Tribunal correctly relied on a recent judgment of Meghalaya Steels Ltd. [2016 (3) TMI 375 - SUPREME COURT] in which it was held that what is to be seen for the applicability of sections 80­IB and 80­IC is whether the profits and gains are derived from the business. So long as profits and gains emanates directly from the business itself, the fact that the immediate source of the subsidies is the Government, would make no difference. Also decided in Dharam Pal Prem Chand Ltd [2008 (11) TMI 231 - DELHI HIGH COURT] as held that the refund of excise duty was provided on the manufacturing activity carried on by the assessee. It was pivoted around such manufacturing activity and the assessee was therefore, entitled to deduction under section 80­IB of the Act in relation to such benefits also. This part of the question is therefore, not considered. Deduction u/s 80­IB on research and development expenditure which the assessee attributes exclusively to its noneligible units - Tribunal however in further appeal by the assessee noted that three different units were manufacturing different items. The assessee has placed before DRP the materials to contend that it had not carried out any research and development activity for formulation being manufactured by Jammu and Kashmir unit. This aspect was not rebutted by the Revenue. No specific material was quoted to disturb the assessee's detailed accounts maintained separately for each unit. It would thus appear that the assessee had canvassed before the revenue authorities and the Tribunal a specific case that formulation being manufactured at its unit at Jammu and Kashmir did not entail any research and development expenditure. Such research and development expenditure was incurred exclusively for the purpose of formulation being manufactured elsewhere. The assessee had also produced detailed accounts separately maintained for all three units giving minute details which the Tribunal accepted. This being a factual aspect, no question of law arises. This question is therefore, not considered. Disallowance of foreign currency loss - HELD THAT:- This Court in case of Commissioner of Income ­tax v. Friends and Friends Shipping (P) Ltd. [2013 (5) TMI 458 - GUJARAT HIGH COURT] CIT(Appeals) has made some observations which would prima facie suggest that there was no direct corelation between the exchange document and the precise export contract. However, such observations cannot be seen in isolation. CIT(Appeals) himself has noted that the assessee had entered into seven separate contracts with the bankers. In the case of M.G.Brothers [1984 (7) TMI 37 - ANDHRA PRADESH HIGH COURT] was concerned with a case where the assessee was carrying on business of groundnut oil and the assessee entered into forward transactions in neem oil and cotton seed oil. In that view of the matter, the Court held that it was not a hedging transaction since there was no evidence that the assessee had adequate stock of raw materials to the extent of hedging transactions. Issues Involved:1. Deletion of addition on account of corporate guarantee fees.2. Deletion of addition on account of disallowance under section 35(2AB) of the Act.3. Deletion of addition made under section 14A of the Act.4. Deletion of addition on account of disallowance of sales promotion expenses.5. Deletion of addition made under section 36(1)(iii) of the Act.6. Admitting additional ground of appeal and allowing restriction of suo-moto disallowance under section 14A.7. Deletion of addition on account of disallowance of deduction under section 80IB on account of allocation of R&D expenditure.8. Deletion of addition on account of disallowance of foreign currency loss.Detailed Analysis:1. Deletion of Addition on Account of Corporate Guarantee Fees:The court admitted the tax appeal to consider whether the Appellate Tribunal erred in law and on facts in deleting the addition of Rs.60,83,440/- made on account of corporate guarantee fees. The detailed analysis of this issue was not provided in the judgment text.2. Deletion of Addition on Account of Disallowance under Section 35(2AB) of the Act:The court admitted the tax appeal to consider whether the Appellate Tribunal erred in law and on facts in deleting the addition of Rs.4,67,54,326/- made on account of disallowance under section 35(2AB) of the Act. The detailed analysis of this issue was not provided in the judgment text.3. Deletion of Addition Made under Section 14A of the Act:The court admitted the tax appeal to consider whether the Appellate Tribunal erred in law and on facts in deleting the addition of Rs.55,64,491/- made under section 14A of the Act. The detailed analysis of this issue was not provided in the judgment text.4. Deletion of Addition on Account of Disallowance of Sales Promotion Expenses:The court admitted the tax appeal to consider whether the Appellate Tribunal erred in law and on facts in deleting the addition of Rs.10,89,29,928/- made on account of disallowance of sales promotion expenses. The detailed analysis of this issue was not provided in the judgment text.5. Deletion of Addition Made under Section 36(1)(iii) of the Act:The court referred to its previous judgment in Tax Appeal no.39/2015, which decided the issue in favor of the assessee. The Tribunal had relied on the decision of the Gujarat High Court in the case of CIT vs. Raghuvir Synthetics Ltd., where it was held that if advances were made for business purposes, then disallowance is not called for. The Tribunal concluded that the advances were given for business purposes and allowed the appeal in favor of the assessee.6. Admitting Additional Ground of Appeal and Allowing Restriction of Suo-Moto Disallowance under Section 14A:The Revenue objected to the Tribunal admitting an additional ground of appeal by which the assessee was allowed to restrict the disallowance under section 14A to Rs.5,808/-. The court noted that it is always open for the Tribunal to admit additional grounds of appeal and entertain the same as long as facts on record are available, referencing the decision in Commissioner of Income-tax v. Mitesh Implex.7. Deletion of Addition on Account of Disallowance of Deduction under Section 80IB:The issue had two elements:- Excise Duty Reimbursement: The Tribunal relied on the Supreme Court judgment in Commissioner of Income-tax v. Meghalaya Steels Ltd., which held that profits derived from business activities, including excise duty reimbursement, qualify for deduction under section 80-IB.- R&D Expenditure Allocation: The Tribunal found that the assessee had not carried out any R&D activity for the Jammu and Kashmir unit and maintained detailed accounts for each unit. This factual finding was accepted, and no question of law arose.8. Deletion of Addition on Account of Disallowance of Foreign Currency Loss:The court referred to its previous decision in Commissioner of Income-tax v. Friends and Friends Shipping (P) Ltd., where it was held that foreign exchange contracts entered into for hedging against losses due to fluctuation in foreign exchange are not speculative transactions under section 43(5) of the Act. The expenses incurred were considered allowable as business expenditure. The court found that the facts of the present case were similar and did not consider the question further.Conclusion:The court admitted the tax appeal to consider specific substantial questions of law regarding the deletion of various additions made by the Appellate Tribunal. The detailed analysis provided insights into the Tribunal's reliance on precedents and factual findings to support its decisions.