2026 (1) TMI 235 - AT - Income Tax

Inter-unit chilled milk transfer pricing and overhead allocation for s.80-IB(11A) deduction, denial set aside; audit verification ordered

Inter-unit transfer pricing for deduction under s.80-IB(11A) was central: applying SC guidance, the Tribunal held that where processing units lacked an ... Deduction claimed u/s 80IB - Difference between the weighted average overhead cost (of the third party vendors) and the actual overhead costs (of the 'chilling units' i.e. the eligible units of the assessee company), being included by the chilling units in the sale price of the milk transferred to its processing units - pricing mechanism adopted by the chilling units of the assessee company for the inter-unit transfer of chilled milk to its processing units - whether or not the assessee company had validly raised a claim for deduction u/s 80IB(11A) of the Act on the profit earned by its chilling units on the transfer of milk to its processing units? - HELD THAT:- As observations of the Hon’ble Apex Court M/S JINDAL STEEL & POWER LIMITED THROUGH ITS MANAGING DIRECTOR [2023 (12) TMI 417 - SUPREME COURT] we are of the firm conviction that if the processing units of the assessee company did not have the option of obtaining chilled milk from the “chilling units” of the assessee company, then in that case it would have had to purchase such chilled milk from the third party vendors (of chilled milk). In such a scenario, the processing units of the assessee company would have to purchase chilled milk from the third party vendors (of chilled milk), and thus, over and above the cost of milk would had to pay to them the weighted overhead cost, i.e., @ Rs. 3.53/- per liter. We, thus, are of a firm conviction that as the chilling units (eligible units) had supplied the milk to the processing units at “market value” comprising of, viz. (i) cost of milk and (ii). weighted average cost of overhead that was charged by the third party vendors (of chilled milk) from the assessee company, therefore, there was no justification for the A.O./ TPO, to conclude, that the chilling units had excessively charged the overhead cost to the processing units. We, thus, in terms of our aforesaid deliberations, are of a firm conviction that as the chilling units i.e., eligible units of the assessee company had carried out inter-unit transfer of milk to the processing units as per the prevailing market value, a fact which has not been dislodged by the department either during the assessment or in the course of the proceedings before us, therefore, there can be no justification in approving the view taken by the A.O/TPO, who had held arm’s length price of the interunit transfer at Rs. Nil and declined the claim of the chilling units for deduction u/s 80IB(11A) of the Act. Whether authorities below had grossly erred in law and on facts of the case in observing that the assessee had failed to submit the audited financial statements and also copies of “Form 10CCBs” of each of the chilling units (eligible units)? - As the assessee had filed profit and loss accounts and balance sheets for all its “eligible units” in a year-wise tabular form, which reflect the income and expenses attributable to each eligible unit, therefore, the statutory obligation cast upon the assessee company for claiming deduction u/s 80IB(11A) of the Act r.w. Rule 18BBB of the Income tax Rules, 1963 is found to be duly complied. We, thus, are of the considered view that as the assessee company had furnished separate reports in “Form 10CCBs” for all its eligible units, i.e., chilling centers (the fact of filing of which as observed by us hereinabove is to be verified by the AO), which were accompanied by the Profit and loss accounts, balance sheets of the said respective units, in a year-wise tabulated form, thus, it had complied with the obligation that was cast upon it for claiming deduction u/s 80IB(11A) r.w Rule 18BBB of the Income Tax Rules, 1962. As we have in terms of our aforesaid deliberations found the claim of the assessee company for deduction u/s 80IB(11A) of the Act in order, though subject to the verification by the A.O. that the “Forms 10CCB” of all the 24 units were furnished by the assessee company, therefore, we refrain from dealing with its alternative claim for deduction w.r.t its plant at “Indragi”, which, thus, is left open. Apropos the observation of the DRP that as Section 80IB(11A) of the Act contemplates deduction of the profits and gains “derived from” the eligible unit, but the assessee’s method of allocating profits based on third party costs cannot be considered as profits derived from its eligible units, we are unable to concur with the same. As the profits of the “eligible units” of the assessee company, i.e., the chilling centers form the first degree source of their eligible income, therefore, we are unable to comprehend that as to how the same does not fall within the meaning of “derived from” the said respective eligible units, as observed by the DRP. The Grounds of appeal Nos. 2 to 8 are allowed in terms of our aforesaid observations. Disallowance u/s 14A read with Rule 8D - As the disallowance u/s. 14A had been worked out by the A.O. by attributing part of the administrative expenses as having been incurred in the context of the investments made by the assessee company for earning exempt income, therefore, its claim that no such disallowance was called for in its case being devoid and bereft of any substance is accordingly rejected. We direct the A.O. to restrict the disallowance u/s.14A read with Rule 8D, to the extent of the exempt income earned by the assessee company during the subject year, i.e. Rs. 39,05,165/-. The Grounds of appeal are partly allowed as above. Justification for the A.O. to have disallowed u/s 37 - differential interest of 2% on the amount that was advanced by the assessee company at a discounted rate of interest during the preceding year to its Managing Director - HELD THAT:- Availability of sufficient interest-free funds and surplus with the assessee company, which could safely be related to the amount that was advanced to its Managing Director, there was no justification for the A.O. to have concluded that part of the interest bearing funds raised by the assessee company were diverted for advancing the loan at a discounted rate, i.e.,@ 9% to its Managing Director and work out the disallowance of the differential interest @ 2% on the amount so advanced. Our aforesaid conviction is fortified by the judgment of Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] as observed that if there were funds available, both interestfree, and overdraft/loans were also taken, then a presumption would arise that the investments made by the assessee company would be out of interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. We thus, in terms of our aforesaid deliberations, direct the A.O. to vacate the disallowance. Disallowing the assessee's claim for deduction u/s. 80JJAA - Deduction in respect of employment of new employees - AO observed that the assessee company was entitled for the deduction u/s. 80JJAA @ 30% of the emoluments paid or payable to its additional employees, and thus, worked out the same disallowing the excess claim of deduction raised by the assessee company - HELD THAT:- Though the assessee company had in its 'Form 10DA' raised the claim of deduction for the year under consideration, i.e., A.Y. 2018-19, @ 30% of the additional wages of Rs. 77,01,612/- paid/payable for the subject year, i.e., at Rs. 23,10,484/-, but had inadvertently mentioned the same in its return of income at Rs. 35,75,814/-. Also, we find substance in the Ld. AR's claim that it was entitled for the claim of deduction that was allowed by the A.O. in the immediately preceding year, i.e., A.Y. 2017-18, being the second year (out of 3 years in which the same is allowable). However, as the aforesaid claim of the assessee company will require factual verification, therefore, we direct the A.O. to re-adjudicate the issue and, after carrying out necessary verification, re-quantify the claim of the assessee company for deduction u/s 80JJA of the Act. Deduction u/s. 80IB(11A) - whether or not the assessee company had filed the audit reports in 'Form 10CCB' r.w Rule 18BBB of its 31 eligible units (as per 'Chart') regarding which it had claimed deduction under Section 80IB(11A)? - HELD THAT:- Although the fact that the 'Form 10CCBs' of the 31 eligible units that have been filed by the assessee company bear the respective acknowledgement numbers and are found to be digitally signed by its chartered accountant, thus, dislodges the aforesaid claim of the A.O., but considering the fact that the report filed by the A.O states facts to the contrary, therefore, we are of the considered view that for the limited purpose of verifying the claim of the assessee company that it had filed 'Form 10CCBs' of the 31 eligible units regarding which deduction u/s 80IB(11A) of Rs. 38,77,30,867/- have been claimed, the matter, in all fairness, be set aside to the file of the Jurisdictional Assessing Officer (JAO), who is directed to verify the aforesaid factual position regarding filing of 'Form 10CCBs' by the assessee company. In case the claim of the assessee company is found in order, then the adverse inferences drawn in the hands of the assessee company regarding its claim for deduction u/s 80IB(11A) of the Act, on the said count, shall stand vacated. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether deduction under section 80IB(11A) could be denied by treating profits of eligible chilling units on inter-unit transfer of chilled milk to processing units as artificial/notional, and by determining arm's length price of the alleged 'excess overhead' gain at nil. (ii) Whether adoption of third-party weighted average overhead rate as 'market value'/benchmark for inter-unit transfer pricing was permissible for computing eligible profits under section 80IB(11A) read with section 80IA(8). (iii) Whether statutory audit-report compliance for section 80IB(11A) (Form 10CCB for each eligible unit with unit-wise accounts) stood satisfied; and if disputed on record, whether the matter required limited remand for verification. (iv) Whether disallowance under section 14A read with Rule 8D(2)(iii) could exceed the exempt income earned during the year. (v) Whether differential interest disallowance on a concessional loan to a key employee/director was sustainable where sufficient interest-free funds existed. (vi) Whether deduction under section 80JJAA required re-quantification where the claim involved carry-forward year benefit and inadvertent mismatch between return and Form 10DA. 2. ISSUE-WISE DETAILED ANALYSIS (i)-(ii) Deduction under section 80IB(11A) for profits of eligible chilling units on inter-unit transfers; ALP and 'market value' Legal framework: The Court examined section 80IA(8) (applicable for computing eligible profits for section 80IB deductions) and the meaning of 'market value' therein, including the statutory contemplation that eligible and non-eligible businesses of the same assessee may transact, with eligible profits to be computed as if transfers were at market value. Interpretation and reasoning: The Court rejected the premise that inter-unit transfers must be at cost and cannot contain profit. It held that section 80IA(8) itself contemplates intra-entity transfers and requires profit computation by adopting market value where recorded consideration does not correspond to market value. The Court accepted the assessee's approach of using third-party vendor overheads paid by processing units (weighted average overhead rate) as a yardstick for market value for chilled milk overhead component, noting that the Department did not dislodge the correctness of the weighted average overhead rate used. On that basis, the Court found no justification to treat the eligible-unit profits as artificial/notional or to determine ALP of the 'gain' from overhead recovery at nil. Conclusion: The Court held that the eligible units' pricing based on prevailing market value (as reflected by third-party comparables used by the assessee) could not be rejected on the theory that intra-unit transfers cannot yield profits; the transfer-pricing adjustment denying the section 80IB(11A) deduction was unsustainable on merits, subject to audit-report verification discussed separately. (iii) Form 10CCB and unit-wise accounts for section 80IB(11A); limited remand for verification Legal framework: The Court examined Rule 18BBB and section 80IA(7) requirements that each eligible undertaking furnish a separate audit report in Form 10CCB accompanied by unit-wise profit and loss account and balance sheet as if the undertaking were a distinct entity. Interpretation and reasoning: On record, the assessee produced Form 10CCBs and unit-wise financials (including tabular unit-wise statements) and supported filing by affidavit and portal acknowledgements; the Revenue report asserted fewer forms were available in the system and questioned signatures/acknowledgements. The Court accepted that unit-wise statements in tabular form could satisfy the requirement of separate unit accounts, and also noted system limitations for the relevant year where downloaded forms might not visibly display digital signatures despite backend authentication. However, due to conflicting factual claims on whether all requisite Form 10CCBs were filed and traceable in the system, the Court considered it fair to remit for verification. Conclusion: The Court set aside the matter to the jurisdictional assessing authority for the limited purpose of verifying whether Form 10CCBs for all eligible units (for the relevant year) were duly filed; if verified as in order, adverse inferences on this compliance ground were to stand vacated. The substantive eligibility/market value reasoning in favour of deduction was otherwise affirmed, and alternative contentions regarding specific processing units were left open as unnecessary to decide. (iv) Section 14A read with Rule 8D(2)(iii): cap to exempt income Legal framework: The Court addressed section 14A and Rule 8D(2)(iii) (administrative expense attribution) and applied the principle that disallowance cannot exceed exempt income earned. Interpretation and reasoning: The Court rejected the argument that availability of interest-free funds eliminated administrative disallowance where the assessing authority had made disallowance only under Rule 8D(2)(iii). Nonetheless, since exempt income earned during the year was lower than the computed disallowance, the Court held disallowance must be restricted to exempt income. Conclusion: Disallowance under section 14A was directed to be restricted to the amount of exempt income earned during the year. (v) Disallowance of differential interest on concessional loan: section 37 Legal framework: The Court applied the principle that where interest-free funds are sufficient, a presumption arises that advances/investments are from such funds, making interest disallowance unwarranted. Interpretation and reasoning: On facts, the Court found sufficient interest-free funds existed to cover the concessional loan amount; hence the inference of diversion of borrowed funds was unjustified. Conclusion: The interest disallowance was directed to be deleted. (vi) Section 80JJAA deduction: re-quantification Legal framework: The Court examined section 80JJAA allowing 30% of additional employee cost for three assessment years, subject to conditions and prescribed reporting. Interpretation and reasoning: The Court accepted that the claim required factual verification because the assessee asserted an inadvertent mismatch between the figure in the return and Form 10DA and also asserted entitlement to the subsequent-year tranche relating to the immediately preceding year's eligible employee cost. Conclusion: The issue was remanded to the assessing authority for verification and re-quantification of deduction under section 80JJAA in accordance with law.