TaxTMI 
TaxTMI 
2011 (8) TMI 620
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....at the Ld. AO grossly erred on facts & in law, in disallowing the claim of deduction under section 80-IB of the Act amounting to Rs. 5,75,01,364. 4.1 That the Ld. AO, erred on facts & in law, in disallowing the benefit of section 80-IB of the Act to the Appellant stating that Forms No.10 CCB are in the name of Joyco India Private limited (amalgamating Company) and not in the name of Wrigley India Private limited (amalgamated Company). 4.2 That the Ld. AO, erred on facts & in law, in coming to the conclusion that Joyco India Private limited ceases to exist on the date of approval of scheme of amalgamation by Hon'ble High Court of Delhi on September 08, 2006. 4.3 That the Ld. AO, erred in not appreciating that the scheme of amalgamation between Joyco India Private limited and Wrigley India Private limited became effective only when certified copy of Hon'ble High Court order approving the scheme of amalgamation was filed with Registrar of Companies, NCT of Delhi and Haryana on October 13, 2006. 4.4 That the Ld. AO, erred on facts & in law, in concluding that after amalgamation of Joyco India Private limited (amalgamating company) with Wrigle....
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....d the idea of management to claim deduction under section 80IB of the Act when auditors of both Joyco India Private limited and Wrigley India Private Limited were the same. 4.12 That the Ld. AO, erred on facts and in law in ignoring the provisions of section 80-IB(12) of the Act. 4.13 That the Ld. AO, erred on facts in stating that Appellant was disallowed the benefit of section 80-1B of the Act in earlier years for Unit II of Plain toffees, Unit III of Lollipop, Unit IV for Gumbase, Unit VI for Chewing Gum when the denial was only for Unit IV for Gumbase. 4.14 That the Ld AO, erred on facts and in law in not following the order of Hon'ble Delhi Tribunal dated December 19, 2008 in the case of Appellant for the Assessment Year 2003-04 wherein the benefit of section 80-IB was conferred to the Appellant for Unit IV for Gumbase and the only dispute was with respect to the determination of market value of the transferred goods. 4.15 That the Ld. DRP/AO, erred on facts and in law in not granting the benefit of section 80-IB of the Act to the Appellant even on the basis of Form 10CCB in the name of Wrigley India (amalgamated Company) submitted during the course of proceedi....
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....ed have completed more than 10 years, which is the statutory time limit for claiming deduction under section 80lB of the Act. 6. That on the facts and in circumstances of the case and in law, while undertaking the addition of Rs. 2,70,35,000/- the Ld. DRP 1 Ld. AO has grossly erred: 6.1 in determining the arm's length adjustment to the Appellant's international transactions from Associated Enterprises (AEs) and thereby enhancing the returned income of the Appellant by Rs. 2,70,35,000. 6.2 in rejecting the transfer pricing methodology adopted by the Appellant and by selecting CPM as the most appropriate method for determining arm's length price of the international transactions undertaken by the Appellant based on subjective presumptions. 6.3 in not appreciating the fact that the there are material differences between the domestic and export segment of the Appellant, and accordingly, the gross margins of the export and domestic transactions are not comparable. 6.4 in not appreciating the approach followed by the Appellant of separately benchmarking the international transaction relating to the contract manufacturing activity u....
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....itted that Ground Nos.1 to 3 are general in nature and do not require any adjudication. Accordingly, the same are dismissed. 4. Ground Nos.4.00 to 4.16 are related to the disallowance of the claim of deduction u/s 80IB to the tune of Rs. 5,75,01,364/-. 5. During the assessment proceedings, the Assessing Officer noted that the certificate filed u/s 10CCB certifying the deduction claim dated 10.10.2006 was in the name of JIPL, the amalgamating company, and which has ceased to exist from the date of the Hon'ble Delhi High Court order, i.e. 8.9.2006. The Assessing Officer also noted that the amalgamation has resulted in violation of provisions of section 80IB (2) regarding the formation of unit by transfer of more than 20% of assets and hence deduction under section 80IB is denied. The Assessing Officer also noted that 80IB benefit in respect of the units on account of chewing gum unit - 6, gum base unit - 4, lollipop unit and plain toffee unit were denied the benefit in the preceding years. The Assessing Officer also noted that assessee is engaged in the manufacturing and producing bubble gum, plain toffee, lollipop, deposit candy, etc. specified in the Eleventh Schedule. He....
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....gamation, all the assets, liabilities and reserves of JIPL were transferred to and vested with the amalgamated company ceased with effect from the appointed date, i.e. 1.4.2005 which is clearly mentioned in the order of the Hon'ble Delhi High Court, copy of which is placed in the paper book at page 86 to 127. He submitted that the filing of the copy of the order with the Registrar of Companies was a part of the scheme and mandatory requirement. The Hon'ble High Court directed the assessee to file the copies of the same with the Registrar of Companies within five weeks. The revised 10CCB certificate in the name of the appellant company was filed with the DRP as additional evidence. He pleaded that the copy of the same is placed at page 443 to 507 of the paper book. The deduction u/s 80IB is undertaking specific and deduction to be allowed to the amalgamating and amalgamated company in accordance with 80IB(12) of the Act. For this, he relied on the Board's Instruction No.F.No.15/5/63-IT(AI) dated December 13, 1963. A copy of which was placed at page 508 of the paper book. He further pleaded that the only amalgamated company can claim deduction u/s 80IB of the Income-tax A....
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....Since the assessee has admitted that JIPL was legally existed till 12.10.2006, thus form no.10CCB was taken in the name of JIPL and claim was made by the amalgamated company and not by the company in whose name the form 10CCB was issued for the relevant assessment year. During the relevant year, JIPL was not entitled to claim u/s 80IB since it was the 11th year of the Bubble Gum unit. He also pleaded that certificate was made in the name of JIPL but falsely the claim was made by the assessee. He also pleaded that the decision of Hon'ble High Court was dated 8.9.2006 in which the Hon'ble High Court has stated that the transferor company shall place all documents to the ROC within five weeks. Since the AR of the assessee is arguing that 10CCB was taken in the name of JIPL and since it was legally existed till 12.10.2006, he submitted that rectified certificate u/s 10CCB filed before the DRP/Assessing Officer was in the name of the assessee company. He pleaded that on the one hand, JIPL was in existent till 12.10.2006 and alternatively it also wanted to get the benefit of 80IB through backdoor on account of amalgamation, since it was itself not entitled to this claim. He plead....
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....der (page 91 of Paper Book,), has been stated to be 1.4.2005 or such other date as the High Court may direct. The assessee has been taking conflicting stands with regard to the existence of M/s Jayco India Ltd. on that date, with the idea of making unjustified claim u/s 80-IB." 8. After hearing both the sides on the issue, we decide as under ;- 8.1 During the year under consideration, one of the companies JIPL which was also wholly owned subsidiary of the parent company of the assessee engaged in the manufacturing and sale of confectionary products, like, bubble gums, chewing gums, lollipops and toffees amalgamated with the assessee company. This amalgamation was approved by the Hon'ble High Court on 8.9.2006 and also became effective from 13.10.2006 on filing the claim and the order of the High Court with the Registrar of Companies, Govt. of NCT of Delhi and Haryana. As per this amalgamation order the appointed date was 1.4.2005 which is clear from the order of the Hon'ble High Court which reads as under :- "THIS COURT DOTH HEREBY SACNTION THE SCHEME OF AMALGAMATION set forth in Schedule-I annexed hereto and DOTH HEREBY DECLARE the same to be binding on all the sh....
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....in existence till the effective date of the Hon'ble High Court order. Since claim of amalgamation was passed by Hon'ble High Court on 8.9.2006, therefore, a fresh 10CCB certificate was made in the name of assessee company and filed before the DRP. This 10CCB certificate deserves to be considered for a claim of deduction u/s 80IB of the Income-tax Act. The provisions of section 80IB(2)(ii) reads as under :- "80IB (1) ..... (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) ...... Provided that the condition in this clause shall....
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....ht of directions contained in this order as aforesaid. Thus, these grounds are also treated as allowed for statistical purposes." With regard to revenue's claim that assessee is producing articles or things specified in Eleventh Schedule, we hold that units set up in backward states specified in Eighth Schedule will not attract the applicability of Eleventh Schedule. The units have been allowed deduction u/s 80IB in the preceding years. In the result, we allow grounds of appeal related to claim of deduction u/s 80IB of Income-tax Act. 9. Grounds No.5 to 5.7 are for not allowing the benefit of carry forward of losses of amalgamated company for the period prior to the amalgamation. 10. The learned AR submitted that the Assessing Officer has held that provisions of section 72A are applicable, hence the benefit of brought forward losses or unabsorbed depreciation cannot be allowed. The Assessing Officer also held that brought forward losses and unabsorbed depreciation cannot be allowed as provisions of section 79 has triggered. The Assessing Officer also held that provisions of section 78 are applicable on the facts of the case. The Ld. DRP has appreciated the proposition ....
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....ation took place between JIAL (amalgamating company) and Wrigley India Pvt. Ltd. (assessee company). He pleaded that the provisions of section 72A triggers only when the losses of the amalgamating company are to be carried forward by the amalgamated company. Therefore, section 72A is not applicable in the assessee's case. In this case, the losses were incurred by the amalgamated company and which have been carried forward and set off in the subsequent years. The learned AR also submitted that DRP has held that the provisions of section 79 are not applicable as more than 51% of the shareholding is in the same hands. He further submitted that DRP has accepted that provisions of section 79 are not applicable to the facts of the assessee's case. The provisions of section 78 are applicable only when predecessor has losses. In the assessee's case, the amalgamating company does not have losses and hence section 78 is not applicable. He pleaded to delete the additions. 12. The learned DR pleaded that the provisions of section 72A are clearly applicable and also submitted written arguments as under : " The important facts and observations are summarise as follow: (a) he....
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....sorbed depreciation. In this case, the amalgamating company was a profit making company therefore, these provisions are not applicable. More than 51% shareholding remain in same hands which fulfills the condition laid out in section 79 of the Income-tax Act. The DRP has already held that the provisions of section 79 are not applicable to the assessee's case as more than 51% of the shares remained in the same name. Further the Hon'ble High Court has approved the scheme of amalgamation. Therefore, we are unable to agree with the observations of Assessing Officer that the amalgamation was not for genuine business purposes and it was a colourable tax device. Similarly, the provisions of section 78 of the Income-tax Act are also not applicable to the facts of the assessee's case as assessee is a company. These provisions are only applicable when there is a change in the constitution of the firm or on succession. The provisions of section 78 read as under :- "78. [(1) Where a change has occurred in the constitution of a firm, nothing in this Chapter shall entitle the firm to have carried forward and set off so much of the loss proportionate to the share of a retired or dec....
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....ss than that of the comparables. This was on the similar line of justification used by the assessee in the earlier years. 4.1 Transfer Pricing approach adopted by the assessee in A Y 2006-07: For the year under consideration the assessee has adopted a transfer pricing approach based on the profitability earned by it on an entity wide level. Herein, Transactional Net Margin method has been used by the assessee to determine the arm's length price of the international transactions undertaken by it. Based on the benchmarking study conducted by the assessee on the publically available databases, the margin (operating profit/Total Cost) of the comparable companies was determined to be 8.07% while that earned by the assessee was 3%. No adjustment for capacity utilization by the assessee has been done in this year. 5. TP approach of the Department : Assessee is selling the manufactured products both in the domestic as well as in the foreign market. Almost the entire export is to the related parties. The products are manufactured in the same factory of the assessee. Therefore, using the direct cost of production, gross profit margin of the assessee can be easily worked out. Cos....
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....ic segment the assessee also carries on additional functions on account of maintaining distribution network and also, on marketing and advertising its product. Thus, the assessee performs additional function for making sales in the domestic segment. Further, even the risk profile in both the segments was completely different. Mentioned below are the key risk which were borne by the assessee in the domestic segment, however, were very minimal in the export segment. Market' Risk: The assessee incurs huge expenditure towards marketing and advertising its product in domestic market and thus, bears risk to the extent. As far as export segment is concerned most of the products are sold to associated enterprises which does not necessitates any marketing or advertisement expenditure. Credit Risk: The dues of the assessee from its export segments are assured as most of the sales are made to associate enterprises however, in case of domestic segment the assessee is subject to credit risk. Thus the assessee operates in a relative risk free environment in its export segment as compared to domestic segment. We would like to bring to the notice of your goodself that the cost s....
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....t that related party transaction has a bearing on the assessee's margin in the case of the domestic segment and is therefore not an uncontrolled transaction for the purpose of comparison, it can very well be argued that the effect is nullified since RPT has a bearing on the export segment also. The assessee has made purchase of raw material from its AE's and the same raw material has been used for manufacturing the product for both the export and domestic segments. Accordingly, the cost being incurred by the assessee in purchase of raw materials is the same for both the segments and the impact of RPT is on both the segments equally and can therefore be ignored. Moreover the assessee has not been able to quantify the quantum of the transaction and it is not known whether related party transactions are more than 15% of the sales, the benchmark normally applied for evaluating the impact of a controlled transaction. Regarding the assesses contention that products were sold in different geographical markets which may have different purchasing power, tastes and economy which may have a bearing on the price the same are found to be without substance, The assessee has made sales....
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....f Allocation Production Volume in MT Sales Volume in MT 12,446 12,512 11,931 11,914 515 598 Actual Actual In Rs (000) Sales Less : Excise Duty Export Incentives 1,913,623 (182,574) 664 1,808,666 (182,574) - 104,956 664 Actual Actual Actual Variable Costs - Purchase of Traded Goods - Ingredients - Wrapping Materials - Labor & Benefits - Direct Manufacturing Exp. - (Stores & Spares) - Distribution & Freight - 449,707 243,060 14,157 12,506 10,021 45,577 - 474,949 217,848 13,472 10,777 9,163 45,577 - 24,758 25,211 685 1,729 858 - - Actual Actual Actual Actual Actual Actual Sub Total 925,028 771,787 53,241 Contribution 906,685 854,306 52,379 Contribution % 52.4% 52.5% 49.6% Fixed Costs - Labor & Benefits - Direct Manufacturing Exp. - Factory Overheads (Stores & Spares) - Research & Development ....
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....s further pointed out that besides economic difference and difference in geographical market, the gross margin from domestic/exports sales cannot be similar as the functional and risk profile of the assessee under these two segments are significantly different. The assessee has also submitted that the TPO has arbitrary rejected the economic adjustment for excess advertisement cost incurred by the assessee to bring it at par with the comparables companies. We have carefully considered the submissions made, the TPO's order and the relevant records. The TPO while justifying the adoption of CPM has stated that the entire export is to the related parties and the products are manufactured in the same factory. Hence, using the direct cost of the production, GP margin can be easily worked out. Cost base of the assessee is by and large with the unrelated parties. Compare to the export to the unrelated parties the import of raw material from the related party is less than 15%. It is seen that this method has been consistently used by the TPO in the last two assessment years. The TPO asked the assessee vide order sheet noting dated 13/01/2009 to show cause why the same method should no....
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....om domestic/exports sales cannot be similar as the functional and risk profile of the assessee under these two segments are significantly different The assessee has also submitted that the TPO has arbitrary rejected the economic adjustment for excess advertisement cost incurred by the assessee to bring it at par with the comparables companies. We have carefully considered the submissions made, the TPO's order and the relevant records. The TPO while justifying the adoption of CPM has stated that the entire export is to the related parties and products are manufactured in, the same factory. Hence, using the direct cost of the production, GP margin can be easily worked out. Cost base of the assessee is by and large with the unrelated parties. Compare to the export to the unrelated parties the import of raw material from the related party is less than 15%. It is seen that this method has been consistently used by the TPO in the last two assessment years. The TPO asked the assessee vide order sheet noting dated 13/0112009 to show cause why the same method should not be used in this assessment year also. We have noticed that similar submissions were made before the TPO which are d....
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....which Rs. 10.4 crores were out of exports. The raw material plus packing material consumed was of Rs. 74.2 crores and out of which the imported was of Rs. 10.7 crores which comes to 14% of the raw material consumed. The domestic sales of the assessee were to the unrelated parties. The exported goods were completely in finished form. The export of goods were made to following as under :- Wrigley Dubai (U.A.E.) Rs. 7,02,43,130/- Wrigley Spain Rs. 1,54,35,954/- And others Rs. 1,80,69,092/- Thus, majority of exports around 82% were to U.A.E. and Spain. The goods sold in domestic market to unrelated parties and the export made to related parties have been manufactured by the same raw material in the same factory. The assessee adopted the TNMM (Transactional Net Margin Method) method to determine the arms length price. The transfer pricing authority has adopted the cost plus method to work out the arms length price. 19. We have considered the pleadings of the assessee with regard to method adopted and had also gone through the order of ITAT, L Bench, Mumbai in ITA No.3557/Mum/2006 in the case of M/s. Chiron Behring Vaccines Pvt. Ltd. v. ACIT. In this case, the ITA....
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....ue is set aside to the file of the AO for fresh adjudication in accordance with law." Thus, Assessing Officer had applied the adjustment made by the TPO by comparing between the assessee's international transaction with its domestic transaction and the same is held against statutory requirement and on this basis, the matter was remanded to Assessing Officer for fresh adjudication. We have gone through the decision and from the decision, we find that the assessee has made a plea in the submissions that the comparison of the domestic margin on the domestic sales with the margin of export sales while passing the order u/s 92CA(3) is against the law and statute. In this case, the method adopted by both TPO and assessee to compute the arm's length price (ALP) was TNMM. Assessee had not demonstrated how this method was against the law and statute and it has also not been elaborated. The ITAT Bench has also not elaborated, how the comparison between international transactions with related parties and unrelated domestic transactions are not as per statutory requirement. Moreover, in this case, the method is different than the method adopted by TPO in assessee's case. The pro....
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....use (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit markup in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise" In this method, the direct and indirect costs of production incurred by the enterprises in respect of property transferred or services provided to an associated enterprise are determined and the amount of normal gross profit mark-up to such costs arising from the transfer or provision of the same or similar property or services by the enterprises or by an unrelated enterprise in a comparable uncontrolled transaction. In the assessee's case, the products which have been sold in the domestic market to the unrelated parties and exported to the related parties are produced in the same factory ....
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.... adjustments as provided in Rule 10B(1)(c)(iii). The credit risk in transaction with unrelated parties in the domestic market and the transactions to the related associated enterprises are not having any very significant difference which may materially affect the determination of the gross profit mark-up on the cost. Credit sales are also made to associate enterprises for 30 days. However, a small adjustment to profit mark-up as provided in the Rules is being made for this aspect. As regarding the claim in respect of the locations of the different related associated enterprises and different geographical market, we would like to state that the majority of the exports were made to the Middle East UAE and Spain (around 82%) where the per capita income is much higher than the India. The goods produced by the assessee are the goods which are not the necessity of life but these are the goods which are normally consumed by the middle or upper strata of the society. The per capita income of countries where these associated enterprises are located are better than India. In our considered view, the geographical location of these markets and type and size of the markets must have made rather....
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....arbor was available to the taxpayer only if the value of international transaction is within +/- 5% from the arithmetical mean. If the value of the international transaction is beyond +/- 5% from arithmetical mean, the transfer pricing adjustment has to be made from the arithmetical mean of prices as determined by the most appropriate method. When the variation exceeds 5% of the arm's length price the assessee shall not get benefit. The ITAT, Visakhapatnam Bench in the case of ACIT, Circle 3 (1) v. Essar Steel Limited, 131 ITD 22 (Visakh.) had considered the issue in the light of Board Circular and amendments by Finance Act, 2002 and held as under :- "It can be seen that the Finance Act, 2001 has inserted new sections 92 and 92A to 92F in the place of old section 92. The above said circular has been issued in order to explain the amendment from the assessment year 2002-03 onwards. Under the proviso to section 92C(2) as inserted by the Finance Act, 2001, only arithmetical mean of the prices has to be taken and the statute did not provide for any concession. Hence, considering the practical difficulties, it appears that the CBDT has issued Circular No. 12, dated 23-8-2001, ....