TaxTMI 
TaxTMI 
2012 (6) TMI 13
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....the grounds of appeal raised by the appellant. 2. Ground No. 1 reads as under:- 1. That the learned Assessing Officer erred in law and on facts in disallowing Legal and Professional Expenses of Rs. 24,00,000/-for the proposed expansion of the appellant's business, by holding that the same were pre-operative expenses of a capital nature. 2.1. Facts in brief as emerged from the corresponding orders listed herein above were that the Appellant company is a Manufacturer and Trader of Pharmaceutical goods, diagnostic kits, medical instruments etc. A return of income for the year under consideration i.e. A.Y. 2006-07, the year under appeal, was filed declaring total income at Rs. (-) 42,70,55,684/-, however, income declared U/s 115 JB at Rs. 148,01,16,388/-. It may not be out of place to mention that the said return was later on revised on two occasions and this fact has duly been recorded by the A.O. by referring the revised figures of the income declared. 2.2. About this ground the observation of the A.O. was that under the head 'Pre-operative Expenses' the assessee has charged to revenue a sum of Rs. 4 Million, details as under:- "Particulars Capitalised Revenue ....
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....ide of the revenue it was argued that if an expenditure is for initiation of business or for the extension of the business then capital in nature. Reliance was placed on Digvijay cement company 159 ITR 253 (Guj). Reliance was also placed on Assam Bengal Cement 27 ITR 34 (SC) and JK chemicals 207 ITR 985 (Bom). 2.6. We have heard both the sides. For the sake of brevity and considering the length of arguments advanced in respect of the other grounds we consider it proper not to reproduce all those arguments of Ld.AR to decide this ground. Otherwise also both the sides have basically relied either upon the submissions already made or the orders of the Revenue authorities. We have studied the adversary case laws cited by the rival sides. On the basis of the study we have arrived at a conclusion that the issue is; whether the impugned expenditure was incurred for setting up a new 'business' or for setting up a new 'unit' for similar type of business already in existence. Undisputedly the assessee had incurred the legal expenditure to set-up a manufacturing unit at Uttaranchal in the F.Y. 2002-03. The said project could not be started, resultantly it was decided for the year under con....
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....epreciation u/s.32 and liable to be disallowed as business revenue expenses. 3. That the learned Assessing Officer erred in law and on facts I making an addition of Rs. 1,35,91,171/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s.32 and liable to be disallowed as business revenue expenses. 3.1. These two grounds are hereby clubbed and to be decided together. Both these grounds relate to a single issue of treating the impugned expenditures by the AO as 'capital expenditure', however, the appellant has claimed the expenditure(s) as 'revenue expenditure'. In respect of "Product Registration Expenses"(ground no. 2) it was noted by the AO that under the head 'Marketing Expenses' an amount of Rs. 2,68,03,226/-was debited which was related to the "Product Registration Expenses". It was explained that the pharmaceutical products requires registration from Government Drug Regulatory Authority, therefore, the said expenditure was incurred. It was also explained that the pharmaceutical goods could not be exported to other countries unless and until the products are approv....
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....xports. They have also rejected an another plea that the said expenses represented the reimbursement of expenses. The argument of the appellant was that services of the overseas associate concerns was towards product registration expenses and those expenses were reimbursed. According to DRP since the goods could not be exported to those countries unless the product is registered, hence the assessee has acquired a benefit of enduring nature and the nature of marketing rights to those countries. The action of the AO was affirmed. 3.4. We are dealing Ground No. 3 simultaneously due to the similarity in the nature of the issue i.e. whether the expenditure in question is 'capital expenditure' or 'revenue expenditure'. The assessee has debited 'Trade Mark Registration Fees' at Rs. 37,92,606/ and 'Patent Fees' at Rs. 1,25,49,880/. In respect of 'Trademark registration fees' the explanation of the assessee was as under; -- "As regard details of 'Trade Marks & Registration Fees', we are enclosing herewith, copy of the said account for the year under assessment, marked as Annexure No.-21. The Assessee Company carries on the business of manufacture and sale of pharmaceuticals which are ....
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....n was made and the depreciation was worked out at Rs. 27,51,315/- and the net differential amount of Rs. 1,35,91,171/- was added. 3.7. The assessee's contention before DRP was that no intangible asset such as trademark or patent was acquired but only fees was paid for the registration. However, the action of the AO was affirmed. 3.8. Learned counsel Mr. Patel has stated that a pharmaceutical company can sell its product only after obtaining registration and that the expenditure was incurred for the running of the business therefore revenue in nature. That is why the ' Product registration' expense was grouped under ' Other marketing expenses'. For allowability u/s. 37 of the Act case law relied upon were : i. Videsh Sanchar Nigam 81 ITD 456 (Mum.) ii. Vodafone Essar Gujarat 38 SOT 51 (Ahd.) iii. Comsat Max Ltd. 29 SOT 436 (Del.) iv. Core Health Care 308 ITR 263 (Guj.) v. Bombay Steam Navigation 56 ITR 52 (SC) About 'Trademark & Patent' fees the contention was that the products are branded with distinctive trade mark so the assessee has exclusive rights and others are prevented for making use of such patented in....
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....ground we have examined the case laws cited by both the sides. It is noticeable that the assessee has not obtained any new product or acquired any new trademark or acquired any new patent rights. The products were stated to be in existence and nothing new has been acquired or purchased by the assessee. The expenditure has enabled the assessee to run the existing business smoothly. Under the facts as narrated to us it is wrong to suggest that an asset either tangible or intangible was acquired by the assessee. The assessee is already in the business of manufacturing of pharmaceutical products. The assessee also carries on scientific research work. For the protection of the result of the research the assessee has to get the patent registered. Rather it is fallacious to presume that an intangible asset was acquired. Enduring benefit is not the only criteria. An enduring benefit has to be coupled with the acquisition of an asset. 3.11. In the case of Shri Digvijay cement [supra] the assessee has incurred expenditure for obtaining a feasibility report for setting up a shipyard. The said expenditure having been incurred with the view to bring into existence an advantage by creating an....
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....y held that such an enduring benefit may not tantamount to rendering of capital expenditure. [DCIT v. Core healthcare 308 ITR 263 (Gujarat)]. A very identical case law has also been cited pronounced by the Hon'ble Supreme Court in the case of CIT v. Finley Mills Ltd. 20 ITR 475 and the opinion expressed was that an expenditure incurred in registering for the first time its trademark, then by registration the owner is merely absolved thereafter from obligation to prove his ownership of trademark. As per the Hon'ble Court the expenditure is neither for the creation of an asset nor an advantage for ever. We therefore hold that this precedent has direct application on the present issue, therefore following the same and considering the totality of the factual matrix, we hereby allow the claim. Resultantly, Ground Nos.2 & 3 are allowed. 4. Ground No.4 reads as under:- 4. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 13,42,49,052/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s.35(2AB) in respect of Clinical Trial and Bio-equivalence Study. 4.1. Revenue officer has not....
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....ture on scientific research on in-house research and development facility as approved by the prescribed authority." Since the expenditure on clinical drug trials and regulatory approval is an integral part of the Scientific Research carried out by the duly approved in-house research and development facility of our company, the expenditure incurred on it is very much eligible for deduction u/s.35(2AB) of the Act. We are enclosing herewith, a copy of 'Clinical Trial Expenses A/c' marked as Annexure No.-5. We are also enclosing herewith, a copy of account of 'Bio-study expenses' incurred in our PTC R&D unit in Ahmedabad, marked as Annexure No.-6." However the AO has held that the enhanced deduction is available on expenditure on scientific research on in-house 'Research & Development' as approved by the prescribed authority as in Sec. 35(2AB)(1), reproduced in the order. According to him as per the language of this section clinical trial has to be in-house, otherwise the use of this terminology in this section would become redundant. It is a settled position of law that no word used in the statute is redundant. The AO has concluded that the clinical trial expenses and bioequival....
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....rvised by appropriate regulatory authorities. All studies that involve a medical or therapeutic intervention on patients are required to be approved by a supervising ethics committee before permission is granted to run the trial. About "Bioequivalence" it is informed that in pharmacokinetics this term is used to assess the expected biological equivalence of two preparations of drug. If two products are bioequivalent, it means that they would be expected to be same. In determining bioequivalence between two products i.e. commercially-available brand product and to-be-marketed generic product, pharmacokinetic studies are conducted whereby each of the preparations are administered to volunteers, generally healthy individuals but occasionally in patients. Ld. A.R. has drawn our attention on page 27 of the paper book where the party wise details of Bio-study research expenses are mentioned. In that list places mentioned are Navi Mumbai, Ahmedabad, Hyderabad, Chennai, Bangalore. There is also party wise details of clinical trial research expenses of Canada and USA. Pages 28 to 47 contain approvals or grant of extensions by The Drug Controller (India) for Bioequivalence Study. Pages 49 on....
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....Ld. Mr. Gupta has further argued that the Explanation only defines the term, "expenditure on scientific research". According to him, such expenditure is allowable only when related to "in-house" research. Even Ld.DR has contested that the bio-equivalence studies are neither clinical trial nor scientific research. In response to the applicability of "principle of consistency" Ld.DR has responded that the "law of resjudicata" is not applicable on tax proceedings, reliance placed on Mahendra Mills 36 ITR 350 (S.C.) and Hider Leather 101 ITR 61 (Guj.). 4.5. We have heard both the side and carefully perused the law applicable in the light of the compilation filed and explanation tendered. For the promotion of scientific research so as to give a boost to such activity the Hon'ble Law makers have introduced this section. Further considering the importance of "clinical drug trial" as a part and parcel of the scientific research as also the obtaining of approval from regulatory authority; in their prudence; considered the same as a part of research. It was brought into the Statute through an Explanation, reproduced below for reference:- Sec. 35(2AB)(1) Where a company engaged in the b....
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....ed the term "in-house" which can be termed, in the present context, that by utilizing the staff of an organization or by utilization of resources of the organization if a research is conducted within the organization; rather than utilization of external resources or staff; then it can be called as in-house research. To further elaborate; say for an example a ship is built in-house in a dock-yard does not mean that all the component have to be made within the four-walls of a ship-yard. An in-house job is that when a job is done within the organization and not by any other organization. The Corporates thus depend upon their own Research Development to be an "inside-job". To innovate new products such Corporates feel that "inside-job" is more dependable. Therefore, an internal research is distinguishable from external research. For doing internal research there can be a possibility to mobilize some external resources. But that external mobilization is only a part of the entire in-house research. 4.8. If we closely examine the language used in section 35(2AB)(1) its says, quote "incurs any expenditure on scientific research on in-house research and development facility", unquote. Th....
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....roduction of Explanation the scope of "expenditure on scientific research" was defined which is required to be in relation to drug and pharmaceutical and thus include expenditure incurred on clinical drug trial. In the compilation, the assessee has placed several approvals through which the Directorate General of Health Services has accepted the bio-equivalence report of the studies in respect of new drugs form the assessee's laboratory. One of the approval is from The Drug Controller General (India). Like wise, Directorate General of Health Services (Drug trial section), Nirman Bhavan, New Delhi has informed that the said Directorate continued to accept the protocols and the report of the studies conducted by the assessee's laboratory. Before us, there was a recognition of renewal of scientific and Industrial research issued by the Government of India, Ministry of Science and Technology. The Ministry of Science and technology has extended an approval as R&D company u/s.80-IB(8A) of the I.T. Act. Number of such approvals and acceptance of reports submitted in respect of new drugs are placed on record. Even before us, it was argued that in the case Claris Life Sciences reported at 2....
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.... following case laws:- Sl. No(s). In the case of..... Reported in.../ITA No... 1. Gujarat Power Corporation ltd. Tax Appeal No.1587 of 2009 dated 28-03-2011 2. Godrej & Boyce Mfg. Co. Ltd. 234 CTR 1 (Bom.) 3. Winsome Textile 319 ITR 204 (P&H) 4. Shapoorji Pallonji 318 ITR 417 (Bom.) 5.3. Ld.AR has also placed reliance on an unreported decision of Hon'ble Gujarat High Court pronounced in the case of CIT v. Gujarat Power Corporation (supra), wherein it was held as under:- "Having thus heard learned counsel for both sides and having perused the orders on record, we find that in the present case assessee had sufficiently explained its investment for borrowed funds pointing out that loan was obtained in assessment year 1997-1998 and its majority of the investment for tax free security were made before the said period. Only a small portion of investment was made subsequently. Assessee had demonstrated that it had other sources of investment and that therefore, according to assessee no part of the borrowed fund could be stated to have been diverted to earn tax free income. When CIT(Appeals) and tribunal both on fac....
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....ed as 328 ITR 81 (Bom)]. In this judgement at the end, the Hon'ble Court had recapitulated the conclusion and pronounced that a finding is required that whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied that the expenditure claimed by the assessee pertained to the said exempted income. Rather, the Hon'ble Court was very specific that in case, if no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. But the Hon'ble Court has also pointed out the importance of Rule 8D of the I.T. Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub-sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001, however Rule 8D was....
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....rtunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion : 74. Our conclusions in this judgment are as follows ; (i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1); (ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxab....
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.... legal pronouncement. Specially the pronouncement of the Hon'ble Bombay High Court was not available at that time, hence, the Assessing Officer's assessment order was devoid of merits as also the law applicable. Now we have got certain guidelines, though can not be said to be exhaustive or complete, but on these lines, the Assessing Officer is expected henceforth to compute the correct disallowance, needless to say after providing an adequate opportunity of hearing to the assessee. Therefore, the matter is restored to be decided afresh in the light of this precedent, hence this ground No.5of the assessee may be treated as allowed but for statistical purposes. 6. Ground Nos.6 & 7 read as under:- 6. That the learned Assessing Officer erred in law and on facts in restricting the deduction u/s.80IC in respect of Baddi Unit to Rs. 45.92 crores as against the appellant's claim of Rs. 116.48 crores. 7. That the learned Assessing Officer erred in law and on facts in restricting the deduction u/s.80IB in respect of Goa Unit to Rs. 17,80,758/- as against the appellant's claim of Rs. 91,15,766/-. 6.1. Both these grounds have common issue as well as mutually argued by Special Couns....
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....espect of the computation of deduction u/s.80IC for Baddi Unit, AO has admittedly described that certain expenditure, such as, manufacturing expenses and depreciation were the actual expenses incurred by the Unit itself and it was a direct cost incurred at the Baddi Unit during the year. However, the marketing expenses, corporate expenses, interest and financial charges were the indirect cost not incurred at the Baddi Unit during the year but by the Head Office and those were Debited to P&L A/c of this Unit in proportion to the sales ratio. The basis of allocation, as noted by the A.O., was the Baddi Sales over the Total Sales of the Company. For Marketing Exp. it was 34.60% of sales ratio and for Corporate Expenses it was 15.20%. A chart was reproduced by the AO in this regard and on that basis it was observed that the direct cost allocated for working out the profits were the manufacturing cost incurred during the year and the depreciation of the assets directly used in the said Unit. The other expenses; namely, marketing expenses, corporate expenses and interest expenses which were incurred by the Head Office were allocated on the sales ratio basis. The AO has also compared that....
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....e price paid by the assessee for those products was although inclusive of the cost of raw-material, packing material, manufacturing expenses, taxes, etc. plus a reasonable amount of profit of the said manufacturer, but even then the price was lower than the selling rate charged by Baddi Unit. The AO has compared the purchase cost incurred on P2P basis with the production cost and selling rate from Baddi Unit and thereupon he has worked out that the average selling rate was higher of Baddi Unit. As per the tabulation made by the AO, undisputedly the assessee used to earn a good margin of profit when purchasing the goods from manufacturers of those goods on P2P basis. In some of the products (for e.g. at Sl.No.1 of the chart; namely, OCID-20-CAP) the purchase cost on P2P basis was 4.27, however, average selling rate by the assessee was 30.10 for F.Y. 2003-04 and likewise for F.Y. 2004-05 the purchase cost on P2P basis was 4.28 and the average selling rate was 30.46.The AO has thus computed the overall percentage of profit in respect of the said 27 products, which were stated to be now manufactured in Baddi Unit. For F.Y. 2003-04, the assessee's percentage of profit was 81%(apx.) and ....
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....f profit of about 80% in respect of those 27 products, however, after the Baddi Unit was started, the profit of margin was increased upto 86% of the said Unit. As per AO, after the setting up of the manufacturing Unit at Baddi, the assessee has earned a further profit of 6% more. Thereafter, the AO has further elaborated the impact of declaring additional profit that it was just for the purpose of claiming higher deduction u/s.80IC, which according to him was escalated due to non-allocation of some of the cost incurred by the assessee-company. The AO has devoted few paragraphs (i.e. para- 8.26 to para-8.31) in respect of (i) marketing net work, (ii) selling cost, (iii) distribution cost, (iv) administrative work, (v) brand value, etc. The AO has discussed that such costs which were handled by other divisions of the assessee-company have not been allocated to this unit. According to him, when the goods are transferred from Baddi Unit to the Marketing Division for selling the products, it is the manufacturing cost and a reasonable amount of profit which should have been charged. The reasoning given by the AO, for e.g. is as under:- "8.26. Thus, this additional profit is the only p....
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...., on that point of time, as per AO, for those products consisted the (i) profit from manufacturing of the product which was taken by P2P supplier, (ii) profit derived from brand value of the product and (iii) profit derived from marketing network of those products. The AO has then invited attention on the provisions of section 80IC and opined that the profits and gains of an eligible business is the only source of income of the assessee. He has referred section 80IC(7) r.w.s.80IA(5), so that the profits of the eligible undertaking is to be computed as if such eligible business is the only source of income. His conclusion was that the sale price of the products manufactured at the Baddi Unit should be the cost of the production plus a reasonable amount of profit which should have been charged, however, the average sale price was escalated by claiming profit derived on sale of products manufactured by Baddi Unit which according to him, the alleged huge profit was not correct for the purpose of claiming the deduction u/s.80IC of the IT Act. Relevant paragraph No.8.34 is reproduced below:- "8.34 As per section 80IC(7) r.w. S.80IA(5), the profits of the eligible undertaking are to be....
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....sale price and not the Baddi unit. According to AO, as far as the sale price in the hands of Baddi Unit was concerned, the sale price must be recorded at arm's length price for internal transfer and not the ultimate sale price. 6.8 He has given an another reasoning and wanted to analyze the issue from yet an another angle. According to him, the assets, such as, brand value and marketing network are the assets owned by the assessee- company as a whole organization. Those assets were not owned by the said Undertaking, i.e. Baddi Unit. Those brands were acquired prior to the setting up of Baddi Unit. The profits of the assessee-company were on account of three reasons; viz. (i) maufacturing assets, (ii) brand assets and (iii) marketing assets. Out of the three, only the manufacturing assets was owned by the said Undertaking, i.e. Baddi Unit. Hence the profit only to the extent of the "manufacturing profit" could be said to be derived from the Baddi Undertaking, which according to AO, was eligible for deduction u/s.80IC of IT Act. For this proposition, reliance was placed on Rolls Royce PLC v. DDIT 19 SOT 42 and Liberty India v. CIT 317 ITR 218 (SC). The AO has then also discussed t....
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....Rs. 3,03,85,888/-. It is seen that the assessee has shown book profits of 30 million against turnover of 96 million for this unit, which works out to 31.35%. This unit also owns only manufacturing assets. Other assets in the form of brand value as well as Marketing Network are owned by the other divisions. Following the same rationale as in the case of Baddi unit, it is held that the profits eligible for deduction u/s.80IB are only the manufacturing profits. As has been held above, the manufacturing profits are about 6% of the turnover. Thus, following the same rationale as in the case of Baddi unit for which deduction u/s.80IC is allowed, the working of amount allowable u/s.80IB for this unit is as under: Turnover of the unit 96431000 Profits @ 6% 5785860 Add book Depreciation 725000 Less Income Tax depreciation 575000 Profits eligible for deduction u/s.80IB 5935860 Amount to be allowed @ 30% 1780758" 7.1. As far as the opinion of the DRP is concerned, the assessee has raised the ground that the AO was not justified in reducing the claim of deductions respectively u/s.80IC and 80IB i....
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....ver of the Baddi Unit i.e. at Rs. 11,94,79,365/- and the deduction u/s.80IC has accordingly been restricted by the AO to Rs. 11,94,79,365/- as against the deduction of Rs. 116.48 crores claimed by the assessee." 7.3. Likewise, in respect of the other ground pertaining to 80IB claim, the action of the AO was approved in the following manner:- "9.3. It is seen that the AO has restricted the assessee's claim of deduction u/s.80IB of Rs. 91,15,766/- to Rs. 17,80,758/- for the same reasons as discussed in the case of Baddi Unit. The AO has worked out the manufacturing profits of the said unit at 6% of the turnover following the same rationale as discussed in the case of Baddi Unit. Since we have upheld the action of the AO in determining the manufacturing profit of the Baddi Unit at 6% of the turnover, the AO's action in restricting the assessee's claim for deduction u/s.80IB in respect of Contrast Media Plant at Goa from Rs. 91,15,766/- to Rs. 17,80,758/- is accordingly confirmed." 8. From the side of the appellant, ld. ARs Mr. Mukesh Patel and Mr. Hitesh Gajaria appeared and stated that the provisions of section 80IC provides for deduction in respect of "any profits and gains....
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....Court in the case of Liberty India (supra) and attempted to justify the theory that only the profit derived from the manufacturing activity can be said to be derived from eligible Undertaking. In this context, the AO has referred to the concept of "Segment Reporting" under the Indian Accounting Standards (IAS) by the ICAI. Applying this concept, the AO has attempted to justify his segregation of profits. Mr. Patel has pleaded that it needs to be pointed out that the concept of "Segment Reporting" deals with the nature of business and not the nature of any specific activity within the business, as sought to be interpreted by the AO. Even the decision of the Supreme Court refers to "each of the eligible businesses constituting a standalone item in the matter of computation of profits" and does not contemplate the computation of profits from segregated activities of the eligible business as has been done by the AO. He has further submitted that it is pertinent to point out that five products (out of the 27 products) manufactured at Baddi comprise of the ATEN family have in fact contributed to nearly 34% of the total sales and profits of the Baddi unit (referred a Statement). This Bran....
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.... 431(SC) 3. CIT v. Vegetable Products Ltd. 88 ITR 192 (SC) 4. CIT v. Simpson & Co. 122 ITR 283 (Mad) 5. Janak Dehydration (P) Ltd. v. ACIT 134 TTJ (Ahd) (UO) 1 6. Khinvasara Investment (P) Ltd. v. Jt. CIT [2008] 110 ITD 198 (Pune) 7. ITO v. Kanchan Oil Industries Ltd. [2005] 92 ITD 557 (Kol.) 9. From the side of the Revenue, Special Counsel Mr. G.C. Srivastava has been engaged to argue these two grounds. He has opened his argument with this pleading that the profits and gains of an eligible business, for the purposes of determining the quantum of deduction under that sub-section be computed as if such eligible business is the only source of income of the assessee. Where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee and the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if t....
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....T. Act. Ld. Counsel has quoted section 80IC(7), wherein it is provided that the provisions contained in sub-section(5) and sub-sections (7) to (12) of section 80IA shall apply to eligible undertaking for the purpose of this section. Therefore, he has drawn our attention on the provisions of section 80IA(5) of IT Act for the legal proposition that the profits of an eligible business shall for the purpose of determining the quantum of deduction be computed as if such eligible business is the only source of income of the assessee during the previous year. He has therefore argued that the only source of income should be taken into account and no other resources or factors of income are required to be taken into account for the purpose of determining the eligible profit. To emphasize his point of view Mr. Srivastava has again drawn our attention on the provisions of section 80IA(8) of IT Act that where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods held for the purposes of any other business are transferred to the eligible business, in either case, the consideration for such transfer as recorde....
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.... of the eligible Unit, i.e. Baddi Unit, (refer Page No.87 of the paper-book). Ld. DR has said that sales to the tune of Rs. 1,19,13,22,749/- were recorded for the accounting period ended on 31.3.2006. He has pleaded that if the said Unit was to sale its products on stand alone basis, then the said Unit which was only two years old could not fetch such high sale price. The said Unit has shown high profit at Rs. 1,16,82,91,400/-. The goods manufactured by the said Unit were transferred to the marketing division of the assessee-company and the sale price was noted by the Baddi Unit as per the final sale price of the product. But the fact is that the marketing divisions and the C&F are involved, therefore the sales are realized by the main marketing division. He has thus pleaded that the profit derived from "marketing function" cannot be dragged to the manufacturing unit for the purpose of claiming deduction u/s.80IC. The Special Provision is confined to certain Undertakings, as defined in the Statute, and such eligible undertakings are entitled for the deduction of the profit of such undertakings only. He has again drawn our attention that the only source of income should be the eligi....
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....s better to elucidate that the I.T. Act has only defined 'income' (Sec. 2(24)) as well as 'business' (Sec. 2(13)) but not the term "profit and gains". However, the section we have to deal with i.e. Sec. 80 IC revolves around the term 'profits and gains'. As per section 2(13) 'business' includes trade, commerce or manufacture. In auxiliary, as per section 2(24) 'income' includes (i) profits and gains. An 'income' has to have a component of 'profits & gains' but all type of 'profits & gains' may not be an 'income' for tax purpose under the Act. The section in controversy i.e. Sec. 80 IC of the Act is embedded with both these terminology, reproduced verbatim :- 80IC (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section(2), there shall, in accordance with and subject to the provisions of this section, be allowed , in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section(3). 10.2 The 'business' is prescribed in sub-section (2) in the following manner : (2) This section applies to any undertaking or enterprise....
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.... money expenditure and may fetch less value. Therefore, in the processing department it is not possible to segregate the two components to determine the segregated margins. Keeping this accounting principle in mind, we revert back to the language of section 80IC which says that a deduction is permissible of such profits of a specified Undertaking engaged in manufacturing of certain article or thing. The business of the said enterprise/concern should be manufacturing of article or thing and the profit therefrom is eligible for deduction u/s.80IC if that profit is part and parcel of the gross total income. As noted hereinabove, profit is the difference between the purchase price and the cost of production along with the cost of bringing the product to market. This basic principle of accountancy, as appeared, have been adopted by Baddi Unit because as per Profit & Loss account, cost of material, personal cost and general expenses, corporate expenses were reduced from the sale price to arrive at the "profit before tax" i.e. Rs. 116,82,91,400/-. 10.3 It is not in dispute that for Baddi Unit the assessee has maintained separate books of accounts and therefore drawn a separate profit a....
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....marketing activities carried out in India and, therefore, chargeable to tax in India. The facts of that case were altogether different and there was a finding that undisputedly there was a PE in India and as per Indo-UK DTAA the income has to be taxed in India. An another fact was that there was no separate account of the assessee's India operation and the AO had found that on the basis of global accounts the profits were determined on sales. In that case, marketing was said to be the primary activity for earning profit. The profit was directly due to operation in India. In that context the word "attributable" was considered and then it was held that such part of the income as it was reasonably attributable to the operations carried out in India is taxable. The expression "business connection" was also considered and then it was found that it will include a person acting on behalf of a non-resident and carried on certain activities is having business connection. A business connection has to be real and intimate and through which income must accrue or arise whether directly or indirectly to the non-resident. On those facts, since it was found that R&D activities were carried out by ....
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....could be said to be in respect of marketing network and brand of the product related expenses. The AO has not complained about the allocation of expenditure as made by the assessee while computing the profit of the Baddi Unit. Once the assessee has itself taken into account the related expenses to arrive at the net profit, then it was not reasonable on the part of the Revenue Department to further reallocate those expenses by curtailing the percentage of eligible profit. 10.6 From the side of the Revenue, ld. Special Counsel has argued that in terms of the provisions of section 80IA(5) the deduction is to be computed as if such eligible business is the only source of income of the assessee. According to him, the manufacturing profit was the only source of income and that alone should be accounted for in the P&L account to claim the deduction u/s.80IC of the Act. Ld. DR has explained that as per the view of the A.O. up-to 80% of the profit was the result of efficient marketing net work plus due to the brand name of the company. Only 6% was the manufacturing profit, per A.O. It is true that section 80IC does recognized the provisions of section 80IA. Refer, Sub-section (7) of sect....
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....we have seen that the profit of an undertaking is always computed as a whole by taking into account the sale price of the product in the market. 10.7 The Ld. AO has suggested that the assessee should have passed entries in its books of account by recording internal transfer of the product from Baddhi Unit to the head office marketing unit and that too at arm's length price. From the side of the appellant an argument was raised that what should be the arm's length price in a situation when a product is ultimately to be sold in the open market. Whether the AO is suggesting that an imaginary line be drawn to determine the profit of the Baddi Unit at a particular stage of transfer of products. Definitely a difficulty will arise to arrive at the sale price as suggested by AO on transfer of product from Baddi to head office. What could be the reasonable profit which is to be charged by the Baddi Unit will then be a subject of dispute and shall be an issue of controversy. On the contrary, if the sale price is recorded at the market price, which is easily ascertainable, that was recorded in the Baddi Unit account, the scope of controversy gets minimal. Rather, the intense contention of ....
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.... section operates is that where one eligible business is transferred to any other business. We again want to emphasis that the word used in this section is "business" and not the word "profit". We can hence draw an inference by describing these two words and thus have precisely noted that 'eligible business' has a different connotation which is not at par or identical with the "eligible profit". The matter we are dealing is not the case where business as a whole is transferred. This is a case where manufacturing products were sold through C&F in the market. Even this is not the case that first sales were made by the Baddi Unit in favour of the head office or the marketing unit and thereupon the sales were executed by the head office to the open market. Once it was not so, then the fixation of market value of such good is out of the ambits of this section. If there is no intercorporate transfer, then the AO has no right to determine the fair market value of such goods or to compute the arm's length price of such goods. The AO has suggested two things; first that there must be inter-corporate transfer, and second that the transfer should be as per the market price determined by the A....
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....mentation is required, then Revenue from sales to external customers are reported in the segmented statement of profit and loss. In an accounting system, an intra-company sale between divisions or units is not regarded as Revenue for the purpose of such financial reporting. As per the Accounting Standards an Enterprise Revenue ignores in house-sales that represent Revenue to one segment and Expense to another. In this connection, the AO has discussed the Hon'ble Supreme Court decision pronounced in the case of Liberty India 317 ITR 218 (SC). The AO wanted to justify his attempt of segmentation on the basis of the theory that only the profits derived due to manufacturing activity can be said to be derived from eligible undertaking. It was contested by AR before us that the "segment reporting" is about the segregation of business and not about the segregation of any specific activity. In the case of Liberty India (supra) it was observed that the IT Act broadly provides two types of tax incentives, namely, investment linked incentives and profit linked incentives. The Court was discussing Chapter VIA which provides incentive in the form of tax deductions to the category of "profit lin....
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....at in the case of the respondent who is a resident in British India all his income, no matter where it arose, within British India or without British India, would be chargeable to excess profits tax just in the same way as it chargeable to income-tax under the Indian IT Act. The whole of his income arising in Raichur has legitimately been taxed under that Act. In that decision also, the word "business" was defined, i.e. business includes any trade, commerce or manufacture. It has also been said that all businesses, to which the said law applied, carried on by the same person shall be treated as one business for the purpose of the said Act. The question was about the manufacturing activity and it was contended that if a man is a manufacturer as well as a seller of goods, then in his case the term "part of a business" means carrying on all the two activities together and therefore constitute the part of the business. One of the Hon'ble Judges has said that the activities which the assessee carried on at Raichur was certainly a business of the assessee. On one hand, it was argued that the accrual of profit must necessarily be at the place where the sale proceeds are received or realiz....
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....ourt as cited by the Special Counsel Mr. Srivastava. At the outset, we want to place on record that the entire issue before the Hon'ble Supreme Court was in respect of third proviso to section 5 of EPT Act. The said proviso was duly a reproduced in para-40 of the order and for ready reference typed below:- "Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State, and where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business." The point for consideration was that whether on those facts the third proviso to section 5 could be invoked. The manufacturing activity of making ground-nut oil was carried out at Raichur (Hyderabad) which was treated as a separate business within the meaning of the said proviso and thereupon it was claimed as exempt being carried out within the territorial jurisdiction of Indian State. So the ....
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....the assessee. That all the operations of the Raichur business are not carried on in Bombay. Therefore, the profits that would be deemed under this section to accrue or arise in Bombay will only be the profits which may reasonably be attributed to that part of the operations carried on in Bombay, that is to say, to sale of part of its oil in Bombay. In this context, an observation was made that a trade is completed at a place where a business transaction is closed. Profits of a business are undoubtedly not "received" till the commodity are sold and they are ascertained only when the sale take place. This aspect has not been doubted or challenged even in the said order. But in the said order the question was that if a part of a business consisted of manufacturing activity and that activity can be segregated so as to compute the yield profit, then whether such profit accrue only at the place where the manufacture are sold. To answer this question, the Hon'ble Court has commented in para-49 that there was no express direction as to apportionment in the third proviso to section-5 of EPT Act. The opinion expressed was very specific that a profit can accrue in respect to that part of a bu....
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....disturb the method of accounting of the assessee regularly followed in the normal course of business. It is true that otherwise no fallacy or mistake was detected in the books of accounts of Baddi Unit prepared on stand alone basis through which the only source of income/profit was the manufacturing of the specified products. We therefore hold that the AO's action of segregation was merely based upon a hypothesis, hence hereby rejected. These two grounds Nos.6 & 7 are allowed. 11. Ground No.8 reads as under:- That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 23,81,922/- as upward adjustment on international transactions under the provisions relating to Transfer Pricing. 11.1 The matter was referred u/s.92CA of the IT Act to the TPO and vide an order u/s.92CA(3) dated 18/09/2009, he has recorded the international transactions of the assessee as reported in Form 3CEB. It was noted that the assessee-company had paid "service charges" @ 10% mark-up to M/s. Zydus Healthcare (U.S.A.) LLC. The nature of services were stated to be mainly in respect of product registration services. Besides, assessee has made reimbursement of expenses incurre....
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....sement of expenses for product registration. It was also an admitted position that mark-up of 10% was not granted to these two AEs. The explanation of the assessee was that before any pharmaceutical company could sell the product in USA it is essential to obtain registration from US Food & Drug Administration (FDA). The Zydus (USA) LLC had a qualified person on Board. Otherwise the work carried out by Zydus LLC was a zero risk administrative operation. In fact, it was a non-business operation which did not have any profit motive. A distinction was described to the TPO that the product registration charges as reimbursed to Zydus (USA) LLC, i.e. AE, was not engaged in independent business. Whereas no product registration charges were paid to other AEs they being engaged in independent business, therefore, there was no question of payment of any mark-up charges. However, the said claim was not accepted by the TPO and he has demonstrated as follows:- Clause 13(a) Clause 13(b) Clause 13(c) Zuydus Healthcare (USA) L.L.C., U.S.A. (Zydus LLC) Reimbursement of expenses incurred on behalf of the assessee for product registration 3,09,64,194 Zydus Healthcare S.A. (Pty.) L....
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....bsp;Customer Services India (P) Ltd. v. Asst.CIT Delhi ITAT (2009) 30 SOT 486 (Del) 4. SAP Labs India (P) Ltd. v. ACIT Bangalore ITAT ITA No.418/Bang/2008 & Others.. 11.6 From the side of the Revenue, ld.DR Mr. Gupta stated at the outset that a reasonable relief of 2% mark-up has already been allotted by the DRP and, therefore, no further relief should be granted. Certain decisions of the Tribunal have also been quoted as follows:- Sl. No(s). In the case of..... ITA No(s)... 1. DCIT v. M/s. Deloitte Consulting India Pvt. Ltd. 1082 & 1084 /Hyd/2010 for A.Y. 2004-05 (cross appeals) dated 22/07/2011 2. M/s. Marubeni Inida Pvt. Ltd. v. Addl. CIT 809/Del/2009 & Others for A.Y. 2002-03 dated 18/03/2011 3. M/s. Bayer Material Science P. Ltd. v. Addl. CIT 7977/Mum/2010 for A.Y. 2006-07 dated 16/12/2011 11.7 Having heard the submissions of both the sides, we have noticed that the main contention before us is whether to grant the benefit prescribed u/s.92C(2) of IT Act. The assessee has furnished the following calculation:- Particulars Amount (INR) Total cost A 29,774,020 Add mark-up @ 10% paid by c....
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....ons this ground No.8 be treated as allowed for statistical purposes. 12. Ground No.9 reads as under:- That the learned Assessing Officer erred in law and on facts in making the following adjustments while computing the book profits u/s.115JB. a. Provision for Doubtful Debts - Rs. 1,19,45,326/- b. Expenses disallowed u/s.14A - Rs. 1,18,84,177/- 12.1 The AO has noticed that the assessee had shown income u/s.115JB at Rs. 149,11,23,887/-. However, it was noticed that "provision for doubtful debt" were not added to the book profit. As per the provisions of section 115JB, Explanation-1 the assessee was asked to explain why the same was not added. The only submission of the assessee was that the issue as raked up by the AO is controversial, hence not added voluntarily. Being not satisfied, the provisions of doubtful debts was added to the book profit. 13. Having heard the submissions of both the sides, we are of the considered view that now this issue stood settled in favour of the Revenue by the order of the Hon'ble Delhi High Court pronounced in the case of Indo Rama Synthetics 320 ITR 340 (Del.). Respectfully following this precedent, we here....
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....tion of Rs. 5,50,000/- u/s.80G instead of Rs. 27,57,600/- (correctly allowable pursuant to increase in the Gross total Income), without any discussion in this regard in the assessment order. 14.1 The ld.AR has stated that this ground in fact is consequential in nature, hence not to be contested presently. In view of this statement, the ground being not contested is hereby dismissed. 15. Ground No.11 reads as under : 11. That the learned Assessing Officer erred in law and on facts in not allowing the benefit of carry forward of MAT credit of Rs. 1,65,98,236/-relating to A.Y. 2000-01 u/s.115JAA in the tax computation as per the notice of Demand u/s.156. 15.1 As far as this ground is concerned, the orders of the Revenue Authorities are not very elaborate, however, in our ample opinion, the scheme of levying the Minimum Alternative Tax (MAT) on zero companies was introduced by the Finance Act, 1996 with effect form 1.4.1997. A new section 115JAA was also inserted to provide for a tax-credit scheme by which MAT paid can be carried forward for set off against regular tax payable during the subsequent years, subject to certain conditions. In a decision of ITAT Chennai Bench pr....