TaxTMI 
TaxTMI 
2013 (12) TMI 241
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.... Commissioner (Appeals) has passed a very detailed order after discussing and analysing the issue relating to transfer pricing adjustment, for coming to his conclusion regarding transfer pricing adjustment in favour of the assessee. Therefore, he pleaded that appeal for the assessment year 2005-06 be taken up first. The learned Departmental representative did not object to this contention of learned counsel for the assessee. 3. In the Revenue's appeal in ITA No. 4444/Mum./2011, for the assessment year 2005-06, following grounds have been raised : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the addition made by the Transfer Pricing Officer/Assessing Officer on account of sale of films amounting to Rs. 3,38,93,862, and ignoring the fact that the global average price adopted by the Transfer Pricing Officer/Assessing Officer for the U. K. and the U. S. A. is a good comparable price. 2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-....
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....n following international transactions with its associate enterprises. S. No. Name of transaction Amount (Rs.) Method 1. Sale of plain film to GPF 13,85,98,000 CUP 2. Sale of sun control film to GPIL 12,56,91,000 CUP 3. Sale of sun control film to GPF 22,71,64,000 CUP 4. Payment of commission to GPL 1,01,87,553 CUP 5. The assessee, in its report in Form No. 3CEB, has benchmarked its transactions by applying comparable uncontrolled price method, wherein average price charged to associate enterprises for sun control films and plain films have been compared with the average price for these products charged to local customers of the assessee in India. The payment of commission to those associate enterprises has also been benchmarked by applying comparable uncontrolled price method at 12.9 percent A reference was made under section 92CA(1) to the Transfer Pricing Officer (for short "TPO") by the Assessing Officer, to examine and determine the assessee's arm's length price of its transactions with its associate enterprises. 6. The Transfer Pricing Officer held that the approach of the assessee for comparing local sale pric....
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....e export prices charged to associate enterprises (who operates in the U. S. and European geographies) with the prices charged to non-associate enterprises (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it does not take into consideration geographical, economic and market differences. The associate enterprises are operating in American markets and European markets which are developed markets. In contrast to that, exports sales to non-associate enterprises are in Asian, African, Middle-East, Far East, Russia and other CIS countries which are either developing markets or not so developed markets. Hence, there are geographical differences between associate enterprises export sales and non-associate enterprises export sales. These differences are on account of market size, market location and level of competition and overall economic development of respective markets. The appellant's export prices substantially differ from country to country for variety of economic reasons and market forces, few of them are as follows : i. Availability of locally manufactured material....
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....ice. The appellant submitted that Transfer Pricing Officer's aforesaid assumption/proposition is erroneous and is devoid of market realities as it fails to appreciate that the American and the European markets in which associate enterprises operate is a distinct market geography with distinct features as compared to other countries (as a class) where non-associate enterprises operates. Merely averaging the sales to non-associate enterprises of two or three countries does not eliminate the pricing differences that exist on account of geographical and market factors. 2.11 To support its submission that there exist substantial price variation from country to country and market to market, the appellant relied on the details of non-associate enterprises export sales filed before the Transfer Pricing Officer and submitted that even the export prices charged to non-associate enterprises located in different countries differs substantially for the same product due to differences in economical, geographical and market conditions and other factors pointed out above. The appellant also relied on the judicial pronouncement in the cases of Intervet India P. Ltd. v Asstt. CIT [2010] 130 TTJ (....
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....ers in their designated territory is very nominal and in some cases even not sufficient to cover the overheads of associate enterprises which are around 20 percent to 25 percent of the landed cost of the goods sold. Operating results of associate enterprises do not justify transfer pricing adjustment : 2.14 In this regard, contentions of appellant are as follows : (a) The associate enterprises are working as distributors solely for the appellant. Therefore, the financial results of associate enterprises get affected solely on account of its transactions with the appellant. Both GPF and GPIL have been consistently either suffering losses or are making only very nominal profits. In support of this contention, the appellant furnished gross profit and net profit analysis of associate enterprises for several years since commencement of their operations. Based on this analysis, it was contended that on an aggregate basis, the gap between the prices at which associate enterprises procured products from the appellant and the price at which they sold the products does not exceed 10 percent In contrast to that, the Transfer Pricing Officer's working of transfer pricing adjustment hi....
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....competitive pricing policy. 2.16 Capacity utilisation aspect : It was further submitted by the appellant that at times in order to ensure that plants runs at the maximum capacity, books the orders even from third parties at the prices which are far below the standard list prices of the appellant, so long such sales result into 'contribution' towards the fixed overheads. It was submitted that this fact can be gathered from the comparative statement of product wise details of sales to associate enterprises and non-associate enterprises, which clearly reflects that even in case of sales to non-associate enterprises customers, prices fluctuate widely. 2.17 It was also submitted that associate enterprises have to further process the products by undertaking slitting, repackaging, labelling as per local standards and laws, etc., for which expenses are incurred by the associate enterprises. In case of sale of products to associate enterprises GPF, GPF sells and markets some of the products purchased from the appellant under its own GPF brand and trade marks, whereas the appellant's sales to non-associate enterprises customers in all other geographies are sold under the appellant's ow....
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....s generally granted by way of charging reduced sales prices and also such discount would be required to justify the commercial nature of the transaction. 2.20 Geographical adjustment : The appellant reiterated its submissions as regards geographical and markets differences and submitted that on an average a price variation always exists to the extent of 20 percent to 30 percent on account of geographical differences between the American and the European markets on the one hand and Asian, African, Far East and Middle East Markets on the other hand. It submitted that adjustment on account of geographical differences to the extent of approximately 20 percent has been judicially approved by the hon'ble Mumbai, Income-tax Appellate Tribunal in the case of Intervet India (P.) Ltd. v Asstt. CIT [2010] 130 TTJ (Mumbai) 301. 2.21 Selling and marketing cost : for making sales to non-associate enterprises, selling and marketing costs are incurred. For making sales to associate enterprises, such costs are not required to be incurred. In case of sales to non-associate enterprises the appellant needs to pay commission to intermediateries, which ranges from three percent to 10 percent, with....
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.... 2.26 The transfer pricing is not an exact science. It involves a rationale and objective analysis of all economic and commercial aspects and circumstances of each specific case to derive a fair and proper analysis. The facts and circumstances in totality need to be taken into consideration to come to conclusion on whether or not in particular case the condition of arm's length standard (or price) is satisfied. 2.27 There is force in the first contention of the appellant that while applying the comparable uncontrolled price method the approach of the Transfer Pricing Officer of comparing the export prices charged to associate enterprises (who operates in U. S. and European geographies) with the prices charged to non-associate enterprises (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it does not take into consideration geographical, economic and market differences. Under the comparable uncontrolled price method, the price of the goods or services is directly compared ....
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....at the appellant's third party exports are to different countries like Russia, Saudi Arabia, Turkey, Singapore, Argentina, Japan, etc. However, in spite of admitting that there are geographical differences and one has to take into account variations on account of geographical differences for arriving at the comparable uncontrolled price in the case of international transactions, the Transfer Pricing Officer concludes that prices charged from non-associate enterprises do reflect the international prices of products as nonassociate enterprises are based in more than one country and that the comparison of these prices vis-a-vis the price charged to the associate enterprises without any adjustment would reflect the comparable uncontrolled price. There is an apparent contradiction between the admitted facts and the ultimate conclusion. While the Transfer Pricing Officer was bold enough to enter the chopping seas of the comparable uncontrolled price method but was unable to navigate it on account of ignoring the core tenets of reasonably accurate adjustments to be made thus leading to an erroneous arm's length price computation mechanism. The Transfer Pricing Officer's assumption that si....
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....ssociate enterprises customers are in the Asian, African, Middle-East, Far East, Russia and other CIS countries. The American and the European markets where associate enterprises operate are matured, highly competitive and bigger size markets as compared to Asian, African, Middle-East, Far East and Russian markets which consists of mostly economically underdeveloped nations except some of the countries like Japan, Australia and that these markets are fragmented in nature. The market prices in the American and the European markets, which are developed and highly competitive markets, are generally lower than other markets. This fact is established from material placed on record by the appellant. For example, the table below reflects some of instances where wholesale prices of AE GPF for its US based customers itself, are lower than the sale prices charged by the appellant to its nonassociate enterprises customers : Sr. No. Product quality Appellant's non-AE prices (US$/ lakhs sq.ft) AE GPF's whole-sale price in US to unrelated customers (US$/lakhs sg.ft) 1. GRD/BLUE/GREY 20 SRC 0.35 0.26 2. GRD/BLUE/GREY 5 SRC 0.35 0.2....
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....erate, therefore, there are no directly comparable uncontrolled transactions. In these circumstances, the most appropriate way to examine the compliance of the arm's length conditions is to deduce the market prices prevailing in the concerned geographical market from the financial statements of respective associate enterprises itself, subject to adjustment for the expenses that the associate enterprises need to incur to consummate the transactions and sell the products. The associate enterprises are selling products purchased from the appellant to the third party unrelated customers. Thus, sale prices charged to such third party unrelated customers for the particular quality of the product represent comparable uncontrolled prices on aggregate basis in the respective comparable market under comparable circumstances. In this regard, perusal of statement furnished by the appellant setting out the prices at which AE GPF sold plain film products and sun control products to its third party customer and AE GPF's corresponding landed cost of those products purchased from the appellant and the gross margin earned by the AE GPF, reveals that the gross difference between the landed cost of go....
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....s prices is as high as 30 percent to 40 percent, which is entirely contrary to facts reflected from audited financial statements of the associate enterprises. Such contradiction/differences exist because the Transfer Pricing Officer has not taken same market/geography non-associate enterprises transactions as comparable transactions. 2.35 The appellant also furnished associate enterprises profitability margin statement since their inception till the relevant financial period. On a perusal of the said statement it is observed that the associate enterprises are either suffering losses consistently for the years or are earning only nominal net profit margins. Had it been the case that appellant has charged lower prices to its associate enterprises than prevailing market prices in the respective geographical market the associate enterprises would have been making significant profits year by year, rather than suffering losses or earning only nominal profits. The fact that the marginal rates of tax are higher in the U. S. A. and the U. K. also acts as a dampener in shifting profits. 2.36 It is a cliche in transfer pricing circles but none the less true that the transfer pricing is ....
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.... dated December 7, 2010, the appellant drew my attention to the fact that in some instances the Transfer Pricing Officer has compared prices charged to associate enterprises with the prices charged in highly priced solitary low volume non-associate enterprises transactions resulting into disproportionate quantum of transfer pricing adjustment. The appellant submitted that such highly priced, solitary, low volume non-associate enterprises transactions are not at all comparable with associate enterprises transactions. On perusal of details placed on record, it is noted that the Transfer Pricing Officer has compared associate enterprises transaction of sale of plain film product "GARFILM MATT (MT-12)" to associate enterprises PF of 70,601.90 kgs with a high priced solitary transaction with a Japan based nonassociate enterprises customer wherein quantity of only 4395 kgs is involved and this transaction alone has led to the transfer pricing adjustment of Rs. 50,03,428. In terms of quantity, these two transactions are not comparable at all. Hence, the transfer pricing adjustment of Rs. 50,03,428 on account of said transaction is unjustified. The Transfer Pricing Officer has compared ass....
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....ng adjustment of Rs. 17,59,974 [29,33,290/12.5 * 7.5] has been calculated on differential commission amounting to Rs. 29,33,290, which is the payment of remittance made to the associate enterprises GPIL in the financial year 2004-05 for the commission amount already debited in the books of the assessee in the financial year 2003-04, which has been reported in Form No. 3CEB, for the financial year 2003-04. This mistake needs to be rectified. On merits, it was submitted that the assessee has benchmarked its commission to associate enterprises applying comparable uncontrolled price method wherein commission to associate enterprises at 12.5 percent has been compared with commission ranging from three percent to 10 percent paid to several non-associate enterprises foreign agents of the assessee. It was submitted before the Commissioner (Appeals) that increase rate of 12.50 percent is justified on account of significant differences in the assessee's agency arrangement with its associate enterprises foreign agents. Such differences are in terms of obligation undertaken functions performed, products covered under the agency arrangement risk assumption, etc. In support of this difference, t....
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....ilding industry by ultimate end consumers. Thus, these are consumer products. IPD products are industrial products (and not consumer products) and are used as input by various industries, viz., packaging industry, electric and motor insulation industry, etc. CPD products are sold in more than 300 qualities and broadly in 80 to 90 quality categories. Each quality differs from other based on customers specific requirement, specifications, etc. For example, in case of building industry, mainly for use in window application, customer may require particular VLT percent (visual light transmission within the limit of particular country's specific parameters), particular colour, particular thickness for safety purposes, etc. IPD products are sold only in a maximum 12 to 16 qualities. In case of CPD products, substitute products are available in the market which almost looks similar as the appellant's products but performance wise it is of inferior quality. But one cannot make out these differences unless practically it has been used. IPD products are commodity products. Almost all competitors' products are alike with little variation. Resultantly, it i....
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....rtisement and promotions through second level distributors and in exhibitions. It is practically impossible to sell the consumer product without educating the consumers on product features and advantages. Consumers for such products consist of general masses. These products are sold in small quantities and cannot be sold in bulk quantities like industrial products. One should also consider the fact that generally consumer products are sold in retail outlets and for this purpose organisation, co-ordination and management of larger supply chain (such as stockist, distributor/wholesaler, retailer, etc.,) needs to be undertaken. All these involve increased level of expenses for the agent, especially when the associate enterprises agent has undertaken contractual obligation to undertake market development. On a perusal of financial statements of the associate enterprises it was observed that they did incur advertisement expenses, travel and entertainment expenses and employee salaries at considerable levels. Further, it was submitted that it is a fact that not much efforts are required for promotion of industrial products and there is no need to hunt for the potential customers for such....
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....at should be the arm's length rate of commission for associate enterprises GPIL in view of differences in appellant's agency arrangement with GPIL and with non-associate enterprises foreign agents. It is noted that in case of limited risk non-associate enterprises foreign agent also the appellant has paid commission at eight percent for industrial products, i.e., plain films. Therefore, it is not the case that increased rate of commission have been paid only to associate enterprises. In case of nonassociate enterprises also, wherever the perceived benefit from agent's activities are higher, increased rate of commission is paid as compared to normal rate of commission of five percent Considering the fact that (a) associate enterprises GPIL is a full fledged agent ; (b) agency arrangement with associate enterprises covers all types of products, (i.e., industrial product as well as consumer products) ; and (c) that there is increased scope and intensity of risk assumed and functions performed by the associate enterprises, it deserves more commission compared to limited risk non-associate enterprises agents. Hence, in my opinion, determination of the arm's length commission for associa....
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....ach of the assessee in para 3.32. He further submitted that if a method adopted by the Transfer Pricing Officer is also not correct, then best way was to compare the third parties dealing in similar case. The products are the same, therefore, the matter should go back to the file of the Transfer Pricing Officer and such third party should be considered in comparable uncontrolled price method. He further added that in the countries where associate enterprises are dealing, there are third parties who are involved in such business, the same can also be considered. Lastly, he submitted that if there are no internal and external comparables, then the most appropriate method which should be adopted is that of transactional net margin method. The learned Departmental representative further submitted that the geographical and marketing difference in the countries where associate enterprises are operating and other countries have a significant difference, then also how can the Commissioner (Appeals) delete the entire adjustment when none of the approach either of the Transfer Pricing Officer or of the assessee has been found to be acceptable by him. Regarding adjustment on account of commis....
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....ountries, which are mostly developing markets and secondly, through two subsidiary companies which are termed as "associate enterprises" and are operating in American and European markets which are developed markets. The assessee has benchmarked its international transactions with its associate enterprises by applying comparable uncontrolled price method, wherein average price charged to associate enterprises have been compared with the average export prices charged to local customers in India. The Transfer Pricing Officer has rejected the assessee's comparison of export sales charged to associate enterprises with local sales price and compared the average nonassociate enterprises export price with the price charged to two associate enterprises. The learned Commissioner (Appeals) accepted the contentions of the assessee that the Transfer Pricing Officer has failed to take into consideration the geographical, economical market differences where the associate enterprises and non-associate enterprises agents are carrying out their business activities. He also appreciated that the export price of the proceeds varies considerably from country to country and specifically in a developed m....
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....terms in a similar market conditions where these associate enterprises are operating, which he failed to do and simply accepted the trading results of the associate enterprises. Under the comparable uncontrolled price method, the price of the goods or services is directly compared with the price in uncontrol transactions under similar conditions. Internal comparable uncontrolled price would be available if the assessee or its group entity enters into a comparable transaction with unrelated party where the goods or services under consideration are same or similar. On the other hand, there could be an external comparable uncontrolled price if a transaction between two independent enterprises involves comparable goods or services under comparable conditions. The comparable uncontrolled price method also requires a very high degree of comparability with regard to the quality of products or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors. 19. Once the learned Commissioner (Appeals) found that there are so much of variables for applying either internal comparable uncontrolled prices and has not applie....
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.... 20. Now, coming to the issue of adjustment on account of commission paid to the associate enterprises, the learned Departmental representative heavily relying upon the findings of the Transfer Pricing Officer submitted that once there is a similar nature of transaction for the same product which are being dealt with by the associate enterprises and non-associate enterprises foreign agents, then there cannot be two rates for payment of commission. Payment of commission at 12.5 percent is definitely excessive and the Transfer Pricing Officer has rightly taken at five percent based on rates of commission paid to non-associate enterprises foreign agents. On the other hand, learned counsel for the assessee had submitted that the agency arrangements with the associate enterprises were entirely different from that of non-associate enterprises foreign agents and this analysis has been discussed in detail by the learned Commissioner (Appeals). He also pointed out the relevant obligations which were to be carried out by the associate enterprises which were not there in case of non-associate enterprises foreign agents. He, thus, strongly relied upon the findings and the conclusion drawn b....
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....ven by the learned Commissioner (Appeals) is set aside. In so far as the application of rate of payment of commission at 10 percent to its associate enterprises is concerned, the same is hereby upheld. Thus, ground No. 2, is partly allowed. 23. Ground No. 3, is with regard to disallowance of interest which relates to capital work-in-progress under section 36(1) (iii) for a sum of Rs. 28.52 lakhs. 24. As admitted by both parties, identical issue has been decided by the coordinate Bench of this Tribunal in ITA No. 7394/Mum./2007 and ITA No. 7687/Mum./2007, wherein the issue was restored to the file of the Assessing Officer with certain directions. 25. After going through the said order, we find that similar issue has been decided by a co-ordinate Bench of the Tribunal in the assessee's own case in ITAs No. 7394 and 7687/Mum./2007, for the assessment year 2004-05, vide order dated July 2, 2009, wherein it has been observed and held as under: "5.4 We have considered the rival submissions made by both the sides, perused the orders of the authorities below. We have also considered the paper book filed on behalf of t....
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....panies was not excessive considering the circumstances in which the commission was paid and the performance required to be made by the subsidiary companies and it was not for transferring or diverting any profit to the subsidiary companies as stated by the Assessing Officer. 2. The said Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in levying interest on the shortfall of payment of advance tax under section 115JB ignoring the submissions made by the appellant that in case of liability under section 115JB no interest can be levied for shortfall in payment of advance tax as has been held by various High Court's decisions. 27. Ground No. 1, relates to transfer pricing adjustment of Rs. 2,03,94,752, in relation to the commission paid to the associate enterprises. 28. Having heard the rival contentions and having perused the material on record as well as the findings of the learned Commissioner (Appeals) and the Assessing Officer, we find that the issue before us is identical to the issue arising out of ground No. 2, decided by us in the Revenue's appeal in ITA No. 4444/Mum./2011, in the assesse....
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....Act, 2008, with retrospective effect from April 1, 2001, and therefore, no interest under section 234C can be levied. 32. The learned Departmental representative, on the other hand, fairly agreed that in so far as the second argument of learned counsel is concerned, the same is covered by the judgment of Calcutta High Court in Emami Ltd. [2011] 337 ITR 470 (Cal). 33. Having heard the rival contentions and having perused the material on record as well as the findings of the learned Commissioner (Appeals) and the Assessing Officer, we find that in so far as the chargeability of interest under section 234B is concerned, the same is payable on failure to pay the advance tax in respect of the tax payable under section 115JB, keeping in view the law settled by the hon'ble Supreme Court in Rolta India Ltd. [2011] 330 ITR 470 (SC), wherein their Lordships have observed and held as under (page 478) : "9. The question which remains to be considered is whether the assessee, which is a MAT company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection t....
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....9 (Karn) stood affirmed. However, the Karnataka High Court has thereafter in the case of Jindal Thermal Power Co. Ltd. v. Dy. CIT [2006] 286 ITR 182 (Karn) distinguished its own decision in case of Kwality Biscuits Ltd. and held that section 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under section 115JB, it was liable to pay interest under sections 234B and 234C of the Act. Thus, it can be concluded that interest under sections 234B and 234C shall be payable on failure to pay advance tax in respect of tax payable under section 115JA/115JB. For the aforestated reasons, Circular No. 13 of 2001, dated November 9, 2001 issued by Central Board of Direct Taxes reported in [2001] 252 ITR (St.) 50 has no application. Moreover, in any event, para 2 of that circular itself indicates that a large number of companies liable to be taxed under MAT provisions of section 115JB were not making advance tax payments. In the said circular, it has been clarified that section 115JB is a self-contained c....
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....y the amendment made in the Finance Act, 2009. It is now provided that while computing the 'book profit" for the purpose of section 115JB the net profit shall be increased by the provision for diminution in the nature of any asset debited to the profit and loss account. The said amendment is retrospectively applicable from April 1, 2001. This nullifies the effect of the above Supreme Court judgment retrospectively. The disallowance so made is therefore confirmed." 35. Thus, the learned Commissioner (Appeals) has confirmed the findings of the Assessing Officer on the ground that by the Finance Act, 2009, amendment has been brought on statute in Explanation-1 clause (i) with retrospective effect from April 1, 2001, therefore, the same has been rightly added. In case of such a situation where any amount is being added as income in the computation under section 115JB, which has been brought on statute by retrospective amendment, has been dealt with by their Lordships of the Calcutta High Court in Emami Ltd. [2011] 337 ITR 470 (Cal), after analysing the provisions of section 115JB, section 234B and 234C, provisions relating to payment of advance tax and provisions of sections 207, 20....
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.... retrospective effect held that the liability to pay interest would arise only on default and is really in the nature of quasi-punishment and thus, although the liability to pay tax arose due to retrospective effect of law, the same should not entail the punishment of payment of interest. Although Mr. Nizamuddin, the learned counsel appearing on behalf of the Revenue, in this connection, strongly relied upon the decision of the Supreme Court in the case of Joint CIT v. Rolta India Ltd. [2011] 330 ITR 470 (SC), we find that in that case the question was whether interest under section 234B of the Act could be charged on the tax calculated on the book profit under section 115JA and in other words, whether advance tax was at all payable on book profits under section 115JA of the Act. The Supreme Court answered the said question in the affirmative and further held that the provisions of interest on default as provided in sections 234B and 234C would also apply. We have already pointed out that Mr. Bajoria, at the very outset, conceded that the said decision should be applied for answering the first question formulated in this appeal against his client. In our opinion, the said decision ....
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....327 ITR 305 (SC) wherein it has been decided that the deduction under section 80HHC from minimum alternate tax income is not subjected to restriction laid down by sub-section (IB) of section 80HHC." 38. After hearing both parties, we find that this ground is similar to the ground No. 1, raised by the Department ; therefore, this ground will be disposed of while deciding the Revenue's appeal in ITA No. 4418/Mum./2010, for the assessment year 2003-04, which has been dealt in succeeding paragraphs. 39. In the result, the assessee's appeal is partly allowed. 40. We now take up the Revenue's appeal in ITA No. 4418/Mum./2010, for assessment year 2003-04, vide which, following grounds have been raised : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 3,68,37,122, under section 80HHC on the book profit under section 115JB without appreciating the fact that there is no such provision in the Act to deal with section 80HHC differently if the assessee is paying tax under section 115JB. ....
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....ion in Dy. CIT v. Syncome Formulations (I) Ltd. [2007] 292 ITR (AT) 144 (Mumbai) [SB] as well as that of Glenmnark Laboratories Ltd. dated November 9, 2004. 4.4. I have perused the facts of the case and the legal position on this issue. As far as percentage of deduction allowable in each year the assessee would not be entitled to 100 percent deduction since sub-section (1) to section 80HHC introduced by the Finance Act, 2000 with effect from April 1, 2001 was specifically meant to phase out the deduction completely for the assessment year 2005-06 in which event on an application of the sub-section only a portion of the amount computed under section 80HHC is allowable for the assessment year 2004-05. This is in accordance with the decision of the Bombay High Court in Ajanta Pharma [2009] 318 ITR 252 (Bom). 4.5. However, the method of computation of deduction under section 80HHC is to be in accordance with the decisions of the Special Bench in Dy. CIT v. Syncome Formulation (I) Ltd. [2007] 292 ITR (AT) 144 (Mumbai) [SB]. The Assessing Officer is directed accordingly." 42. At the....
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.... 80HHC(1) refers to 'eligibility7 whereas section 80HHC(3) refers to computation of tax incentive. Coming to section 80HHC(1B) it is clear that after Finance Act, 2000 with effect from assessment year 2001-02 exporters would not get 100 percent deduction in respect of profits derived from exports but that they would get deduction of 80 percent in the assessment year 2001-02, 70 percent in the assessment year 2002-03 and so on. Thus, section 80HHC(1B) deals not with 'eligibility' but with the 'extent of deduction'. As earlier stated, section 115JB is a self-contained code. It taxes deemed income. It begins with a non obstante clause. Section 115JB refers to computation of 'book profits' which have to be computed by making upward and downward adjustments. In the downward adjustment, vide clause (iv) it seeks to exclude 'eligible' profits derived from exports. On the other hand, under section 80HHC(1B) it is the extent of deduction which matters. The word 'thereof' in each of the items under section 80HHC(1B) is important. Thus, if an assessee earns Rs. 100 crores then for the assessment year 2001-02, the extent of deduction is 80 percent thereof and so on which means that the princip....
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....on 115JB will cease to be a selfcontained code. In section 115JB, as in section 115JA, it has been clearly stated that the relief will be computed under section 80HHC(3)/(3A), subject to the conditions under sub-sections (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of the Explanation to section 115JB (subject to the conditions specified in sub-sections (4) and (4A) of that section) to obliterate the difference between 'eligibility' and 'deductibility' of profits as contended on behalf of the Department." 44. In view of the law laid down by the hon'ble Supreme Court, we direct the Assessing Officer to compute the deduction under section 80HHC in the light of the aforementioned judgment of hon'ble Supreme Court. Thus, ground No. 1, raised by the Revenue is dismissed. 45. The additional ground raised by the assessee in its ITA No. 4189/Mum./ 2010, as reproduced above, is hereby disposed of in favour of the assessee as the same is covered by the aforementioned judgm....
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.... we find that this issue has been restored to the file of the Assessing Officer for carrying out verification as per the directions given therein which, for the sake of ready reference, is reproduced below : "11. Ground No. 4 of the appeal reads as follows : "The said learned Commissioner of Income-tax (Appeals) erred in not accepting the claim of the appellant for deduction under section 35AB (Rs. 1,15,86,168) and depreciation under section 32 (56,40,216) aggregating to Rs. 1,72,26,384. The said learned Commissioner of Income-tax (Appeals) erred in observing that this matter has to be decided by the Assessing Officer when all the details were submitted at the time of hearing of the appeal and the question of allowability of the deduction was required to be taken by him.'" 12. The observations of the Commissioner of Income-tax (Appeals) on this issue were as follows : The Assessing Officer disallowed Rs. 1,22,18,252 but the correct amount was Rs. 1,03,85,368 being depreciation on technical know-how on the ground that no such dep....