TaxTMI 
TaxTMI 
TaxTMI 
2015 (3) TMI 983
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..... The Dispute Resolution Panel, Hyderabad, passed order under section 144C(5) on September 30, 2010 and Assessing Officer finalised the assessment order on November 1, 2010. This order is the subject-matter of present appeal. 2. The assessee raised 20 grounds in its appeal. Grounds Nos. 1, 18, 19 and 20 are general in nature and does not require any adjudication. In the course of appellate proceedings the assessee has not pressed ground No. 4 which is on claim of weighted deduction under section 35(2AB) of the Act. 2.1. We have heard learned counsel and the learned Departmental representative in detail and also perused the chart placed on record with reference to the grounds and submissions including the paper book relevant for considering the issues under appeal. The learned Departmental representative relied on the facts as stated in orders and the findings of the Assessing Officer/Dispute Resolution Panel. Various grounds are decided as under : 3. Grounds Nos. 2 and 17 : These two grounds are as under : "Ground No. 2. The Assessing Officer's order giving effect to the Assessing Officer and the learn....
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....idering the rival submissions, we are unable to agree with the contentions raised by the assessee for considering the second revised return filed on December 24, 2009. While admitting that the order of the Dispute Resolution Panel in rejecting the assessee's contention is not correct, in the sense that draft assessment order cannot be taken as a final assessment order, the assessee's contention that the second revised return should be considered as a valid revised return cannot be accepted. Even though, the reason for filing the second revised return is due to merger of Perlecan Pharma Pvt. Ltd. with the assessee-company effective from January 1, 2006, vide order of the hon'ble High Court of Andhra Pradesh dated July 7, 2009 and a second revised return was prepared and filed giving effect to the said order, the provisions of the Income-tax Act does not permit the second revised return filed beyond the time-limit provided to be treated as a valid return of income. The provisions of section 139(5) are as under : "(5) If any person, having furnished a return under sub-section (1), or in pursuance of a noti....
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....al gain arising on sale of Goa unit of the assessee results in short-term capital gain or long-term capital gain. 4.2. Briefly stated, the assessee was having a manufacturing unit at Goa. During the year, the unit was sold to M/s. Watson India Ltd. for a consideration of Rs. 75.62 crores. The assessee filed the computation of capital gains in the original return as under : "Capital gains in the original return of income : Sale Consideration Rs. 7,50,22,200 Less : Cost of Acquisition Rs. 1,60,60,688 Rs. 5,89,61,512 (B) Sale of business and commercial right at Goa Sale consideration Rs. 10,42,82,630 Less : Cost of acquisition - Rs. 10,42,82,630" 4.3. Subsequently, the assessee filed the capital gains in the revised return of income as under : "Capital gains in the revised return of income : Gross sale consideration received Rs. 75,61,88,546 Less : Net worth of the unit Land Rs. 1,60,60,688 WDV of block of assets + Additions made during the year Rs. 24,49,49,785 Rs. 26,10,10,563 Long-term capital gains Rs. 49,51,77,983" 4.3.1. The date of sale to M/s. Watson India Ltd. was on Octobe....
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.... counsel, in addition to relying on the decision of the hon'ble Delhi High Court in the case of CIT v. Hughes Escorts Communication Ltd. [2009] 311 ITR 253 (Delhi) also relied on the co-ordinate Bench decision in the case of Dhoomketu Builders and Development (P.) Ltd. v. Addl. CIT [2014] 2 ITR (Trib)-OL 172 (Delhi) and in the case of Jitendra Mohan v. ITO [2007] 11 SOT 594 (Delhi). He also referred to the principles rendered by the hon'ble Supreme Court in the case of Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325 (SC). The learned Departmental representative relied on the orders of the Dispute Resolution Panel. 4.5. We have considered the issue and examined the relevant facts and case law. In this case, the assessee made the application to Goa Industrial Development Corporation on October 28, 2002, for allotment of plot in the industrial area being developed by Goa Industrial Development Corporation. There is no dispute with reference to date of lease registration being of July 31, 2003. The recitals of the agreement are already extracted in the assessment order but suffice to say that the assessee paid an amount of Rs. 2,05,660 as security deposit at th....
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....p; "7. Section 2(13) provides the definition of expression 'business' according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Learned counsel for the assessee has referred to a large number of decisions noticed above. Similarly, the Assessing Officer has made a reference to the decision of the hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case [1997] 227 ITR 172 (SC). In various authoritative pronouncement of the hon'ble Supreme Court and the hon'ble High Court, meaning and scope of expression, business has been propounded. It is not necessary to recite and recapitulate of those decisions but on the strength of them it would be suffice to say that word 'business' had a wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn an income. Section 3 of the Income-tax Act, 1961 defines 'previous year'. Previous year means the financial year immediately preceding the assessment year. The proviso appended to thi....
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.... and before the commencement of the business, all expenses during the interregnum, would be permis sible deductions under section 10(2)."' (emphasis supplied) 4.6. Adverting to the present facts of the case, we find that the assessee can be considered as setting up the business only from the time it got allotment of the land, if not ready to commence manufacturing activity, and not before. In this case, even though actual manufacturing activity started much later, the setting up of the business can be considered only when the assessee is in position to occupy land to start the unit in Goa, Goa Industrial Development Corporation, as considered by authorities. The principles discussed above in fact consider the setting up much later. But the authorities even gave a benefit in considering the date of taking possession of land while deciding the date of set-up. Therefore, we are of the considered opinion that date of setting up of the business activity, as accepted by the Assessing Officer and the Dispute Resolution Panel as on April 10, 2003, does not require any modification, even though lease deed was entered into subsequently and unit was set up much later. In view of this, t....
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....th the amounts and claimed both of them as expenditure. 6.3. Invoking the Explanation to section 37, the Assessing Officer considered the claim of interest as penal in nature and accordingly disallowed the amount, wholly allowing overcharged amount paid to the (Drugs (Prices Control) Order). It was the contention of the assessee that NPPA vide its order dated July 14, 2005 asked to pay an amount of Rs. 28,49,85,605 towards recovering of excess price on sale of the product along with interest. Therefore, both the amounts are allowable as deduction. The assessee relied on the decision of the hon'ble Allahabad High Court in the case of Kamlapat Motilal v. CIT [1976] 104 ITR 783 (All) on the proposition that if the principal is a permissible deduction, interest payable thereon would also be a permissible deduction. However, the Dispute Resolution Panel did not agree on the reason that interest was charged for violating the provisions of Central Act and therefore penal in nature. The assessee relied on the submissions before the Dispute Resolution Panel and also the decision of the co-ordinate Bench of the Tribunal in the case of A. P. Paper Mills Ltd. v. Asst. CIT in ITA No. 872/H....
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....raised vide letter/order dated June 10, 1997, of the Department of Chemicals and Petrochemicals'. 10.1 Grounds Nos. 9 and 10 are the additional grounds raised in the course of present appellate proceedings vide letter dated August 9, 2007. The facts leading to the present issue are that during the previous year relevant to the assessment year 1998-99, the assessee received a demand dated June 10, 1997 from the Department of Chemicals and Petrochemicals (DCP) amounting to Rs. 1,90,43,347 towards overcharging of price in respect of the appellant's product "Betnelan Tabs sold during the period January 1995 to July 1995. The demand was revised to Rs. 1,20,42,312. Interest of Rs. 84,29,619 upto December 31, 1999 was charged on the demand at the rate of 15 per cent. per annum. Aggrieved by the DCP's order, the assessee filed a Writ Petition bearing No. 1266 of 1999 before the Division Bench of the hon'ble High Court of Bombay. The Division Bench, vide order dated February 16, 2004 upheld the stand of the DCP. The DCP, sub sequently by an order dated 17/18th May 2004, revised upwards the interest demand to Rs. 1....
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....of bank guarantee in respect of bank loan taken by Pathnet." 7.1. This ground pertains to disallowance of amount paid on discharge of bank guarantee issued for subsidiaries. The facts of the case are that the assessee furnished a guarantee in connection with the borrowing by Pathnet from ICICI Bank. The assessee held 49 per cent. stake in the Pathnet. The assessee during the year had sold its stake in Pathnet and settled the guarantee of Rs. 2,08,02,460 issued for loan taken by the joint venture with the bank. The assessee wrote off the said amount in the books by debiting to the profit and loss account as the same was not recoverable from Pathnet. 7.2. The assessee contended that Pathnet was in the business of setting up of medical pathological laboratories. The assessee has given the corporate guarantee against the loan taken by the joint venture. The assessee has commercial interest in the joint venture and the loan amount paid by the assessee is in the commercial expediency of the business of the assessee. 7.3. Regarding bad debts written off the learned Assessing Officer in his order held as under : As per ....
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....t was paid and written off by the assessee to protect its credibility in business and claimed as allowable expenditure under section 37(1) of the Act. The claim was based on the following judgments : (a) Asst. CIT v. W. S. Industries (India) Ltd. [2011] 9 ITR (Trib) 596 (Chennai) where the Income-tax Appellate Tribunal has held that amount paid on discharge of corporate guarantee given to the subsidiary company is an allowable expenditure on the grounds of commercial expediency. (b) S. A. Builders v. CIT (Appeals) [2007] 288 ITR 1 (SC) has observed the following on the principle of commercial expediency (page 8) : "The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency." (c) Pfizer Pharmaceuticals (India) (P.) Ltd. v. Dy....
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....oyee compensation and amortised over the vesting period. The assessee claimed the said expenditure as allowable expenditure. The Assessing Officer has disallowed the same contending that the expenditure is notional in nature. 9.2. It was submitted that the expenditure was incurred towards retaining the employees and hence is an allowable revenue expenditure. The same has been allowed in the assessee's own case by the Commissioner of Income-tax (Appeals) for the assessment year 2004-05. The judgment of hon'ble High Court of Madras in the case of M/s. PVP Industries (TC(A). No. 1023 of 2005) was relied along with other Income-tax Appellate Tribunal Bench orders where it has been decided that the ESOP charge made in books following the Securities and Exchange Board of India directions is an allowable expenditure. 9.3. After hearing the case, the Special Bench of the Income-tax Appellate Tribunal Bangalore in the case of Biocon Ltd. v. Deputy CIT [2013] 25 ITR (Trib) 602 (Bang) [SB] held that employee stock option plan discount (difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made....
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....ake the entire liability contingent ; (iii) However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme ; (iv) There is likely to be a difference in the quantum of discount at the stage of vesting of the stock options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the option depending on the market price of the shares then pre vailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Income-tax Act. (v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the optio....
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....x in India, the question of with holding taxes on the same does not arise at all. The Income-tax Appellate Tribunal also held that in the assessment proceedings the Assessing Officer has to necessarily come to a conclusion as to whether payments made to non-residents are liable to tax in India before making any disallowance under section 40(a)(i). The said decision was again followed by the Income-tax Appellate Tribunal in the assessee's own case in respect of assessment year 2000-01. 10.2. It was further submitted that in respect of the legal and professional charges paid to non-residents, the same being services performed outside India and payments received outside India, the same were not liable to tax as per the provisions of the Act and the relevant Double Taxation Avoidance Agreement. The Assessing Officer, however, without arriving at a definite finding as to whether the payments made to non-residents was in fact chargeable to tax in India and simply based on the ground that the assessee has not made an application under section 195(2) of the Act has jumped to the conclusion that the said payments are liable to be disallowed under section 40(a)(i). This is contrary to t....
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....nditure under section 40(a)(ia) of the Act. Under these proceedings, the Assessing Officer has to come to a definite finding whether commission paid to foreign agents was in fact chargeable to tax in India or not because that find ing depends on the determination of the total income of the assessee. Accordingly in these proceedings the Revenue cannot be heard say ing that since the assessee has not deducted tax under section 195(1), it will make the disallowance under section 40(a)(ia) of the Act. To repeat, it has to come to a definite conclusion that the income was chargeable to tax in India. 9. Of course, the Assessing Officer has held that the income was chargeable to tax in India because the payment was received in India. It is on record that the assessee had purchased demand draft favouring the foreign agents and the same were sent by post. The drafts were sent by post by the assessee itself and not at the instance of the agents nor was there such stipulation in the agreements with the agents. Same set of circumstances were there in assessment year 1994-95 in which the Tribunal held th....
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....oreign agent was taxable in India. Therefore, there was no question of deducting any tax at source on any exemption of the payment made to the non-residents. Thus, the judgment in the case of Transmission Corporation [1999] 239 ITR 587 (SC) does not advance the case of the Department in the present appeal. Finally, it may be pertinent to note that Circular No. 786 dated February 7, 2000, i.e., the same has been issued after the judgment was rendered in the case of Transmission Corporation [1999] 239 ITR 587 (SC), i.e., August 17, 1999. The facts in the assessee's case remain governed by the Board Circular and hence, in the final analysis, respectfully following the earlier order of the Tribunal in the assessee's own case, we uphold the order of the Commissioner of Income-tax (Appeals) deleting the disallowance." 10.5. The same was relied upon before the Income-tax Appellate Tribunal in I. T. A. No. 739/Hyd/07. While agreeing with the principles, the matter was restored to the Assessing Officer as Revenue had raised additional grounds with reference to payments being illegal payments under food for oil programme (Volker Committee report) in the assessment year 2003-04. In t....
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.... individual doctor service. It was submitted that the expenditure were incurred in the course of business and wholly and exclusively for the purpose of business. The Assessing Officer/ Dispute Resolution Panel disallowed the expenditure stating that the expenditure is not incurred in the course of the business of the assessee. 11.2. This issue was a recurring one having been considered by the Income- tax Appellate Tribunal in the assessment year 2003-04 in ITA No.655/Hyd/ 07 dated October 29, 2010 in assessment year 2003-04. Business promotion expenditure was stated to be payments to the doctors, hospitals in cash amount and also like gifts. The contention of the assessee was that this expenditure was incurred wholly and exclusively for the purpose of business, whereas the Assessing Officer/Dispute Resolution Panel was of the opinion that the assessee cannot explain said payments as related to business. Similar issue was examined by the Assessing Officer and the Commissioner of Income-tax (Appeals) in the assessment year 2003-04 in the above order (supra). The Income-tax Appellate Tribunal also upheld the disallowance of these items vide para-39 of the order. Accordingly, the addi....
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....ding hospital equipments like laser machines, etc. Since no satisfactory explanation was given by the assessee during the assessment proceedings, the Assessing Officer disallowed the same. The Commissioner of Income-tax (Appeals) set aside the issue to the file of the Assessing Officer with a direction to verify the nature of expenditure and disallow only that expenditure which are not incurred for the purpose of business. We do not find any infirmity in the direction of the Commissioner of Income-tax (Appeals) and the assessee is directed to substantiate its claim before the Assessing Officer. Accordingly this ground of the assessee is dismissed." Since the issue was set aside by the Commissioner of Income-tax (Appeals) to the file of the Assessing Officer to verify the nature of expenditure and disallow only that expenditure which is not incurred for the purpose of business, we also modify the order of the Assessing Officer/Dispute Resolution Panel and direct the Assessing Officer to examine the nature of expenditure and consider disallowance of expenditure which is not incurred for the purpose of business. The issue is restored to the file of the Assessing Officer. 11.4. The C....
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....g only need to be considered. In the present case the expenditure that is allocated is the expenditure in corporate office which cannot be related to any business. It has its own income like dividend, interest and operations, etc. The staff therein do not provide any direct service to any of the units eligible for deductions under sections 10-B, 80-IB etc. In view of the forgoing explanation the services that may remotely and indirectly and, at the most, possibly, give some benefit to the units and the expenditure therein need not be allocated and deducted. The similar observation was made in the Authority for Advance Rulings in the case of National Fertilizers Ltd., In re [2005] 142 Taxman 5 (AAR) interpreting the meaning of "derived from" by the hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC). Further in a Ruling by the hon'ble High Court of Delhi in the case of CIT v. S. T. Micro Electronics Pvt. Ltd. ITA No. 928/2010 it is observed that what was required to be apportioned was the common expenditure of the units and not the total expenses. 12.3. Without prejudice to the above "derived" principle, the principle of "nexus" is also requir....
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....the absence of identifying the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of turnover. Accordingly, we direct the Assesing Officer to apportion the expenditure on the basis of turnover of various units. The issue is set aside to the file of the Assessing Officer for fresh consideration." 12.6. Respectfully following the above, in this year also the matter is set aside to the Assessing Officer to re-examine the claim on similar lines. Accordingly, ground is allowed for statistical purposes. 13. Ground No. 12 is as follows : "12. The Assessing Officer and the learned Dispute Resolution Panel erred in considering the payment made to get the existing customers contracts of Falcon assigned in favour of the assessee as capital expenditure instead of revenue expenditure as claimed by the assessee." 13.1. This ground is regarding expenditure incurred towards customer contracts. During the financial year 2005-06 the assessee acquired 100 per cent. share capital of Indutrias Quimicas Falcon de Mexico (hereinafter and before referred to as "Falcon") from Roche Inter....
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....in. Suffice to say that the agreement is for purchase and sale of a business. Preamble states the M/s. Roach manages the business of Falcon and this business consist of number of third party agreements for supply of naproxen and steroids manufactured under the Falcon business, termed as "transferred business" in the agreement and the assessee acquired the transferred business. Clause 2.1 clearly states that the agreement was for purchase and sale of assets which are listed in (a) to (c). Terms also include that seller has to renegotiate contracts with the third parties to the extent of transferred business. The assessee also treated the same as purchase of intangible assets in the books. All these indicate that what the assessee purchased are intangible assets of transferred business and the Assessing Officer and the Dispute Resolution Panel were correct in treating it as capital expenditure and allowing depreciation under section 32 of the Act. We agree with the findings of authorities. Ground is rejected. Ground No. 13 is as follows : "13. The Assessing Officer and the learned Dispute Resolution Panel has ....
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....ins to disallowance of loss incurred on transfer of investment in Pathnet India (Pvt.) Ltd. (a joint venture entity). Pathnet is in the business of setting up of medical pathological laboratories. The assessee had 49 per cent. stake in Pathnet. 14.2. During the year under consideration, the assessee transferred its total stake in Pathnet. The assessee incurred loss of Rs. 4,90,00,000 on such transfer and debited the same to the profit and loss account of the year and claimed as allowable expenditure. The Assessing Officer/Dispute Resolution Panel has considered the loss arising on transfer of shares as capital in nature and has disallowed the loss claimed as expenditure not allowable under section 37. 14.3. It was submitted that the investment by the assessee in the Pathnet was a business investment. The assessee has treated Pathnet as a special purpose vehicle for entering into the business of pathological laboratories. 14.4. Without prejudice to the above, the assessee contends that as the loss has arisen due to transfer of the assessees' investment in Pathnet and as the shares in Pathnet was held by the assessee prior to its transfer, the same should be as allowed as long....
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....n Aurantis was a business investment. The assessee has treated Aurantis as a special purpose vehicle for entering into the business of pathological laboratories. Without prejudice to the above the assessee contends that as the loss has arisen due to transfer of the assessees' investment in Pathnet and as the shares in Pathnet was held by the assessee prior to its transfer, the same should be allowed long-term capital loss under the head "Capital gains". 15.3. This claim is similar to the claim made with reference to investment in Pathnet discussed in Ground No. 14 above. For the reasons stated above, this should be considered as long-term/short-term capital loss as the case may be and allowed set off or carried forward to be set off later as per the provisions of Act. This was not done by the authorities. Therefore, we allow the alternate claim of the assessee and direct the Assessing Officer to compute the same and allow benefit of set off as per the provisions of Act. Ground considered allowed to that extent. Ground No. 16 is as follows : "16. The assessee respectfully objects to the adjustment of Rs.....
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.... they are our group entities, the loans given by the assessee- company were risk free as these could have been repaid after a stipulated period. Hence, the unrated loan under BBB grade (which are with risk adjustment) adopted by the Transfer Pricing Officer/Assessing Officer is factually not tenable. It was further submitted that the Commissioner of Income-tax (Appeals)-III, in the assessee's own case for the assessment year 2004-05, has held the rate earned by company on the investments, in the form of bank deposits, should only be compared and allowed the appeal partly for that year. It was further submitted that the Income-tax Appellate Tribunal Chennai Bench in the case of Siva Industries and Holdings Ltd. v. Asst. CIT (I.T.A No. 2148/Mds/2010) decided that "once the transaction between the assessee and the associate enterprise is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to the international transaction. If this is so, then the domestic prime lending rate (PLR) would have no applicability and the international rate fixed being LIBOR would come in....
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..... On considering of the submission, the learned Commissioner of Income-tax (Appeals) re-worked out the interest on the basis of deposit at 7 per cent. by stating as under : "10.3 On due consideration, I agree with the contention of the learned authorised representative that prime lending rate cannot be adopted for determining the arm's length price of the interest receivable from the associated enterprise. Prime lending rate is the rate at which a bank charges interest to its borrowers. The appellant is not a bank or a lending institution. It is not in the business of regular lending, so as to consider and compare with a rate used by a lending insti tution. Hence, the comparison cannot be said to be between two identical or nearly identical properties. In fact, prime lending rate is the rate at which the appellant could have borrowed the money. A basis for an income cannot be compared with a basis for expenditure. The rate charged by the appellant can be compared to an interest that it could have earned on an investment, say a bank deposit, which is also risk-free. During the appeal proceedings, the learned authorise....