AI OCR 
TaxTMI 
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2016 (5) TMI 157
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....The Act') in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP') is illegal and bad in law. 1. That the Ld. DRP erred on facts and in law in confirming the additions/ disallowances proposed in the draft order passed by the assessing officer without judiciously considering the factual and legal objections to the draft assessment order. 2. That the DRP erred on facts and in law in not directing the assessing officer to delete various additions/ disallowance, which were squarely covered in favour of the appellant by the appellate orders for the earlier years.That the Ld. DRP erred, both on facts and in law, in confirming the addition of Rs. 238,16,00,000 by holding that the appellant's international related party transactions do not satisfy the arm's length principle as envisaged under the Act and in doing so the Ld. DRP has grossly erred in agreeing with the Ld. Transfer Pricing Officer's ('TPO') action of: 2.1 disregarding the arm's length price ('ALP') and the methodical benchmarking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of t....
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....ncluding certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; 5.6 committing factual errors in computation of the operating margin of the comparables; 5.7 making TP adjustment on total turnover including domestic sales as well as exports made to non AEs and not restricting the amount of adjustment to international transactions with AEs thereby disregarding judicial pronouncements; 5.8 not appreciating that TP adjustment cannot exceed the total profit made by the overseas AEs from the international transactions entered into with the appellant company. 6. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP has erred in making arbitrary/ frivolous statements based on conjectures/ surmises and unsound presumptions, which are not in accordance with the facts of the case. 7. On the facts and in the circumstances of the case and in law, the Ld. AO/DRP has erred in disregarding sound TP principles and judicial pronouncements in India in undertaking the TP adjustment. 8. That the Ld. AO/DRP erred on facts and in law in disallowing Rs. 1,03,33,543, being deferred employees....
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....d consequently, no part of interest expenditure was, in any case, disallowable under section 14Aof the Act. 10.3 That the AO / DRP erred on facts and in law in holding that the primary reasons for making investment was to earn exempt income, for making disallowance u/s 14A of the Act, which is in complete disregard to material put on record by the appellant. 11. That the AO/DRP further erred on facts and in law in making upward adjustment of Rs. 7,40,66,105 while computing book profit under section 115JB of the Act, without appreciating that: (a) adjustment, if any, could have only been made out of expenditure actually debited to the audited accounts; (b) the method/ formula prescribed in Rule 8D of the Rules was not relevant for computing book profit. 12. That the Ld. AO/DRP erred on facts and in law in disallowing the entire deduction of Rs. 1,36,68,21,506/ crores claimed by the appellant under sections 80-IB and 80-IC of the Act in respect of profits derived by five separate and independent eligible units. 12.1 That the AO/ DRP erred on facts and in law in denying the deduction claimed on the ground that separate balance sheet and profit and loss account were a....
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....(2AB) of the Act on the cost of assets provided to the employees working in approved Research & Development (R&D) facilities and engaged in execution of R&D activities. 14. That the AO/DRP erred on facts and in law in not adjudicating on the claim of deduction of Rs. 2,23,06,073, being the demand raised under the Drugs (Price Control) Order, 1979. 15. That the AO/DRP erred on facts and in law in not adjudicating on the adjustment of exchange fluctuations on External Commercial Borrowings, Hedging contracts in relation thereto and hedging charges to the cost of capital assets, and allowing depreciation there on as part of actual cost of the depreciable assets. 16. That the AO/DRP erred on facts and in law in adjusting book profit under section 115JB of the Act by Rs. 98,53,213 on account of provision for diminution in value of current investments written back during the year. 17. That the AO erred on facts and in law in law in charging interest under section 234B of the Act. 18. That the Ld. AO/DRP have erred in making arbitrary/ frivolous statements based on conjectures/ surmises and unsound presumptions, which are not in accordance with facts of the case. 19. Tha....
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....5, New Delhi has preferred an appeal before us raising 19grounds that are listed above. 05. Ground No 1 is general and grounds no. 2 to 7 relates to the transfer pricing issues and ground no 8 to 19 relates to corporate tax issues in this appeal. 06. Ground No.1 is raised against the assessment order dated 16.11.2012 alleging that it is illegal and bad in law. Assessee mentioned that that the order is passed without judiciously considering factual and legal objections to draft assessment order by ld. DRP. Assessee further mentioned that ld. DRP has erred in not deleting/ adjudicating/ directing on various addition and disallowances, which are squarely covered in favour of assesse by appellate orders for earlier years in assessee's own case. This ground is general in nature and as against each addition/disallowances separate grounds are raised, therefore, this ground is not dealt with by the parties before us and hence, it is dismissed. Transfer pricing issues 07. Now we proceed to discuss each of the grounds raised by the assessee on transfer pricing issues. On behalf of revenue Shri Rahul Mitra, CA, submitted detailed arguments on the issues, which were supported by his writt....
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....ort services availed 863649036 TNMM 7. Provision of technical services 76325310 TNMM 8. Technical services availed 59740808 TNMM 9. Royalties and technical fees received 559814477 TNMM 10. Contract manufacturing services availed 108636205 TNMM 11. According to the Transfer pricing Study Report (hereinafter referred to in short as 'TP Report') submitted it was mentioned that appellant is a manufacturer who is exposed to normal risk such as risk for success and failure of the business operations and on the other hand the associated enterprises are only engaged in sales and distribution activities and few on secondary manufacturing.Therefore, AE assumes lesser risk than the assesse and based on this functional analysis it was mentioned that these AEs have less complex operations and bare a minimum risk without owning any intangible property or unique asset and therefore these AEs have been selected as the 'tested party' for the purpose of economic analysis. On these premises, TP study was carried out and it was submitted that the transaction of associated enterprises are at Arm's length. 12. Ld. TPO rejected the selection of the foreign AEs as 'tested party....
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....d party for determining ALP for benchmarking international transactions following TNMM methods as the most appropriate method. Therefore, assessee is in appeal before us on Transfer pricing issues. 13. Before us on these TP grounds, Shri Rahul Mitra , CA, ld. AR submitted that ground No.2.2 of the appeal is against not accepting overseas associated enterprises as the tested partythough same being the least complex entities of the transacting parties. He submitted that these groundsmight first be heard on grounds of TP adjustment. He submitted a written synopsis and for which he referred to page no.3 of that synopsis regarding selection of tested parties. He submitted that ld. TPO has rejected the contention of the assesse for taking foreign AEs as tested party because of five following reasons:- (i) The Hon'ble Income Tax Appellate Tribunal ("ITAT"") in the case of Appellant itself for AY 2004-05 rejected overseas AEs as tested parties. (ii) The financial statements of overseas AEs (except Nihon) are for the period January to December. Financial accounts of the overseas AEs should be re-casted from December ended figures to March ended figures so that the period January to Mar....
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....ing valuable intangible and bearing significant risk compared to their AEs. For support , he referred to the revised TP guidelines of July 22, 2010 and specifically Para 3.19 of that guidelines. (c) He further referred to United States TP regulations andPara 6.3.3.1 of UN TP manual and India Chapter 10.3.1.3to support his contention that less complex entities should be selected as tested parties. (d) Therefore, he contended that selection of foreign AE as tested partyis in accordance with Indian TP regulations, OECD TP guidelines, UN Transfer pricing manual and TP regulations of United States. (e) He further submitted that as the selection of the tested party is upper most steps in the process suggested by OECD in transfer pricing comparability analysis and therefore it is first step. Therefore, selection of tested party is to be made based on the above-referredguidelines other it may give erroneous results. (f) He submitted that this view has been affirmed in decision of Development consultants Pvt. Ltd. Vs. DCIT, 115 TTJ 557 and General Motors India Pvt. Ltd. Vs. DCIT (ITA No.3096 and 3308 of ITAT Ahmedabad. He relied on decision of Mastek Ltd. and Garware Polyester where....
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.... tribunal in the assessee'sown case for earlier year has held against the assessee that foreign AE cannot be taken as tested party (b) Regarding claim of the aseesee the APA has been entered in to between the assesse and CBDT, he submitted that it is merely a negotiated agreement and cannot be relied upon for this year. (c) He further submitted that APA cannot be applied retrospectively in the present year as it is beyond the roll back period of APA, if any. He further referred to the APA stating that it is specifically applicable for AY for which it is entered in to . (d) He submitted that at Page 4 of the TPO order Para No.5 stating that no comparables are available and in absence of comparable data foreign party cannot be taken as tested party 16. In rejoinder ld., AR relied on commentary on OECD for tested parties and US TP manual. He further submitted that it is undisputed that APAP does not apply other than the year for which it is entered but the principles laid down there in are equally applicable particularly when International Transactions and FAR analysis for both the years of assessee and AES are similar. 17. On specific query from the bench, whether the FAR ana....
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....that 'the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. Thus, in a sense, the tested party would have lesser risk as compared to the other transacting party or the real entrepreneur. 22. As per the OECD Transfer Pricing Guidelines 2010, when applying a cost plus, resale price or transactional net margin method, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which....
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....ation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested part for the P2 transaction would most often be B." 25. From the above guidance certain principles emerges in selection of tested party (a) The choice available of tested party for comparability only in CUP method , TNMM and 'Other method', in other methods such as RPM and CPM choice of selecting a tested party is not available. In any case,it is not required in Profit split method. (b) The tested party normally should be the least complex partytothe controlled transactions. (c) Availability of Most reliable data of tested party and requirement of minimum adjustments is also one of the most important aspects in selection of tested party. (d) There is no bar against the selection of Tested party either Local party or Foreign party. Neither ....
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.... for regulatory approvals from foreign governments (e) Management support In the riskassumed byappellant is discussed at page no 502 to 505 of the paper book. After that page no 505 to 523 the functions performed by each of the AEs and risk assumed is discussed. It shows that the functions performed by AEs are very limited and naturally, consequent risks assumed are less. After that at page no 525 and 526 of the paper book where in it is agreed that manner in which segmentation of the AEs would be computed being December/ March year end which would be certified by the independent cost accountants. It is further provided that in case of AES are secondary manufacturers as well as low risk distributors margins would be computed separately. Therefore, APA has been agreed on the whole mechanism of computation of Alp of International transactions of the assessee. 27. It is also important 28. The issue that arises is though APA is signed for AY 2014-15 can it have any impact on the transactions for the year under appeal. According to The APA it shall apply in respect to previous year 2013-14 relevant to AY 2014-15, however principals laid down for comparability analysis in that does ....
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.... referred to as "rollback provision"). (2) The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely:- (i) the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies; (ii) the return of income for the relevant rollback year has been or is furnished by the applicant before the due date specified in Explanation 2 to sub-section (1) of section 139; (iii) the report in respect of the international transaction had been furnished in accordance with section 92E; (iv) the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and (v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule (5); (3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of an international transaction for a rollback year, if,- (i) the determination of arm's length price of the said i....
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....ssesse for AY 2004-05 it is apparent that tribunal has accepted that least complex party to the transaction should be taken as tested party. In that year due to the weakness of the TP documentation of the assesse where assesse compared the operating margin of all the overseas AEs with reference to a single set of comparables selected from around the world without any regard to the functional and geographical dissimilarities. In that set of facts, coordinate bench has held that such comparability analysis is not appropriate and therefore in absence of comparable data there was no option but to uphold the appellant as a tested party. Therefore,coordinate bench has upheld the principle thattested party should be least complex but on the facts of the case for that year on non-availability of comparable data, it is so held. In the current year, the appellant has adduced reasonably comparative data based on region and country for comparing the foreign AEs. Therefore the facts in the present year are quite distinct than the year decided by ITAT i.e. A.Y. 2004-05. In view of this, we reject the reasons assigned by ld. TPO for rejecting the selection of overseas AE as the tested party. 33.....
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....omparables etc. Hence, in the present case, it is necessary to consider an analysis that whether the comparables selected by the TPO had analogous functional profile to that of functional profile of the assessee. It is true that functional profile and assets and risk analysis was made available but that is to be correctly understood in the light of the nature of International transaction carried out by the assessee with the said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel India Pvt. Ltd v. DCIT (2011- TII-07-ITAT-DEL-TP) where the assessee stated to be engaged in the business of providing electronic data support service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the purpose of selection of comparables and the answer given was that functional profile must be first examined and after that proceeds to select the comparables. Interestingly, in the present case now before us, comparables chosen by the assessee were discussed by the TPO and those were discarded. The b....
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....as Rs. 1,58,43,923/- and for AY 2004-05 it was Rs. 1,45,77,704/-. The value of service forms approximately 6% to 7% of the Cost of Sales to TKC. HENCE, THIS Shri Rahul Mitra argued, shows that testing the margins of TKC would not serve the purpose of determining the arm's length nature of the transactions undertaken by the assessee with TKC. Hence, the recourse available to test the arm's length price of the services rendered by the assessee to TKC is to test the margins from the Indian side. In view of the discussion on tested part earlier, the assessee was selected as the tested party being least complex of the two entities. Hence, the transfer pricing analysis in this case was done from the Indian side, wherein, the margins of the assessee with respect to services provided to TKC were compared internally with services provided to other third parties in foreign market. Taking into account the divergent submissions, the Hon'ble Tribunal had recorded its findings that - "33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm's length price of the international transa....
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....h the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the test party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method." With regard to the challenges emerging in transfer pricing in India, it has been observed as under: "10.4. Emerging Transfer Pricing Challenges in India 10.4.1. Transfer pricing Regulations in India 10.4.1.1.................................................................... 10.4.1.2........................................................................ 10.4.1.3 The Indian transfer pricing administration prefers Indian comparables in most c....
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.... Mahindra in the automotive segment. 11.2.6. In this connection, we tend to recall the ruling of the Hon'ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP & 1. After due consideration of rival submissions, the Hon'ble Court had ruled thus - "16.....If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it should have considered the objections filed by the petition on merits. As a consequence of the impugned order, firstly the objections raised by the petitioner have not been decided, secondly, in view of the directions issued by the Dispute Resolution Panel, the petitioner would not be in a position to avail of the remedy of appeal before commissioner (Appeals) against the draft assessment order; and thirdly, in the light of the observation made by the dispute Resolution Panel that the petitioner has chosen to withdraw the objections, preferring any appeal against the impugned order before any forum would be an exercise in futility, as no appeal would be entertained against an order pass....
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....tly applicable to the issue under dispute. (ii) In the case of M/s. Onward Technologies Ltd (supra) as relied on by the Revenue, it is observed that the assessee, a parent company had international transaction with its AEs. With regard to IT enabled services provide to its AEs, the assessee had chosen six comparables with its foreign AEs as a tested party. The TPO had ignored the working of the assessee whereby selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon'ble Bench had, after having considered rival submissions, recorded its findings, among others, as under: "11.2.2.(On page12) So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and i....
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....ories Limited (supra) took a stand that 'If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration.' Then, the United Nation's Practical Manual on Transfer Pricing for Developing Countries had observed that "5.3.3.1...... The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration...." 11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the 'tested party' either from local or foreign party and the United Nation's Practical Manual on transfer pricing for developing countries had observed that 'It may be the local or the foreign party', we tend to agre....
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.... of the company at a discounted price to the fair market value of the share. The difference between the fair market value of the shares and the amount paid by the employee on actual exercise of option represented employee compensation expense. In accordance with the mandatory SEBI guidelines, the difference between the fair market value of the shares and the amount receivable from the employee at the time of exercise of option was debited/ charged to the profit and loss account as expenses. Therefore, the appellant claimed a deduction the scheme as amount of deferred compensation. The ld. AO did not allow holding that it is contingent liability. Further it was also stated that it is in the nature of bonus commission etc. and therefore not allowable u/s 40(a)(ia) of the Act. The ld. DRP upheld the order of the AO. Before us, it was contended that the above said amount is allowable u/s 37(1) of the Act as it is in lieu of the services rendered, as issue of ESOP is a standard method of remunerating employees. This scheme is also approved by SEBI guidelines. It is also submitted that it is not a contingent liability but the actual expenditure incurred. Further, it was submitted that is....
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....", as well as allowance and depreciation, has also been used. For example depreciation and allowances are dealt with in section 32, therefore, the parliament has used expression "any expenditure" in section 37 to cover both. Therefore, the expression "expenditure" as used in section 37 made in the circumstances of a particular case, covers an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the ld. DR that discount on shares is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra)." Further whether the ESOP expenditure is a contingent loss has also been considered in the same decision as under :- "B. Is discount a Contingent liability ? ....
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....omes obligatory on the part of the company to honor its commitment of allowing the vesting of 25% of the option. It is at the end of the first year that the company incurs liability of fulfilling its promise of allowing proportionate discount, which liability would be actually discharged at the end of the fourth year when the options are exercised by the employees. Now the question arises as to whether the liability at the end of each year can be construed as a contingent one? 9.3.3 The Hon'ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 dealt with the deductibility or otherwise of provision for liability towards encashment of earned leave. In that case, the company floated beneficial scheme for its employees for encashment of leave. The earned leave could be accumulated up to certain days. The assessee created provision of Rs. 62.25 lakh for encashment of accrued leave and claimed deduction for the same. The Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment o....
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....lier, the company would rectify or replace the defective parts free of charge. This warranty was given under certain conditions stipulated in the warranty clause. The assessee made a provision for warranty at Rs. 5.18 lakh towards the warranty claim likely to arise on the sales effected by the assessee. The Assessing Officer disallowed the same on the ground that the liability was merely a contingent liability and hence not allowable as deduction u/s 37 of the Act. When the matter finally came up before the Hon'ble Supreme court, it entitled the assessee to deduction on the "accrual" concept by holding that a provision is recognized when : "(a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation : and (c) a reliable estimate can be made of the amount of the obligation". Resultantly, the provision was held to be deductible. 9.3.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is....
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....s argument of the revenue is also rejected. In the result ground no 8 of the appeal is allowed. 43. Ground no.9 of the appeal is against disallowance of deduction of contribution of Rs. 47 lacs and Rs. 1250,000 made by the appellant to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation u/s 35/ 37 of the Act. During the relevant previous year appellant contributed this sum and deduction u/s 80G of the Act was claimed. Vide note no.13 to the computation of the income such contribution was claimed as deduction u/s 37 of the Act. Ld. AO disallowed it holding that it was not incurred for the purposes of the business and alternatively as no tax has been deducted it was disallowable u/s 40a(ia) of the Act . Ld. DRP confirmed the findings of the AO. 44. Before us, it was contested that contributions were made in the course of the business of the appellant and therefore it resulted into advantage on business carried on by the appellant and hence incurred wholly and exclusively for the purpose of the business. It was also stated that this issue is squarely covered in favour of the appellant by the decision of the Tribunal in appellant's own case in ITA 4251 and 3925/Del/20....
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....s. 77378363/- and reduced suo motto disallowance made by the appellant of Rs. 3311708/- from it and made addition of Rs. 74066105/- u/s 14A of the Act. Ld. DRP confirmed the action of the AO. Therefore, assesse is in appeal before us. 49. Before us it was contended that (a) Rule 8D was wrongly computed by Ld. AO considering the entire investment including investment which did not yield any exempt income. He should have only considered the investments, which has yielded the exempt income; if at all disallowance under Rule 8D was to be made. (b) As meager dividend of Rs. 7968/- is received and disallowance computed by Ld. AO far more in excess of dividend income which is incorrect. Assessee itself has made huge disallowance on this count which is also far more in excess of the dividend income. i.e. exempt income. (c) In absence any satisfaction with regard to suomotto disallowance already made by assessee, Rule 8D cannot be invoked automatically without recording any satisfaction by the Ld. AO that it is incorrect. For each of this contention ld. AR submitted large judicial pronouncement including that of jurisdictional high court. 50. Against this ld. DR submitted that for....
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....ection (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules. 14. The view and legal ratio expressed above is not being elucidated for the first time. The Delhi High Court in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272/203 Taxman 364/15 taxmann.com 390 has observed:- 'Scope of sub-sections (2) and (3) of Section 14A Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding....
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....n the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the asses see; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D (1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required ....
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....rej and Boyce Mfg. Co. Ltd. (supra) had referred to Section 14(2) of the Act and observed:- 'Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression "prescribed" in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straigh....
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....e Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by the Assessing Officer with reference to the accounts under Section 14(2) of the Act and Rule 8D(1) of the Rules. It was observed:- "Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made b....
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....e normal computation of Income also to the book profit of the company while working out tax payable in accordance with section 115JB of the Income tax Act. He submitted that this action of the ld. AO is erroneous. He submitted that section 14A of the act applies to Chapter IV of the Income tax Act whereas the computation of book profit is made under ChapterXIIB of the act and therefore no disallowance u/s 14A of the act which is restricted to chapter IV of the act can be made while computing book profit u/s 115JB of the act. He further submitted that the addition to the book profit vide clause No.(f) to explanation 1 also speaks about amount of expenditure relatable to any income to which section 10 applies whereas Rule 8D covers all expenditure including hypothetical disallowance. He submitted that disallowance u/s 14A of the act cannot be read into computation of books profit u/s 115JB of the Act. He further relied on decision of Hon'ble Delhi High Court in case of Pr. CIT Vs. Bhushan Steel Ltd in ITA no. 593/2015 dated 29.09.2015. He further relied on the decision of coordinate bench in Quippo Telecom Infrastructure vs. ACIT in ITA No, 4931/Del/2010. 54. Against this ld., DR re....
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....tion u/s 80IB: Rs. 9.02 crores b) New Tablet Plant - I (Ponta) - Deduction u/s 80IB: Rs. 22.06 crores c) New Tablet Plant - II- (Ponta) - Deduction u/s 80IB: Rs. 15.61 crores d) New SGC Plant (Ponta) - Deduction u/s 80IB: Rs. 37.64 crores e) New Tablet Plant - III (Ponta) - Deduction u/s 80IB: Rs. 52.35 crores In respect of the previously mentioned units, the appellant submittedthat it has maintained separate books of accounts on SAP ERP, which were duly audited and report of the auditor along with the profit and loss account of the units was filed along with the return of income. The net profits of the units were computed by (i) reducing actual direct expenses incurred at respective units; and (ii) allocating and apportioning common expenses debited at head office/research center, based on sales.During the course of the assessment, the ld. AO specifically directed the appellant to justify the claim of deduction of Rs. 136.68 crores made under sections 80IB and 80IC of the Act during the previous year relevant to the assessment year 2008-09. In response to the previously mentionedquery, submissions dated 21.11.2011, 25.11.2011, 30.11.2011 and 12.12.2011 were filed before t....
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....t it is of utmost importance to note that for the assessment years 2001-02 and 2002-03, re-assessment proceedings under section 147 of the Act were initiated in the case of the appellant and one of the reasons for reopening the assessment was for verifying deduction under section 80IB/IC of the Act, especially in context of basis of allocation of head office and research & development expenses. Further on verifying the basis of allocation of head office and research & development expenses adopted by the appellant, the assessing officer did not make any disallowance/adjustment to the claim of deduction made by the appellant under section 80IB/IC of the Act. Therefore,claim of deduction by the appellant under sections 80IB/IC of the Act has been duly examined on all relevant factors in the earlier years and on being fully satisfied, the deduction was allowed.It is, however, only in the assessment year 2008-09, that the assessing officer, for the first time, denied the claim of deduction made under section 80IB/IC of the Act on the primary ground that the appellant had failed to maintain separate books of accounts in respect of unit(s) for which deduction was claimed. In this regard, ....
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....n our attention to the judgment of the Gujarat High Court in the case of Saurastra Cement & Chemical Industries Ltd v. CIT (1979) 11 CTR (Guj) 139: [1980] 132 ITR 669 to contend that once the revenue had allowed the relief for the previous assessment year, it was not open to disturb the relief for the subsequent years without disturbing the relief granted in the initial year. Our attention is also invited to the judgment of this court in the case of CIT vs. Paul Brothers reported in [1995] 216 ITR 548 where in court was considering the issue for the assessment year 1981-82. This court took a view that for the purpose of Section80-HH or Section80-J, there is no provision for withdrawal of deduction for the subsequent year for breach of certain conditions, unless the relief granted for the earlier year 1981-82 was withdrawn. For the reasons set out earlier, we need not consider this aspect. We find no merit in this appeal and accordingly, the same is dismissed." (v) CIT v. Western Outdoor Interactive Pvt. Ltd: 349 ITR 309, (Bom) held as under: "We have considered the submissions. We find that the submissions made by Mr. Pardiwalla on the basis of the decision of this Court in the....
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.... In this regard, it will be appreciated that the units were set up in earlier years and deduction in respect of profits derived therefrom was, in principle, allowed year after year (except certain variation in the quantum in certain years) after thorough examination. In that view of the matter, the deduction claimed by the appellant calls for being allowed in the year under consideration too. c) He submitted that it is well settled proposition that if there being no change either in facts or in law, as compared to the earlier and subsequent years, the position accepted/ determined by the Department needs to be followed even on the principle of consistency. He relied on following decisions for this proposition: (i) CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC) (ii) Radhasoami Satsang v. CIT: 193 ITR 321 (SC) (iii) DIT (E) v. Apparel Export Promotion Council: 244 ITR 734 (Del) (iv) CIT v. Neo Polypack (P) Ltd: 245 ITR 492 (Del.) (v) CIT v. Dalmia Promoters Developers (P) Ltd: 281 ITR 346 (Del.) (vi) DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) (vii) CIT v. P. KhrishnaWarrier: 208 ITR 823 (Ker) (viii) CIT v Harishchandra Gupta 132 ITR 799 (Ori) (ix....
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....que batch number and related details of sales and material cost are identified based on such batch number and plant wise SKU codes. In the SAP ERP System of the appellant, the following codes are assigned to identify each and every transaction: (i) Plant Code is assigned for every Plant within each Business area; (ii) Unique batch number is assigned to each batch of packed form of medicine [i.e., SKU]; (iii) Each and every production order of medicine is assigned separate and identifiable code, based on which the entire expenses incurred to produce the medicine is identifiable; (iv) Each and every item of raw material is assigned separate and identifiable code; therefore, consumption of raw-material is identifiable; (v) Each and every product manufactured is assigned unique product code starting with "8" series; (vi) Unique packaging code is assigned starting with "3" series at the time of initiating packaging; Hence all the transactions (e.g., Costs, revenues, etc.) for each of the product at every level viz., Business Area, Plant, etc., are separately identifiable. Each undertaking of the appellant is treated as independent and separate unit based on the combination o....
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....rately capturing the transactions directly relating to the Business Unit prior to any allocable item and on the basis of the financial results generated from the ERP based software, unit wise accounts of each of the eligible units are prepared and also the non-eligible units are prepared and thereafter, the appellant ultimately consolidates and prepares its financial statements. It is further submitted that based on unit wise accounts prepared, the appellant claims deduction under section 80IB/ 80-IC of the Act, which is duly supported by certificate of the Chartered Accountant. f) He submitted that ld. AO was swayed by the facts that only common thing in the entire system is that a common ERP based accounting software is installed at the company level. He also took us to production & sales process adopted by the appellant submitted in the form of a flow chart to show that based on the unique product/batch code, the details of all transactions/entries relating to each business area or its plants are distinctly identifiable by way of a separate code, as per which profits of each unit has been arrived at. In nutshell, he submitted that financial accounts are recorded separately fro....
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....1 (Del) where in allocation of expenses based on head counts andturnover is upheld to stress that there is no bar in law for common expenses to be allocated on a scientific/ rational basis to the eligible unit. j) Therefore,he submitted it from above method of accounting followed by the assessee that itamounts to maintenance of separate books of account for each of the undertakings.He further refuted the observation of ld. AO that the appellant failed to give the true and correct profits of the undertaking merely because a trial balance was not provided when complete details of each and every transaction is maintained and profit and loss account and balance sheets are available. k) He submitted that under the provisions of section 80IB/IC of the Act, there is no provision/ requirement of maintenance of separate books of account in respect of each eligible undertaking. What is only required is that the assessee has to furnish report of a Chartered Accountant in the prescribed Form No.10CCB certifying that deduction has been rightly computed in respect of profit derived from the undertaking.Ld. AR extensively referred to provisions of section 80 IA (7) of the act, Form No 10CCB, ....
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....e SKU's sold within India are cleared from NIU's to centralized godown of the Company situated at Nangli Poona, Delhi. Thereafter, from this godown, the SKU's are transferred to stockists of the Company at respective locations in India. Thus, in essence, the NIU's (which are eligible to claim deduction under sections 80IB/IC of the Act) clear the SKU's to the company's godown for final sale to the stockists. The godown only facilitates movement of goods from NIU's for onward sales. Hence, no stock transfer takes place from one unit to the other unit. Further NIU does not recognize any amount as 'sale' in its books of accounts, until the SKU manufactured by the respective NIU is actually sold to the stockists. The NIU books the amount of sale based on price at which SKU has been transferred to the stockists from the godown. Therefore, accordingly provisions of section 80 IA (8) do not apply to the appellant. m) Further, it was submitted without prejudice and even otherwise, even if it is presumed (without admitting) that the products are transferred to another unit, then, too, such transfer has been made at arm's length, For this he relied on the Circular No.169, dated 23.6.1975 a....
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....t of the eligible undertaking along with the prescribed Form 10CCB, but it was duly filed before the Dispute Resolution panel. Further, the profit & loss account was duly filed with the assessing officer alongwith the Form 10CCB during the assessment proceedings only. The said statements were, thus, available with the assessing officer at the time of passing the final assessment order.His further argument was that Assessee has made substantial compliance, that too before the passing of the final assessment order, thereforeit was not proper on the part of the assessing officer to deny the legitimate claim of deduction on a technical ground of non-filing of balance sheet with the return of income. For the proposition that the filing the report of the chartered accountant is mandatory but filing the same along with the return of income is directory, he relied on following decisions i. CIT vs. Nagpur Hotel Owner's Association: 247 ITR 201 (SC) ii. CIT v. Centimeters Electricals (P.) Ltd.: 317 ITR 249 (Del) iii. CIT v. Axis Computers India P. Ltd.: 178 Taxman 143 (Del) iv. CIT vs. Web Commerce (India) (P.) Ltd.: 178 Taxman 310 (Del) - SLP of revenue dismissed in SLP No. SLP (C) ....
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....and loss account for the units from the SAP, assessehas maintained separate books of accounts. He further submitted that declaration in Form No.10CCB shows that the assesse has submitted the balance sheet and profit and loss account;however, there was no such balance sheet andonly profit and loss account was submitted along with audit report. 61. He further submitted that no separate balance sheet was maintained as is evident from page 999 where the assumptions have been noted for the purpose of allocation of various expenditure. Hence, he submitted that no separate books of account are maintained for eligible units however, allocated statement of expenditure and adjusted profit and loss account and balance sheet are prepared for claiming deduction. 62. He further submitted that assesse claimed deduction also on trading profit for which deduction u/s 80IC and 80IB are not eligible. 63. He referred to Page No.51 of the assessment order where the gross taxable of the assesse 178.64 crores and if the other income from the pure trading etc. amounting to Rs. 225.83 crores is excluded it results into the loss and therefore the assesse is not eligible for any deduction, as there is no ....
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.... took us to the computation of total income to show that there is no substance in the argument of the revenue on this count. He submitted that no error has been pointed out by the Ld. AO or the ld. DRP of Ld. DR in the computation of deduction of income, of eligible undertaking. (d) That the claim of deduction of tablet plant No.III is supported by audit report available at Page 1026 and further at page 1030 of the paper book the profit is quantified at Rs. 523509006/- and in the declaration it shows the balance sheet which is at page no.1031 and profit and loss account is also at page no.1032 of the paper book. He submitted that it is prepared on the same basis following the same accounting practices and adopting same methodology therefore though, deduction is claimed for the first year there is no infirmity pointed out by the revenue in the working of deduction. (e) That the four points, which have been stated at page 58 of the order, have already been replied and in rebuttal nothing has been stated by the ld. DR. as the submission of the assesse has not been controverted there is no point in referring to the four points submitted by ld. DR once again. However, he reiterated ....
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....ssesse submitted copy of audited accounts of New industrial undertaking and submitted the basis for computation of the profit eligible for deduction for these undertakings. During the course of assessment proceedings assesse was specifically asked to explain the reasons and basis for apportionment of 30% R&D expenditure and 75% of the head office expenses to this new undertaking. Assesse explained vide letter 02.12.2008 and after going through the submission made the assesse and based on allocation explained by the assessee, profits of the undertaking u/s 80IB/80IC were accepted by the AO. Therefore, in the initial year the claim of deduction for the unit New Tablet Plant-I was claimed, examined and allowed. 71. In case of New Tablet Plant-II which was set up in AY 2006-07, the assesse did not claim any deduction in view of provision of section 80A(2). 72. Similarly, in case of new SGC Plant which was set in AY 2007-08 the assesse did not claim any deduction for that year in view of the provision of section 80A(2) of the Act as the gross total income of the assesse was negative. 73. In case of New Tablet Plant-III, this is the first year of deduction and assesse has claimed the ....
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....ted before us is of Honorable Delhi high court in 34 taxmann.com 3 (Delhi) in case of CIT V Delhi Press Patrika Parakashan P Limited where in it is held that "69. The next controversy that needs to be addressed is whether it was open for the Assessing Officer to deny the benefit of Section 80-I of the Act to the assessee having allowed benefit to the assessee in the preceding three years. It is contended on behalf of the assessee that it was necessary for the Assessing Officer to be consistent with the assessment for the earlier years. The question as to the qualification of Unit Nos. 2 & 3 as industrial undertakings arose in the earlier years and the Assessing Officer had accepted that Unit Nos.2 & 3 qualified for deduction under Section 80-I of the Act in the earlier years. By virtue of section 80-I(5) of the Act deduction under section 80-I of the Act was available to an assessee in the assessmentyear relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things (such assessment year being the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year. This necessari....
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.... granted for the assessment year 1939-40. The assessee had challenged the assessment order which was accepted by the Appellate Assistant Commissioner who upheld the assessee's claim for exemption. This view was consistently followed by the successive Assessing Officers till 1963-64. In these circumstances, the Supreme Court held that the view that had been settled and accepted over a period of years should not be allowed to be disturbed. 73. This court in the case of Lagan Kala Upvan (supra), following the decision of the Supreme Court in the case of Radhasoami Satsang (supra) has also held that where a particular view has been accepted by the Assessing Officer to several years the same cannot be permitted to be departed from unless there is some material facts that justified such a change. Similar view has been expressed by this court in the case of Modi Industries Ltd. (supra). In this case, while considering a claim of deduction made by an assessee under section 80J of the Act, this High Court held as under:- "The second question relates to the claim of the assessee for deduction under Section 80J of the Income Tax Act in respect of its new unit namely 10 ton Furnance ....
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....t the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity...." 75. In the facts of the present case, where although the Assessing officer has allowed the assessee deduction under section 80-I of the Act in the preceding years, one may still have certain reservations as to whether the issue of eligibility of Unit nos. 2 and 3 fulfilling the conditions has been finally settled, since the question has not been a subject matter of any appellate proceedings in the years preceding the assessment year 1991-92. However, there is yet another aspect which needs to be considered. By virtue of section 80-I(5) of the Act, deduction under section 80-I of the Act is available to an assessee in respect of the assessment year (referred to as the initial assessment year) relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is fir....
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....ssessment years 1988-89, 1989-1990 and 1990-1991 have consistently accepted the claim of the assessee for deduction under 80-I of the Act and it would not be open for the Assessing Officer to deny the deduction under Section 80-I of the Act on the ground of non fulfilment of the conditions under 80-I(2) of the Act without disturbing the assessment for the assessment years relevant to the previous year in which the Unit Nos.2 & 3 were established. 78. This view has also been accepted by a Division Bench of Gujarat High Court in the case of Saurashtra Cement & Chemical Industries (supra). In that case, the Gujarat High Court held that where relief of a tax holiday had been granted to an assessee in an initial assessment year in which the conditions for grant of tax holiday had to be examined, denial of relief in the subsequent years would not be permissible without disturbing the assessment in the initial assessment year. The relevant extract from the decision of the Gujarat High Court in Saurashtra Cement & Chemical Industries (supra) is quoted below:- "The next question to which the Tribunal addressed itself, and no our opinion rightly, was whether the Tribunal was justified ....
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....istency as it has already been propounded by Hon'ble Supreme Court and various other Hon'ble High Courts. The latest in point of time is CIT V Excel Industries where honourable Supreme court has held that "28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue. 29. In Radhasoami Satsang Saomi Bagh v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v.Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation because of new views....
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.... 77. Therefore, following this principal also we are of the view that deduction for the year claimed by the assesse with respect to itsGoa Unit and New Tablet Plant-I cannot be disturbed on the principle of consistency also. Further, this argument cannot be taken shelter regarding the claim of the assesse for New Tablet Plant-II, SGC Plant and New Tablet Plant-III. 78. The third argument advanced by the assesse is that the accounts of the assesse are being maintained on SAP ERP System, which provides separate books of accounts resulting into independent balance sheet and profit and loss account of the eligible unit. For this ld., AR explained in detail how the ERP system works and how it generates individual profit and loss account and balance sheet of the Industrial units. In the present business environment and looking to the nature of the business and the size of the operation of the company, it is apparent that it is multi product, multi-location company. The assesse has made a claim of various units, which is submitted before us from Page No.974 to 1038 of Paper Book Volume No.IV. The details of this is tabulated as under:- Name of the unit Date of Audit report as per Rule ....
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....contention of the ld. AO that common books of account are maintained and not separate books of account is devoid of any merit. As such, Assessee has contended that provision of section 80IB and 80IC does not provide that Assessee should maintain separate books of accounts with respect to eligible undertaking. It only provides as per provision 80IA (7) that the 'accounts' of the undertaking for the previous year for which deduction is claim should havebeen audited by an 'accountant'. The provision of the section does not talk about maintenance of 'separate books of accounts'. Provisions of section 80 IA (7) are as under :- "(7) 38[The deduction] under sub-section (1) from profits and gains derived from an 39[undertaking] shall not be admissible unless the accounts of the 39[undertaking] for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form40 duly signed and verified by such accountant." 80. Rule 18BBB of the Income tax rules governing t....
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.... business of manufacturing of yarn. The assessee derived, during the relevant assessment year, a gross total income of Rs. 51,82,666/- from what it called 'manufacturing activity'. It denied that it had undertaken any trading activity during the year in question. On the said sum of Rs. 51,82,666/-, the assessee claimed deduction at the rate of thirty per cent under Section 80IA of the Act amounting to Rs. 15,54,800/-. The Assessing Officer found that the assessee had not maintained a separate trading and profit and loss account for the goods manufactured. In the assessment year in question, it appears that the assessee had sold raw wool, wool waste, textile, and knitting cloths. When a query was raised, the assessee contended that, business exigencies in the assessment year in question, it had sold the above items. However, according to the assessee, the sale of raw wool, wool waste, etc., would not disentitle it from claiming the benefit under Section 80IA of the Act on the total sum of Rs. 51,82,666/- at the rate of 30%. Department found that the assessee has not maintained the accounts for manufacture of yarn actually produced as a part of industrial undertaking. Consequ....
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....tive ledgers, cashbook and bankbook and journal of any independent industrial undertaking is available. According to section 2 (12A) of the income tax Act books of accounts have been defined as under :- (12A)42a "books or books of account" includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;] On reading of the above, it is apparent assessee has maintained separate books of accounts, which are on the SAP ERP system, which provides transaction-by-transaction ledgers, daybooks, cashbooks, and other books such as quantitative details and stock registers. The Ld. AO was of the view that as the books of accounts are maintained for the entity as a whole, it has not maintained separate books of accounts for the eligible industrial undertaking. It will further be appreciated that the primary purpose of maintaining separate books of account in any provision of the Act is only to enable the assessing officer to verify that deduction under any particular provision has been correctly computed. If from any system/ software, iden....
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....portioned. The details filed before CIT(A) clearly demonstrate that in the case of the assessee, the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act." 83. Addressing the next arguments of the revenue that there are certain items of other income, which are reduced from the computation of total income then the manufacturing activity results in loss. For this, propositionLD. DR drew our attention to page no 51 of the assessment order where ld. AO has stated that assessee has earned Royalty Income of Rs. 18.91 Crs, (ii) export Incentives of Rs. 78.93 crores, (iii) sundries and miscellaneous income Rs. 33.74 Cr and Income from trading activity of Rs. 94.25 Crores totaling to Rs. 225.83 Crs. . It was stated that the gross tot....
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....e benefits of the R & D works, the products would be manufactured by the said units. Further on allocation of head office expenses we fully agree that it relates to costs that have been incurred on an entity level and pertains to the company as a whole. Appellant has apportioned 75% of such head office expenses to the individual undertakings based on sales. This method of allocation has been consistently followed by the assessee since commencement, whichis duly certified by the auditors and accepted in the assessments completed in the past. We do not find any irrationality in the al above allocation keys adopted by the assessee firstly and for the reason that it has been accepted by the revenue in past it cannot be disputed now in subsequent years without there being any change in the factsand / or law. Honourable Delhi high court in the case of CIT vs. EHPT India Pvt Ltd: 350 ITR 41 (Del) where in allocation of expenses based on head counts and turnover is upheld to stress that there is no bar in law for common expenses to be allocated on a scientific/ rational basis to the eligible unit has held as under :- "10. The provisions of sub-section (4) of section 10A, relied upon by t....
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.... the department for a number of years. However, for the assessment years 1991-92 to 1997-98 the Assessing Officer took the view that the discount on the chits should be assessed every year, taking into account the number of instalments paid and remaining to be paid. The contention of the assessee was that the method adopted by him has been consistently accepted in the past and there was no justification for any departure. Accepting the submission, the Supreme Court held as under: "As stated above, we are concerned with the assessment years 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produ....
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....sfer of goods or services pointed out before us by revenue we are of the view that provision of section 80 IA (8) are not attracted. 86. Further,it is submitted by the assessee that various units are manufacturing different products and final products are sold in the openmarket. Sales of each of the unit are accounted in the profit and loss account by the appellant of that unit. It is not pointed out before us that what is the material or services that has not been accounted for by the assseess as sales and itis not at themarket rate and what is the market rate of such product or services sold by those units. It is emphatically stated that there is no inter unit transfer of the goods or services. In view of the above,we do not have any option but to reject the objection of the revenue of invoking section 80 IA (8) of the Act on this issue. 87. It is one of the contention of revenue that selling and distribution activity is itself a separate profit center and therefore whatever services have been provided by the selling and distribution arm of the company to the eligible undertaking should have been charged and reduced from the profit of the industrial undertaking after valuing se....
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.... 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 eligible source of income and not other sources of income, such as, profits of marketing division or profits on account of established brand. For the allocation of profit of manufacturing unit the mandate is very clear because Income Tax Rule, 1962 contains Rule 18BBB w....
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....(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 (a) which has begun or begins to manufacture or produce any Article or thing ......... Therefore, 'manufacturing' is the first criteria for the eligibility of the 'business' to qualify for t....
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....ing 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 and loss account. In such a situation, whether the AO is empowered to disturb the computation of profit, is always a subject matter of controversy. From the side of the assessee,....
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....tedly 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 the assessee, therefore, 15% of the profit was allocated to the R&D activities and balance of the profit was attributable to the marketing activities in India. The sai....
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....e 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 section 80IC which prescribes as follows:- "Section 80IC(7) : The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80IA shall....
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....he 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 the Ld.AR is that the facts of the case have explicitly demonstrated that the goods manufactured at Baddi Unit ....
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....asis 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 AO. Both these suggestions are not practicable. If these two suggestions are to be implemented, then a....
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....d 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 (supra). 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 linked incentives". The incentive is linked with generation of 'operational profit'. Therefore, t....
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.... 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 realized. But on the other hand, it was argued that the profits received relate (i) firstly to his business as a manuf....
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....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 Court has observed that to succeed in their claim, it is incumbent upon the assessee to show that th....
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....ay. 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 business only when apportionment is possible. The Hon'ble Court has said that only....
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....ormal 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." We have carefully perused this decision and note that the controversy in this ground of appeal with respect to applicability of section 80 IA (8) of the act, on marketing and other selling distribution as well as research and development services provided by the undertaking as a whole to the eligible industrial undertaking at the cost or market rate for working out the eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to the decision cited by the Ld. AR. Therefore, we respectfully following the above decision of coordinate bench hold that provisions of section 80 IA (8) of the act does not apply to the assessee ontransfer of services of marketing division of the company to the eligible industrial undertaking whose profits a....
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....imeters Electricals (P.) Ltd. [IT Appeal No. 1366 of 2008, decided on 2-12-2008] and held that as long as the audit report is filed before the framing of the assessment, the provisions of section 80-IA(7) would be complied with inasmuch as the same are directory and not mandatory. A similar view would have to be taken in the present case also inasmuch as the provisions are the same. Consequently, we do not find any fault with the conclusions arrived at by the Tribunal. No substantial question of law arises for our consideration. The appeal is dismissed." [Underline supplied by us] In this case, appellant has already filed the audit report and the profit and loss account of the units however; the profit and loss account was filed before ld. DRP but in any way available with ld. DRP and Ld. AO at the time of finalization of the assessment order. In the decision cited before us HonourableDelhi high court has held that even if the audit report is not filed then also the deduction cannot be denied if same is filed before finalization of assessment. Therefore case of the assessee stands on the better footing. No other contrary decision was put before us by revenue. Hence, we do not wish....
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.... the assets, the Tribunal permitted the department to raise a plea to find out whether the assessee was allowed any depreciation under an enactment which was in force earlier, i.e., before the Indian Income-tax Act was made applicable to the assessee. The Court held that the subject-matter of the appeal before the Tribunal was the question as to what should be the proper written down value of the assets for calculating the depreciation allowance under the Indian Income-tax Act. It was certainly open to the department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the written down value on any of the grounds decided against it. In the case before the Supreme Court, earlier enactment was to be referred to, whereas in the present case only a different provision of the same enactment has to be considered. Therefore, I see no reason as to why the plea of the ld. D.R. cannot be accepted. In the present case, of course, the department is the appellant unlike in the case of Hukumchand Mills Ltd. (supra). But, in my view, it makes no difference. The department is aggrieved by the deletion of disallowance of expenditure which disall....
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....that is not to be ruled out, merely because a consideration thereof would call for further facts to be gone into. In Hukumchand Mills' decision [1967] 63 ITR 232, the Supreme Court laid down no fetter on the Tribunal's powers. That case, indeed, was a case where the new plea raised by the department before the Tribunal could not be considered without a further investigation into facts. Nevertheless, the Tribunal entertained the plea, and remitted the case to the ITO for the ascertainment of the relevant facts. The Supreme Court, in their decision upheld not only the Department's new plea, but also the Tribunal's order of remand based on the new plea." In the light of the above discussion, I agree with the view taken by the ld. J.M. to hold that the plea raised by the ld. D.R. is to be accepted and the matter is to be remanded to the Assessing Officer for considering the claim of the assessee for claiming deduction of unaccounted expenditure under section 37(1) of the Act." In the above case the issue as set aside to the file of the ld. AO to decide and examine the facts in the course of hearing before the Tribunal, the revenue raised a fresh plea that the Assessing Officer sho....
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....not adjudicating the claim of deduction u/s 35(2AB) of the Act on the cost of the assets provided to the employees working in approved R&D facilities and engaged in research and development activities. 93. The brief facts of this ground is that the appellant has incurred an capital expenditure amounting to Rs. 28532155/- on the assets which are provided to the employees who are working and executing R&D work of the company. According to section 35(2AB) weighted deduction on such assets @150% of expenditure is allowable. The assesse has claimed 100% deduction on this amount u/s 35(2) (ia) of the Act. The claim of the assesse was made in Note No.5(b) of the revised return filed by the assesse. Ld. AO did not consider this claim and ld. DRP has also not issued any direction. Before us ld. AR submitted that the appellant is eligible for this weighted deduction. He submitted that this issue is squarely covered in favour of the assesse in ITA No.1513/Del/2004 for AY 1999-2000 and for later on years.The Ld. DR submitted that the claim needs verification and it may be sent to ld. AO for verification. 94. We have carefully considered the rival contentions and we are of the view that the i....
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....m 320 (Bombay) Commissioner of Income-tax v. Geoffrey Manners & Co. Ltd has dealt with identical issue as under :- 3. It is submitted by Mr.Suresh Kumar, learned counsel appearing for the Revenue, that the Tribunal committed grave and serious error of law in allowing deduction for the provision made on account of liability towards contribution to DrugPrice Equalization Account (DPEA). This is ignoring the fact that the liability is mere provision which was contingent in nature and it has not been crystallized during the previous year because the Assessee approached the Delhi High Court challenging the stipulation in the DrugPriceControlOrder. There was interim stay in favour of the Assessee. Eventually that Writ Petition was allowed. The order of the Delhi High Court was challenged in the Honourable Supreme Court by the Revenue and the Revenue succeeded. The Assessing Officer and the Commissioner concurrently held that the Assessee was entitled to the deductions only in the year in which the liability was actually accruing and the amount was payable. Since there was interim stay the Authorities took the view that as and when the liability is actually incurred or discharged that t....
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....ion of Honourable Mumbai high court we are of the view that claim of the assessee of Rs. 22306073/- on account of amount payable under Drug price Control Equalization is prima facie allowable. Further, we also agree with the argument of ld. AR that when the claim is made by the assesse by way of note then the ld. AO as well as DRP should have considered the claim of the assesse on merits. Not considering the issue and not adjudicating thereon is an injustice to the claim to which the assesse is eligible. In view of this, we direct the Ld. AO to verify the claim and, if found in accordance with the decision of Honourable Bombay high court it may be allowed. Ground No 14 of appeal is allowed. 98. Ground no.15 of the appeal is against not adjudicating on the adjustment of exchange fluctuation on external commercial borrowing, hedging contract in relation thereto and hedging charges to the cost of capital asset and thereafter-granting depreciation thereon after considering it as a cost of acquisition of asset. During the year appellant has incurred mark-to market loos of Rs. 46.40 crores on ECB raised for purchase of plant and machinery and other capital investment. It has also earned....