TaxTMI 
TaxTMI 
2016 (5) TMI 157
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....143(3) r.w.s. 144C of the Income Tax Act, 1961 (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 maintaine....
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....s with the sole objective of making the adjustment; 5.5 modifying the search strategy consistently applied by the appellant and including 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 judicia....
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.... (2) &(3) of section 14A of the Act were not satisfied. 10.2 That the AO/ DRP erred on facts and in law in not appreciating that there was no nexus between any interest expenditure incurred by the appellant and the exempt income and 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 secti....
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....echanisms (particularly in paras B-1, B-2 and D of the impugned order) to arrive at the profits eligible for deduction under section 80-IB and section 80-IC of the Act, disregarding the method prescribed under the Act. 13. That the AO/DRP erred on facts and in law in not adjudicating the claim of weighted deduction under section 35(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 va....
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....t u/s 115JB of the Act at Rs. 7720967422/-. Against this assesse filed objections before the Learned Dispute Resolution panel that passed its direction on 29.09.2012. Based on those directions, ld. AO passed final assessment order u/s 143(3) r.ws 144C on 16.11.2012. Assesse being aggrieved with the final assessment order passed by the Additional Commissioner of Income Tax, Range-15, 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 additio....
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....14 and 415 of the paperbook 1. Sale of APIs 8685223772 Transactional Net Margin method (TNMM) 2. Sale of dosage formulations 14141615556 TNMM 3. Sale of machines, spares and consumables 88757051 TNMM 4. Purchase of dosage formulations 35214894 TNMM 5. Allocation of SAP licensed and maintenance charges 13564066 Comparable uncontrolled price (CUP) method 6. Market research and support 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 asses....
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....ions at Rs. 4450.75 crores whereas price charged by the assesse is Rs. 4212.59 crores and thereby resulting in a difference Rs. 238.16 crores which was proposed to be added to the income of the assessee. Against this assesse preferred objections before ld.DRP against the draft order containing above TP addition. Ld. DRP vide its direction dated 29.09.2012 has held that it is in complete agreement with the approach followed by the TPO that the assesse should have been taken as the tested 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 c....
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....sis of assessee and the AEs in this assessment year vis-à-vis the year approved in the APA, same shall have persuasive value. As CBDT has principally approved the concept of overseas AEs adopted as the tested party in the Appellant's own case for AY 2014-15, the same treatment shall be given to the International transactions, which are also same in this year i.e. in AY 2008-09. Thereafter he referred to the various clauses and conditions of APA. (b) He further submitted that the assesse is performing complex functions owning 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....
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.... to several quantitative filters applied by ld. TPO. In the end, he contended that the order of ld. TPO and confirmation by that by Ld. DRP is erroneous. He strongly contended that foreign AEs should be taken as tested party and thereafter the TP study report prepared by the assessee should be examined fordetermination of Alp of the International transactions of the assessee.The Thrust of his argument was mainly on selection of tested party and it was submitted that this issue may be decided first for carrying on onward process of determination of ALP. 15. Against this ld. DR submitted that:- (a) That 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....
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....The transfer pricing legislation in India does not provide any guidance on the concept of 'tested party'; however, there are some decisions on this issue, which can be of great help. 21. In order to understand the concept of tested party, one need to refer to the transfer pricing legislations of developed countries where the principles of transfer pricing have been in use for a long time and act as a guiding force for all the developing economies. The transfer pricing guidelines issued by the US Internal revenue services under section 482 provide and discuss the concept of transfer pricing. Section 1.482-5 of the US Transfer Pricing Regulations state 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 comp....
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....the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found i.e. it will most often be the one that has the less complex functional analysis. 3.19 This can be illustrated as follows. Assume that company a manufactures two types of products, P1 and P2 that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical specification set by B. Assume that in this P1 transaction, A only performs simple functions and does not make any valuable, unique contribution in relation 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 th....
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.... Malaysia and Morocco the regional benchmarking has been accepted of Asia. In case of South Africa, Peru the benchmarking of Europe and in case of Egypt, Brazil and Thailand benchmarking of Asia is accepted. According to Parano.5, it is also emphatically mentioned that foreign AEs are the tested parties. It is also important to notice that how this agreement has been reached between the parties. Page No 500 where in it is held that applicant i.e. appellant is an entrepreneur manufacturer where in the functions performed by it are (a) R & D for both the products and processes (b) Production and supply of formulations and APIs (c) Provision of technical support and quality control process for the AEs (d) Application 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 wh....
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....ilar for the this year, should be given highest sanctity and therefore mechanism suggest in that agreement should be necessarily followed in determining ALP of the transactions for this year. 29. Though In the APA signed by the assessee there is no "roll back provisions"" for the year under appeal, however we analyses the circumstances, which provides for applying that rule. Rule 10MA of the Income tax Rules 1962 provides for the roll back provisions as under :- 10MA. (1) Subject to the provisions of this rule, the agreement may provide for determining the arm's length price or specify the manner in which arm's length price shall be determined in relation to the international transaction entered into by the person during the rollback year (hereinafter 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....
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....s are least complex and adequate financial data for comparison on region basis / country basis are available and further the financial transactions are same, we hold that based on APA for A Y 2014-15 the selection of tested party should be taken as Foreign AE for the current year too. 31. On looking at the TP Study report of the assesse placed at page Nos. 409 to 478 of Paper Book Volume-II as well as the order of TPO it is apparent that assesse has also adopted region based analysis and also country by country analysis of comparable where they are available. Therefore, in the TP study report as far as the tested party is concerned we do not agree with the observation of the TPO that no comparables are available. It runs contrary to the finding of the CBDT in APA. 32. Coming back to the order of coordinate bench in case of assesse 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 ....
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....n marketing activity. After due consideration of the issue, the Hon'ble Bench had observed thus: "16.1... (on page 47) It is clear that arm's length price is to be determined by taking result of comparable transactions and those transactions must be in comparable circumstances. It is therefore required to have a proper study of specific characteristics of controlled transaction. It is also required that there should be proper study of functions performed to match the identical situations under which functions have been performed. Then risk profile is also required to be compared. We may like to add that there are so many perspectives which were required to be compared and in this connection the Hon'ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables 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 underst....
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........................... 3................................................................................................... 4. TKS is the entrepreneur company and has created significant marketing intangibles over the years. It uses its marketing intangibles to generate the work and assumes all the market, price and product risks. TKC came out the work on its own, only parts of the job are sub-contracted to the assessee for its convenience. Futher, being an entrepreneur company, it is difficult to determine the profits of ATKC with respect to work downloaded to India (as the revenue received for work off-shored to India cannot be separately identified). Further, the revenue generated from the services provided by the assessee would form only a small part of the entire operations. The value of engineering drawing and design services rendered by the assessee to TKC for AY 2002-04 was 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....
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.... upon from the taxpayer." In substance, a foreign entity (a foreign AE) could also be taken as a tested party for comparison. 11.2. At this juncture, we would like to refer to the United Nation's Practical Manual on Transfer Pricing for Developing Countries wherein the selection of the tested party has been dealt with. This Manual has been the work of many authors which included India, Norway, Nigeria, Italy, USA, Netherlands, Brazil, China, OECD, Japan etc. For ready reference, the relevant portion of it observation is extracted as under: "5.3.3. Selection of the Tested Party: 5.3.3.1. When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method (see further Chapter 6) 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 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 ....
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....ssessee, the TPO had taken GMDAT as the tested party while making adjustment to transaction relating to payment of royalty by GMI to GMDAT. 11.2.4. Rebutting the Revenue's allegation made during the course of proceedings that the segmental financial statement of GMDAT was not reliable, the assessee reiterates that the segmental data relied upon for benchmarking international transactions relating to import of CKD Kits and components was completely reliable and was based on sound allocation keys. To substantiate its claim, the assessee has also furnished a report on factual findings certified by the statutory auditors - Deloitte Anjin LLC. 11.2.5. Moreover, we find that the DRP had not considered in great detail the plea of the assessee as to why GMDAT should not be selected as the tested party for analyzing the inter-company transactions. Instead, the DRP had, in a cryptic manner, concluded that the results of assessee have to be compared with the stand alone results of Mahindra & 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 ....
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....ation, advances would bear interest and, therefore, need to charge a markup as per CUP method. Accordingly, the TPO proposed to benchmark the loans at dollar denominated LIBO [London Inter Bank Operative] rate plus mark up of 3%. When the issue landed up before the DRP, the DRP had, after analyzing the issue, directed the AO/TPO to compute the interest on loans to AE @ 14% per annum thereby enhanced the transfer pricing adjustment. Aggrieved assessee took up the issue with the Tribunal. The Hon'ble Tribunal, after due consideration of the issue in depth and for the reasons recorded therein, directed the AO/TPO to determine the arm's length interest at Libor plus 2% on the monthly closing balance of advances during the FY. We have, with due regards, perused the issue and the findings of the Hon'ble Bench in detail. Ironically, the main issue before the Bench was the percentage of the interest to be calculated on the loan advanced by the assessee to its foreign AEs. We are, therefore, of the view that this case is not directly 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 a....
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....of this Tribunal in the case of Mastek Limited ITA No.3096/Ahd/2010 (AY- 2006-07) (supra) had stressed that (at the cost of repetition) "we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables". The Hon'ble Calcutta Tribunal in the case of Development Consultants (P) Ltd (supra) 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 transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm's length for both the assessment years." Thirdly, the Hon'ble Delhi Tribunal in the case of Ranbaxy Laboratories Limited (supra) took a stand that 'If the taxpayer wishes to take foreign AE as a tested party, then....
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.... manner of determination of ALP. Corporate Tax Issues 37. Now we proceed to decide the corporate tax issues in this appeal where ld. AR of the assessee Shri Ajay Vohra, Sr. Advocate, presented extensive arguments on each of the issues supported by his written synopsis and also paper books on the various grounds. Ld. CIT DR defended each of them on behalf of revenue citing the orders of lower authorities extensively. We deal with them as under. 38. Now we come to ground no.8 of the appeal, which is against, disallowance of Rs. 10333543/- being deferred employees compensation debited to the profit and loss account pursuant to company'sEmployees'Stock Option Scheme. 39. The brief facts are that the assesse has claimed deduction of this sum on issuance of options to certain eligible employees to acquire equity shares of the company at price lower than the market value in terms of ESOP scheme of the assesse. Under the Scheme, as part of the employee compensation measure, an option to purchase the shares of the appellant-company after the completion of the vesting period was granted to the employees of the company at a discounted price to the fair market value of the share. T....
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....8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd.[2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering "loss" in certain circumstances within the purview of "expenditure" as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships noticed that the word "expenditure" has not been defined in the Act. They held that : "the word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business or profession". In sections 30 to 36 the expression "expenditure incurred", as well as allowance and depreciation, has also been used. For e....
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....mployees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Act, 1872 defines "contingent contract" as "a contract to do or not do something, if some event, collateral to such contract does not happen". We need to determine as to whether the liability arising on the assessee-company for issuing shares at a discounted premium can be characterized as a contingent liability in the light of the definition of contingent contract. From the stand point of the company, the options under ESOP 2000 vest with the employees at the rate of 25% only on putting in service for one year by the employees. Unless such service is rendered, the employees do not qualify for such options. In other words, rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to....
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....of his employee" shall be allowed as deduction in computing the income of the previous year in which such sum is actually paid. With this legislative amendment, the application of the ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolutely intact that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. 9.3.4 Almost to the similar effect, there is another judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. In that case, the assessee-company was engaged in selling certain products. At the time of sale, the company provided a standard warranty that in the event of certain part becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch, whichever is earlier, the company would rectify o....
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....ntingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability." In view of this,we cannot follow the decision of coordinate bench in case of the assessee itself for earlier years. No other contrary decision has been brought to our notice by ld. DR.Therefore order of AO is reversed holding that Rs. 10333543/- being deferred employees compensation debited to the profit and loss account is allowable u/s 37(1) of the Act. 42. Ld. AO has further held that even otherwise this deduction is hit by provision of section 40a (ia) of the act and as no tax is deducted on this payment it is disallowable. No such provision for deduction of tax at sources on this expenditure has been brought to our notice. Therefore we hold that provisions of section 40a(ia) does not apply to 'payment of salaries' for the year under appeal. Hence, this argument of the ....
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.... Therefore, we also hold that in absence of specific section under which the tax is required to be deducted on such contribution without their being any service rendered by the recipient of the contribution disallowance u/s 40a(ia) also cannot be made. In the result ground no.9 of the appeal is allowed. 47. Ground no.10 of the appeal is against disallowance of Rs. 74066105/- u/s 14A of the act by applying the formula prescribed under Rule 8D of the Income Tax Rules, 1962. 48. During the year appellant received Rs. 7968/- towards dividend income which is exempt u/s 10 of the Act. The investments on which this dividend income is received were made before many years. In case of investment in Great Eastern Shipping Company Ltd wasamounting to Rs. 34899/- only. Further dividend of Rs. 4242/- out of Rs. 7968/- is received on shares that were sold by the assesse before many years howeveritwere not registered in the name of the buyer. During the year company itself has disallowed Rs. 3311708/- u/s 14A of the act on account of expenditure incurred by the company on its Treasury Division.However, ld.AO applied the Rule 8Dof the Income Tax Rules 1962 and computed disallowance of Rs. 773....
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....0 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted to mean that the entire tax-exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." Therefore, according to us, as such no further disallowance u/s 14A can be imputed. Furthermore,we did not find any satisfaction of the AO with regard to examination of the books of account of the assesse that how disallowance already offered by assesse of Rs. 3311708/- which are also certified by the tax auditor is incorrect. In absence of such satisfaction AO does not have any authority to invoke provisions of Rule 8D. On this count also the addition cannot be upheld. Honourable Delhi high court in case of CIT V TaikishaEngineering Limited in 54 taxmann.com 109 has held as under :- 13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded ....
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....ure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D "As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45 of 2008, dated Ma....
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....shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the tot....
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....the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154.' 16. Equally illuminating are the following observations in Godrej and Boyce Mfg. Co. Ltd. (supra) ". . . However, if the assessee does not maintain separate accounts, it would be necessary for the Assessing Officer to deter-mine the proportion of expenditure incurred in relation to the dividend business (i.e., earning exempt income). It is for exactly such situations that a machinery/method for computing the proportion of expenditure incurred in relation to the dividend business has been provided by way of section 14A(2)/(....
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....assessee were not rejected and held to be unsatisfactory, on examination of accounts. Judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if the satisfaction of the Assessing Officer is in issue, and such question of satisfaction is with reference to the accounts". Therefore, in view of above two decisionsof Honourablejurisdictional High court we hold that no such further disallowance over and above what is admitted by the assessee can be made.Hence, ground no.10 of the appeal of the assesse is allowed and disallowance of Rs. 74066105/- u/s 14A of the Act is directed to be deleted. 52. Ground no.11 of the appeal is against making an upward adjustment of Rs. 74066105/- while computing the book profit u/s 115JB of the Act. The facts and the details of such disallowance are already covered by us while deciding ground no.10 of the appeal and further while offering book profit tax assessee has already added back the amount disallowed u/s 14A in normalcomputation to the book profit of the assesse u/s 115JB of the act. Form no 29B submitted in the paper book shows t....
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.... Ltd. v. Addl. CIT [2012] 21 taxmann.com 483 (Ahd. - Trib); (ii) Reliance Industrial Infrastructure Ltd. [IT Appeal Nos. 69 & 70/(Mum) of 2009, dated 5-4-2013]; (iii) Essar Teleholdings Ltd. [IT Appeal No. 3850 (Mum.) of 2010, dated 29-7-2011]; (iv) J.K. Paper Ltd. [IT Appeal Nos. 4027 & 4080 (Ahd.) of 2008 & 979 (Ahd) of 2006]; (v) National Commodity Derivatives Exchange Ltd. [IT Appeal No. 2923 (Mum) of 2010, dated 26-8-2011]; and (vi) Quippo Telecom Infrastructure Ltd. [IT Appeal No. 4931 (De1hi) 2010, dated 18 February 2011] (Delhi). Respectfully following the propositions laid down in the previously mentioned decisions, we direct the Ld. AO to exclude the amount of addition of Rs. 7,66,40,105/- made u/s.14A, while computing the book profit u/s.115JB.In view of this we allow ground no.11 of the appeal. 56. Ground no.12 of the appeal is against the disallowing the entire deduction of Rs. 136,68,21,506/- claimed by the assesse u/s 80IB and 80IC of the Act in respect of five separate and independent eligible units. Facts relating to this ground are that In the previous year relevant to the assessment year 2008-09, i.e. the year un....
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....ounts were maintained for the appellant company as a whole and separate books of accounts for the eligible undertakings were not maintained. Ld. AO also held that the profit of units eligible for deduction under section 80IB/IC of the Act, were disproportionately high as compared to total business profits of the appellant-company and further that global sales price was adopted for the purpose of claiming higher deduction. Ld. AO further held that appellant did not give the basis of apportionment of common expenses, etc. Ld. DRP agreed with the order of Ld. AO. Therefore, assessee is in appeal before us on this ground. 57. Before us the |Ld. AR specifically contested this disallowance on following grounds:- a) He submitted that the appellant has been claiming deduction under section 80IB/IC of the Act in respect of the aforesaid units at Goa and Ponta Sahib from the assessment year 2002-03 onwards. He submitted that during the year under consideration, the appellant had set up one new unit at Ponta Sahib, being New Tablet Plant - IIII, which, too, operates in the similar way as the others units, which were set up in the earlier years and independently satisfied all the p....
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.... disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the Income-tax Officer cannot examine the question again and decide to withhold or withdraw the relief which has been already once granted." (ii) CIT v. Paul Brothers: 216 ITR 548 (Bom.) "Either in section80HH or in section80J, there is no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions. Hence unless the relief granted for the assessment year 1980-81 was withdrawn, the Income-tax Officer could not have withheld the relief for the subsequent years. (See Gujarat High Court decision in the case of Saurashtra Cement v. CIT: 123 ITR 669. Hence, the approach of the Tribunal on all the counts has been perfectly legal." (iii) CIT v Gujarat State Fertilizers Co. Ltd: 247 ITR 690 (Guj.) "Having heard learned counsel for the parties and critically examining the relevant provisions contained in section 80J in the light of the decisions cited before us, we are of the considered opinion that, as in the preceding assessment years, the appellant cannot be denied the benefit of deduction at the pre....
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....EPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis a vis the claim to exemption under section10A of the Act. Therefore, it is not open to the department to deny the benefit of Section10A for subsequent assessment yearsi. e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit." (vi) CIT vs. Escorts Ltd : 338 ITR 435 (vii) CIT vs. Delhi Press Patra Prakashan Ltd. (No.2) : 355 ITR 14 (viii) CIT vs. Tata Communications Internet Services Ltd.: 251 CTR 290 In view of the above, it is submitted that since deduction under sections 80IB/IC of the Act are deductions admissible for a certain term, the question whether or not the statutory conditions precedent to the admissibility thereof (including the question whether separate books of accounts are maintained) are fulfilled in the case of an appellant, is required to be examined by the Revenue in the first year in which ....
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....80IA(5)/(7) of the Act, he submitted that Ld. assessing officer failed to appreciate the case of the appellant that its records were maintained on a "business area" basis on SAP ERP System, which satisfies the condition prescribed in section 80IA(5)/(7) of the Act, For this he drew our attention to the written synopsis wherein he has elaborately discussed the accountingpractice of the company same is discussed for the sake of clarity as under :- A 'business area' is an organizational unit within the financial accounting system and corresponds to a defined business segment or area of responsibility, which includes the following: (i) 'Pharma manufacturing unit'; and (ii) 'API manufacturing unit'. Each business area is further sub-divided for e.g. the manufacturing business area further comprises of various plants. Each plant is given a separate Plant Code within the business area. In this regard, it may be noted that a plant location may have different production units (referred to as 'Blocks'), manufacturing different kinds of medicines. The appellant refers to the units, which are eligible to claim deduction under section 80-IB/IC of the Act, as ....
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....he following: (i) Direct costs, i.e., costs directly related to manufacturing the product. Such costs include raw material cost, labour cost, packaging cost and excise duty, quantification which has not been disputed by the assessing officer. It may be noted that such direct costs in majority of the cases form more than 60% of the total expenses during the year under consideration. (ii) Common Manufacturing costs i.e., cost of common utilities used by manufacturing blocks located at a plant location, which are allocated to each block on the basis of raw material consumption/ value of assets. Such costs includePower, fuel, boiler related expenses, stores and spares, consumables.Plant administration expenses, for e.g. security, human resource, insurance of inventories/ fixed assets, travel, printing and stationery, rates and taxes, etc. Further, other overheads, namely expenses of head office, international division, etc., are allocated to the relevant Block on the basis of the sales. The above approach has been traditionally followed by the appellant to compute the total cost of the respective units. e) On the basis of above system of recording accounting ....
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....penses is concerned, the same primarily represents cost related to the development of 'new' medicinal products. It is only after innovation of the new product that the same is produced. In these circumstances, the appellant, in line with the traditional allocation methodology adopted in the earlier years apportioned 30% of such R&D expenses to the individual undertakings in the ratio of sales. His main thrust was that allocation was made based on proper allocation key and same is accepted by revenue in earlier years. h) Ld. AR also assailed the observation of ld. AO that the said products, as and when invented in future, would be manufactured by each of the units or any one of them. He submitted that there is nothing to indicate that in the event of the appellant deciding to commercially exploit the benefits of the R & D work, the products would be manufactured by the said units. Therefore, his submission was that the presumption of a nexus between the R & D activities and the units is incorrect. i) Regarding allocation of head office expenses hesubmitted that the same relates to costs that have been incurred on an entity level and pertains to the company as a who....
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....in law. Nevertheless, in any way assessee has maintained separate books of accounts in the SAP ERP system. Therefore, otherwise it cannot be said that assessee has not maintained separate books of accounts for eligible units. l) With reference to the allegation of the assessing officer that the appellant has adopted global selling price, which included element of profits earned from the selling and distribution activity and hence could not be considered to be at arm's length, Ld. AR referred to the provisions of section 80 IA (8) of the act and submitted that the provisions of section 80IA(8) of the Act are not at all applicable to the case of the appellant in so far as no inter-unit transfer of products are made by the appellant. For this, he explained the business process of the appellant that New Industrial Units (NIU)'s, which are eligible to claim deduction under sections 80IB/IC of the Act, are manufacturing different pharma products in different package forms, referred to as SKU's. These SKU's manufactured by the NIU's are the final finished products which are readily saleable in the market and no further processing/packaging is required in such SKU's. The finished ....
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....tions hence the cost incurred by this function has been considered as common cost and is accordingly, allocated to the manufacturing units of the company by considering it to be a separate cost center like any other department. Therefore, according to him sellingand distributions functions cannot be separately taken as profit center. He relied up on decision of the Ahmedabad Bench of the Tribunal in the case of Cadila Healthcare Limited vs. ACIT: 21 taxmann.com 483 where in this whole controversy has been considered and decided in favour of assessee regarding services given by the entity to the NIUs of selling and distribution to be charged at the market rate for working out legible profit of NIus. o) Further, as far as the computation of deduction based on profits from manufacturing activities in the ratio of turnover of manufacturing units with that of the company, he submitted that the method of computation sought to be applied by the assessing officer has nowhere been prescribed under section 80IB/IC of the Act. He relied on the following decisions: (i) Maral Overseas Ltd. vs. ACIT: 136 ITD 177 (SB) (ii) Scientific Atlanta India Technology (P) Limited....
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....s: 285 ITR 260 (Mad.) xiv. Amit vegetable Oil Ltd. v. CIT : 158 Taxman 36 (All) xv. CIT v. Shivanand Electronics: 75 Taxman 93 (Bom) xvi. CIT v. Dr. L.M. Singhvi: 157 Taxman 312 (Raj) xvii. CIT V. Medicaps Ltd.: 323 ITR 554 (MP) xviii. CIT vs. American Data Solutions (P.) Ltd: 223 Taxman 143 (HC) (Kar) xix. CIT vs. Godha Chemicals (P.) Ltd.: 353 ITR 679 (Raj.) (Mag) xx. CIT vs. Gujarat Oil & Allied Services: 201 ITR 325 (Guj) xxi. CIT v. A.N. Arunachalam: 208 ITR 481 (Mad) xxii. CIT v. Shivanand Enterprises: 209 ITR 63 (Bom) xxiii. Zenith Processing Mills v. CIT: 219 ITR 721 (Guj) Therefore, he submitted that the assessing officer erred in denying the claim of deduction under section 80IB/IC of the Act on the ground of non-filing of balance sheet of the eligible units, without appreciating that, the same were filed during the DRP proceedings and were available at the time of passing the final assessment order. 58. For the previously mentioned cumulative reasons, he submitted that the ld. AO grosslyerred in denying the claim of deduction made under section 80IB/IC of the Act. 59. Count....
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.... (iii) The assesse does not record the sales at Arm's length pricing and if the profit of selling and distribution and b rand profit are excluded which are profit center in itself then there is a loss (iv) The assesse has failed to determine profit in accordance with section 80IA (a) of the Act and has not allocated expenses which are related to manufacturing activity and if it is done there would be a loss. 64. He further referred to page no.973 wherein which is a statement showing computation of deduction with respect to various units and he submitted that deduction u/s 80IC with respect to new tablet plant No.III is the first time claimed during the year amounting to Rs. 523509006/- and therefore this claim has been examined for the first time during the year and hence without considering the other points there is no deduction allowable to the assesse on this sum at least. 65. Based on the above submission it was submitted that the whole issue of claim of the deduction should be set aside to the file of Assessing officer and for this he relied on the decision of ACIT Vs. Amarnath Reddy 126 ITD 113 (TM) TII-425-ITAT Madras dated 29.09.2015. 66. In rejoinder the....
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....whether such deduction claimed was allowed and reason for variations in the deduction claimed and allowed. Assesse has also submitted the copy of the assessment orders for respective years that have been submitted in supplementary paper book by the assesse. It was further submitted in the chart that AY 2001- 2002 and 2002-03 reassessment proceedings were initiated for verification of allocation of head office and R&D expenses with respect to claim of the assesse u/s 80IB and 8IC and after verification no disallowance or adjustment to the claim of the assesse was made and relevant assessment orders were placed in the paper book. 68. We have carefully considered the rival contentions. During the year assesse has claimed deduction u/s 80IB and 80IC as under:- Name of unit Section under which claimed Year of establishment Year of claim Initial year of the claim Amount claimed remarks Goa Plant 80IB 31.03.2002 7th 2002-03 90204832 Profit for year is Rs. 300682774/- and deduction is claim @30% of the eligible profit. New Tablet Plant-I 80IC 31.03.2005 4th 2005-06 Rs.220579510 It is eligible for deduction @100% of profit fo....
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....ed to examine the claim of deduction and its eligibility to examine whether all statutory conditions are satisfied in the first year in which the appellant claims the deduction.If revenue does not disturb the claim of the assesse in that year, it is not open to revenue to disallow the deduction in the subsequent years. The various authorities cited by the ld. AR are specifically on the point in favour of the assessee. The contention of the revenue that this is the first year in which the methodology of claim of deduction of the assesse is being verified is not accordance with the previous assessment orders passed by the AO with respect to deduction u/s 80IB with respect to Goa plant and deduction u/s 80IC of the Act for New Tablet Plant-I. On perusal of those orders, it is apparent that these deductions claimed by the assesse in the initial year of this industrial undertaking have been examined in detail andthen allowed by the revenue after making enquiry. In view of this, the argument of the revenue cannot be accepted that these deductions have not been examined. For this finding, we have material on record the assessment history in the form of assessment orders of the assessee fo....
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.... years. 70. It is well settled law that the principles of res judicata do not apply to income tax proceedings and assessment for each year is an independent proceeding. It is now equally well established that issues that have been settled and accepted over a period of time should not be revisited in subsequent assessment years in absence of any material change which would justify the change in view. 71. The Supreme Court in the case of Radhasoami Satsang (supra) has held that unless there is a material change in justifying the revenue to take a different view the earlier view which has been settled and accepted of a several years should not be disturbed. The relevant extract from the said judgment is quoted below:- "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a Unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all app....
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....ion 80J of the Act was made by the assessee in the assessment year 1973-74. The assessee was denied that claim by the Assessing Officer. For this reason, the Assessing Officer denied the claim in this assessment year as well, taking note of the fact that the matter pertaining to 1973-74 was pending before the Income Tax Tribunal. It is a matter of record that the appeal filed by the assessee for the assessment year 1973-74 was allowed by the Income Tax Appellate Tribunal. The effect thereof was that the assessee was granted the requisite deduction under Section 80J of the Act for the assessment year 1973-74. The Department has sought reference under Section 256(1) of the Act which reference application was also rejected by the Tribunal. Likewise, for the assessment years 1974-75 and 1975-76, the claims of the assessee were allowed. The assessee, once given thededuction under Section 80J of the Act is entitled to such a deduction for a period of 5 years. If the assessee has been allowed the benefit of Section 80J in the last three precedingyears, there is no reason to deny the same for the instant assessment year. We, therefore, answer this issue also in favour of the asses....
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....h deduction is also available for the seven assessment years immediately succeeding the initial assessment year. Surely in cases where an assessee is held to be eligible for deduction in the initial assessment year, the same cannot be denied in the subsequent assessmentyears on the ground of ineligibility since the set of facts which enable an assessee to claim to be eligible for deduction under section 80-I of the Act occur in the previous year relevant to the initial assessment year and have to be examined in the initial assessment year. In such cases, where the facts on the basis of which the deductions are claimed are subject matter of an earlier assessment year and do not arise in the current assessment year, it would not be possible for an Assessing Officer to take a different view in the current assessment year without altering or reopening the assessment proceedings in which the eligibility to claim the deduction has been established. 76. In cases where deduction is granted under Section 80-I of the Act, the applicability of the Section is determined in the year in which the new industrial undertaking is established. The qualification as to whether any industrial u....
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....r reference, that is, 1969-70, without disturbing the relief granted for the initial year. It should be stated that there is no provision in the scheme of s. 80J similar to the one which we find in the case of development rebate which could be withdrawn in subsequent years for breach of certain conditions. No doubt, the relief of tax holiday under s. 80J can be withheld or discontinued provided the relief granted in the initial year of assessment is disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the ITO cannot examine the question again and decide to withhold or withdraw the relief which has been already once granted." 79. The Division Bench of the Bombay High Court in the case of Paul Brothers (supra) has also adopted the view expressed by the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries (supra)." For the sake of brevity, we do not reproduceother decisions cited by ld. AR that reiterates the same principles that in absence of any change in facts / law etc. during intervening period the deduction granted after examination in initial year of a tax holiday period it cannot be questioned in....
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....rehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." 30. Reference was also made to Parashuram Pottery Works Ltd. v. ITO [1977] 106 ITR 1 (SC) and then it was held: "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or....
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.... PB Volume IV Goa Unit 31.01.2012 Yes 974-986 New Tablet Plant-I 31.01.2012 Yes 987-999 New Tablet Plant-II 31.01.2012 Yes 1000-1012 New SCG Plant 31.01.2012 Yes 1013-1025 New Tablet Plant-III 31.01.2012 Yes 1026-1038 79. On examination of the above stated balance sheet and profit and loss account of the above industrial undertaking where the claim of the deduction of the assesse is worked out and certified by the Independent accountant is prepared based on similar accounting policies and practices. It is also apparent that the profit and loss and the balance sheet have been prepared on rational basis after allocation of proper expenditure, which has been followed by the assesse consistently and based on the accounting practices followed in earlier years. The main reason for asking of separate books of accounts of the eligible undertaking is only to verify that whether the assesse has computed the eligible profits for deduction has some sanctity or not. Assesse has consistently followed allocation of 75% of head office expenses to the individual undertaking based on sales clocked by the individual units. This ....
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....provides as under :- ^98[Form of audit report for claiming deduction under section 80-I or 80-IA or 99[80-IB or section 80-IC]. 18BBB . (1) The report of the audit of the accounts of an assessee, which is required to be furnished under sub-section (7) of section 80-IA or sub-section (7) of section 80-I, except in the cases of multiplex theatres as defined in sub-section (7A) of section 80-IB or convention centres as defined in sub-section (7B) of section 80-IB 1[or hospitals in rural areas as defined in sub-section (11B) of section 80-IB], shall be in Form No. 10CCB. (2) A separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction under section 80-I or 80-IA or 80-IB1[or 80-IC] and shall be accompanied by the Profit and Loss Account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise were a distinct entity. (3) In the case of an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining an infrastructure facility, the form shall be accompanied by a copy of the agreement of the enterprise with the Central....
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....Consequently, the Assessing Officer worked out, on his own, the manufacturing account, as indicated in his Order, giving a bifurcation in terms of quantity of raw wool produced. On Appeal before honourable court it was held as under :- "4. In our view, the findings given by ITAT and the High Court are findings of fact. In this case, we are not concerned with the interpretation of Section 80IA of the Act. On facts, we find that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year. If the assessee had maintained a separate account, then, in that event, a clear picture would have emerged which would have indicated the income accrued from the manufacturing activity and the income accrued on the sale of raw material. We do not know the reason why separate accounts were not maintained for the raw material sold and for the income derived from manufacture of yarn." On reading of the above decision, it is apparent that the main purposes of the maintenance of separate account are to deduce correct profit eligible for deduction. Hon Supreme court in above decision has also held in thebackground of the fact....
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....m any system/ software, identified and separate accounts relatable to any particular unit/ undertaking are discernible and are capable of being generated, the same, in our view, is sufficient compliance with the requirement of maintenance of separate books of account, if any. However, it is to be noted in present era of technological evolution that old age notions of the maintenance of accounts and business records do not survive and business entity today survives on real time information on each aspect of its business process. In this era when an entity maintains its accounting and business records on Enterprise Resource Planning system, which is a standard procedure or program to optimize all business processes including Sales, Logistics, Production, Quality, Finance of an entity and SAP is a name of software product and it's a company name too which a leading provider of these solutions, it is rather incorrect to say that separate books of accounts are not maintained by the assessee. Evidence led before ld. AO in the form of profit and loss accounts, before ld. DRP in the form of the profit and loss account and complete balance sheets of the undertaking, before 'accountant' ....
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....s. . It was stated that the gross total income of the assessee is Rs. 178.64 Crores and if the above stated income are excluded i.e. of Rs. 225.83 Crores the total income of the assessee will result in to loss and therefore there is no profit in manufacturing activity of the assessee and hence no d deduction is allowable to the assessee. On this aspect we have carefully perused the computation of total income filed by the assessee which is at page no 1145 to 1155 of the paper book where the gross total income of the assessee is Rs. 3347340467 and claim of the deduction u/s 80 IB/IC of the act of Rs. 1366821506/-. Therefore, it is apparent that assessee's deduction is not exceeding the gross total income of the assessee. We have perused the provision of section 80 A of the act which provides as under :- Deductions to be made in computing total income. 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to ^48[80U]. (2) The aggregate amount of the deductions^49under this Chapter shall not, in any c....
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....10. The provisions of sub-section (4) of section 10A, relied upon by the Assessing Officer, apply for the purpose of segregating the profits of the business into export profits and domestic profits. It is a statutory formula for ascertaining what are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. We are not in the present case concerned with sub-section (4). That sub-section will apply when the combined profits - profits of the exempt unit and those of the non-exempt unit - have been ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. What we are concerned herein is the stage before that. We are concerned herein with the method by which the indirect or common expenses - expenses which are incurred for both the exempt and taxable units - are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case consid....
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....g method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court." In the light of the observations of the Supreme Court in Hukam Chand Mills Ltd. (supra), in a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits. On the contrary, as we have already pointed out, distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the present one where the deduction under Section 10A is available over a period of ten years and only in some years the method of apportionment of income is disturbed. In other words, there is no "just cause" made out for abandoning the pas....
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....ld have been charged and reduced from the profit of the industrial undertaking after valuing service of selling and distribution arm of the company at market rate. At present assessee has allocated it at cost. Therefore, ld. AO has invoked provisions of section 80 IA (8) of the act. It is not dispute that that products manufactured by these industrial units are sold by selling and distribution arm of the assessee and the cost incurred is allocated to these respective units on the basis of appropriate allocation key of 'sales'. Ld. AR of the appellant relying on the decision of coordinate bench of Cadila Healthcare Ltd vs. ACIT 21 Taxmann.com 483 has submitted that there cannot be any specific demarcation between manufacturing and selling activities of the assessee and profit accrues only at the time of sales of the goods only. Therefore, the contention of the revenue that selling and distribution function of the assessee is a separate profit center is required to be rejected at threshold. We have carefully considered the argument of ld. AR and of the revenue on this point as well as the ld. AO and Ld. DRP. We are of the view that this argument is almost similar to the argument rais....
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....f profit of manufacturing unit the mandate is very clear because Income Tax Rule, 1962 contains Rule 18BBB wherein as per sub-rule(2) a separate report is to be furnished by each undertaking and that report shall be accompanied by a profit & loss account and balance-sheet of that Undertaking as if the Undertaking is a distinct entity. He has therefore argued that the allocation of the profit of a manufacturing unit should be made on stand alone basis. He has questioned that how the sale price of the products of the Baddi Unit were determined and recorded. Because of the brand value the sale price must have been determined by the management as if the profit is earned by the assessee- company on sale of the products of the Baddi Unit. It was recorded on the presumption that the sales were executed by the Head Office by charging brand value, the name of the product and the goodwill of the Company. In any case, according to Ld. DR, a reasonable expenditure should have been provided, so that such an abnormal profit @ 58.66% could be checked. 9.6 In support of the above submissions, Mr. Srivastava has placed on strong reliance on the decision of Hon'ble Supreme Court in the ....
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.... Article or thing ......... Therefore, 'manufacturing' is the first criteria for the eligibility of the 'business' to qualify for the deduction. Hence the 'profits' are required to be derived from a manufacturing undertaking which is producing the specified article. That 'profit' is inclusive in the 'gross total income'. As already noted, the terminology "profit" has not been defined in this Act therefore we have taken the help of other resources. The basic question is that what is the "profit" of a manufacturing unit? Firstly, the term "Profit" implies a comparison between the stage of a business at two specific dates separated by an interval of a year. Thus fundamentally the meaning is that the amount of gain made by the business during the year. This can be ascertained by a comparison of the assets of the business at the two dates. To determine the "profit" of a manufacturing Unit the accounting standard has given certain guidelines, enumerated in short. In the accounting the "profit" is the difference between the purchase price and the cost of bringing the product to market. A "gross profit" is equal to sales revenue min....
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....ccount. 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, reliance was placed on Addl. CIT v. Delhi Press Patra Prakashan [2006] 10 SOT 74 (Delhi) (URO). In this case, the assessee was claiming deduction u/s.80IA in respect of a Unit No.4. The said Unit was showing profit @ 62%. As against that, AO has noticed that a margin of profit shown by the assessee as a whole was only to the extent of 10%. The AO has therefore recomputed the profit of the said Unit by applying sub-section (10) of section 80IA and restricted the profit of the said Unit to 10% only. While dealing this issue, the Respected Coordinate Bench has concluded that it was not justified to disturb the working of profit merely because the profit rate of eligible unit was substantially higher than overall rate of profit of other Units of the assessee, more so when separate books were maintained by the assessee in respect of the said eligible Unit. In the present case as well the AO has proceeded to disturb the profit of the Baddi Unit and held that only 6% profit is eligible for deduction u/s.80IC.While doing so....
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....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 said decision was entirely based upon the connectivity of the marketing operations with the profits. The CBDT Circular No.23 of 1969 dated 23/07/1969 was also taken into account wherein it was opined that where a non-resident's sales to Indian customers are secured through the services of an agent in India then that profit is attributable to the agent's services. Meaning thereby because of the close connection of the agent's marketing activity the proportionate profit was attributed to the said activity. Contrary to this, there was no finding that upto the extent of 80%, the profit was attributed to the assessee-company. The segregation between 80% and 6% was not on account of any evidence through which it could independently be established that the major portion of the profit could be attributed to the assessee-company and rest of the profit could only be attributed to the Baddi Unit. 10.5 The AO has also made out a case that the book profit percentage of Baddi Unit was 58.67%, whereas the pr....
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.... 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, so far as may be, apply to the eligible undertaking or enterprise under this section." Due to this reason, our attention was drawn on the provisions of section 80IA(5) of IT Act; reads as under:- "Section 80IA(5) : Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." As per this section, the profits of an eligible undertaking shall be computed as if such eligible business is the only sourc....
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....rded 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 were transported to various C&F agents across the country for sale purpose. Therefore, the eligible business is the manufacturing of pharmaceutical products and the only source of income was the profit earned on sale of the products. 10.8 An interesting argument was raised by ld. Special Counsel that the provisions of section 80IA(8) prescribes the segregation of profit in case of transfer of goods from one Unit to another Unit. But section 80IA(8) reads as follows:- 'Section 80IA(8) : Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services....
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....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 Pandora box shall be opened in respect of the determination of arm's length price vis a vis a fair market and then to arrive at reasonable profit. Rather a very complex situation shall emerge. Specially when the Statute do not subscribe such deemed inter-corporate transfer but subscribe actual earning of profit, then the impugned suggestion of the AO do not have legal sanctity in the eyes of law. 10.9 A very pertinent question has been raised by ld.AR Mr. Patel that what should be the line of demarcation to determine the sale price of a product if not the market price. As far as the present system of fixation of sale price of the product is concerned, a consistent method was adopted keeping in mind the several factors, depending upon the market situation, we have been informed. But if the assessee is compelled to deviate from the consistent method of pricing, then any other suggestion shall not be workable because no imaginary....
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....ves 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, the respected Parliament has confined the grant of deductions only derived from eligible business. Each eligible business constitutes a stand alone item in the matter of computation of profit. The Court has said that because of this reason the concept of "segment reporting" was introduced in Indian Accounting Standards. Ld. Counsel Mr. Srivastava has argued that the deduction u/s.80IC is a profit linked incentive. Only the Operational Profit has to be claimed for 80IC deduction. According to him, each of the eligible business constitutes a stand alone item in the matter of computation of profit. For the computation of profit of an eligible business the word used is "derived" in section 80IC which is a narrower connotation, as compared to the word "attributable". In other words, by using the expression "profits derived by an undertaking", Parliament intended to cover such sources not beyond the first degree, i.e. the first degree ....
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....s 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 manufacture, (ii) secondly to his trading operations and (iii) thirdly to his business of export. On that basis, it was opined that the profit or loss has to be apportioned between these businesses in a business like manner and also according to well established principle of accountancy. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the place of accrual of profit. The act of sale is the mode of realizing the profits. If the goods are sold to a third person at Mill premises, one could have said that the profits arose by reason of sale. The Profit would only be ascribed to the business of manufacture and would arise at the Mill Premises. Merely because a Mill owner has started another business organization in the nature of sale depot, that cannot wholly deprive the business of manufacture of its profits, though there may have to be apportio....
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....ed 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 there was in fact a part of a business and that the profit had actually accrued or arose in that part of an Indian State. The Court has clearly stated in para-41 that both the elements should found exist and then only the business could be treated as a separate business. However, the said proviso has propounded only deeming provisions, as is apparent from the language of the section itself. For the purpose of the said section, it was deemed to be a separate business. The whole of the profits of which accrue in an Indian State and the other part of the business be deemed to be a separate business. In para-44, the Hon'ble Court has discussed the problem with reference to certain decisions of English Courts and then made an observation that it had been held that if separation is possible in such cases, the proper course is to follow that sever the profits of the two businesses and assess accordingly. The r....
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....ra-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 on the said assumption that apportionment was possible the said proviso was based upon that presumption only. If no apportionment can be made in respect of the process of a particular business, then that will not be considered to be a part of the business at all and held that the proviso will not apply. It was concluded that the principle of apportionment was implied therein. After this detailed discussion, we thus arrive at the conclusion that the principle of apportionment was the criteria for segregating the manufacturing profit if it was feasible to do so. As against that in the present case the assessee has computed the profit of the Baddi Unit on the basis of the well accepted principle of accountancy that a profit is accrued where a transaction is closed, meaning thereby the profit arises solely at the time of sale. 10.13 After the detailed discussion, before we close the controvers....
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....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 are claimed as deductible. 88. Further ld. AO has also given one of reason that the claim of the assessee is not admissible because of the reason that along with Form NO.10CCB assessee was required to file the balance sheet and profit and loss account of the eligible undertaking. It is admitted fact that assessee did not file balance sheet along with Form No.10CCB but has filed profit and loss accompanied with that audit report.Subsequently, before ld. DRP, those were filed and were available with ld. DRP as well as with AO at the time of framing final assessment order. Hence it is contended by the ld. AR that substantial compliances has been made by the assessee by filing the profit and loss account and complete compliance before passing of the final assessment order by filing the balance sheet. Hence,ld. AR contended that if the full details are available with the AO before passing of ass....
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....rableDelhi 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 to agree to the contention of the revenue that as the balance sheets were not filed by the assessee of those eligible industrialundertaking whole of the deduction is not allowable to the assessee. 89. Coming to the computation of the eligible income of the assessee for all the eligible units, Ld. AO could not point out any error except dealt with by us which are not on the issue of facts of the case but all of them are on legal grounds, which we have answered in preceding paragraphs of this order. In view of claim of the assessee supported by the audited certificate as provide u/s 80 IA (7) of the act read with rule 18 BBB and supported by the profit and loss account and balance sheets of the assesse, allocation of all the expenses based on the accepted formula which the assessee is applying for last several years and which has also not been disputed by the ld. AO in past years....
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.... 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 disallowance was made under one particular provision. The subject-matter of the appeal was whether the expenditure claimed by the assessee was allowable or not. If it was not disallowable under one particular provision but is disallowable under any other provision, the subject-matter, viz., the allowability of expenditure remains the same. There are a number of decisions in which it has been held that the Tribunal can base its decision on a ground not raised before the appellate authority or in the grounds of appeal before it but is not bound to do so. It is not precluded from considering a point which arises out of the appeal merely because such point had not been raised or urged by either party at the earlier stage of the proceedings. Some of these decisions, only to name a few, are CIT v. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 7051 (Mad.), CIT v. AC Paul [1983] 1....
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.... 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 should have invoked the provisions of section 37(1) and requested the Bench to remit back the matter to the file of the Assessing Officer to consider the allowability or otherwise of the expenditure under section 37(1). We do not find that any such fresh plea is raised by the revenue during the course of hearing which is not taken by the LD. AO or Ld. DRP. On factual points, nothing has been alleged by revenue, which remains to be examined, which is brought to our notice. In absence of any fresh plea by the revenue, we are afraid that we cannot agree with the contention of revenue. Our this reason also gets the support from the decision of coordinate bench in Zuari Leasing and Finance Corpo Limited V ITO 112 ITD 205 ( Delhi) (T M ) where in its held that :- "10. It is clear from above that primary power, rather obligation of the Tribunal, is to d....
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....s 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 issue is squarely covered in favour of the appellant by decision of ITAT in assessee's own case. However, neither the AO nor the ld. DRP has applied its mind to the facts of this case and has not adjudicated on the issue. Facts of this expenditure with adequate details are also not record before us. Therefore we set aside this ground of appeal to the file of AO to verify the claim made by the assesse and if the facts and circumstances are similar to the issue decided by the ITAT in case of assesse for earlier years same may be allowed. In the result, ground 13 of the appeal is allowed with above direction. 95. Ground no.14 of the appeal is against not adjudicating the claim of deduction of Rs. 22306073/- being the demand raised under the Drug Price Control Order, 1979. The brief facts of the case are that under DPCO in its report dat....
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....venue 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 the deduction could be claimed. Such concurrent view should not have been held to be perverse and should not have been interfered by the Tribunal. 4. In relation to this question it is submitted by Mr. Pardiwalla, learned Senior Counsel appearing for the Assessee, that the Tribunal has not committed any serious and grave error of law as projected. The Tribunal has in accepting the stand of the Assessee concluded that the liability is for contribution to the DrugPrice Equalization Account. The Assessee may have disputed the liability insofar as this contribution, however, the liability is clearly ascertainable one. There was no stay against accrual of the liability under clause 7(2) of the DrugPriceControlOrder. This being a statutory liability it is allowable in the year in which it arises irrespective of whether the....
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....ommercial 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 gain of Rs. 22.12 crores. It has also incurred further expenditure of Rs. 14.20 crores on borrowings and hedging contracts. The appellant this detail in the notes forming part of the return of income and submitted that deduction in respect of aforesaid expenditure may be allowed as deduction u/s 37 of the Act or same amount may be added to the cost of capital asset as actual cost and grant depreciation thereon. This issue remains un-adjudicated by ld. AO and ld. DRP did not issue any direction. 99. Ld.AR submitted that though assesse has submitted in the notes to the return of income,it was not adjudicated. Further, he submitted that as the borrowings were for the purpose of acquisition of capital assets the same is directly related to the cost of such asset and therefore should be added to the cost ....