TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 1276
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....at the assessee has debited an amount of Rs. 4,40,52,225/- under the head "Sales Promotion Expenses" including a sum of Rs. 1,04,28,370/- on gift articles. These expenses were incurred towards purchase of various gift items such as ball pens, towels and tissues, wallets, gift sets, household appliances and watches, besides sponsoring Doctors meet at Phuket where the amount of Rs. 17,17,785/- was expended. The Assessing Officer required the assessee to explain and justify the expenditure on gift article and sponsored trip and explain as to how it is related to the business of the assessee which consists of trading and manufacturing of pharmaceuticals. The assessee in its reply submitted that sales promotion expenses are integral part of pharmaceutical industry. They are incurred towards field force incentives, doctors education, sales review meeting, medical conferences and expenses related to product promotions and samples. Further, there are printed materials which are used by the medical sales representatives to promote the product and highlight various usages of the product to the doctors. It was contended by the assessee that these expenses are incurred by the marketing team fo....
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....onsideration. Referring to page-594 to 600 of the Paper book the Ld. Counsel submits that the CBDT Circular No. 5 of 2012 which stated that the expenditure incurred by the assessee in providing such "free bees had to be regarded as incurred for the purpose which either an offence or prohibited by law and disallowable under Explanation to Sec. 37(1) of the Act has been considered by the Co-ordinate Bench of this Tribunal in Syncom Formulations Vs DCIT in ITA No. 6429 & 6428/M/2012 dated 23rd December, 2015 and held that Circular of CBDT shall be prospectively applicable w.e.f 1st August 2012. Therefore, the Ld. Counsel submits that since the Assessment Year under consideration is Assessment Year 2004-05, the CBDT Circular shall not be applicable. 5. The Ld. Departmental Representative Shri N.K. Chand appearing on behalf of the Revenue vehemently supports the order of the Assessing Officer and the Ld. CIT(A) in making adhoc disallowance of 10% in respect of gift articles given to the medical practitioners has not been incurred for the purpose of business of the assessee. 6. Heard both sides and perused the orders of the lower authorities as well as the decisions relied on by the as....
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....% disallowance is made and in the other year an adhoc 10% of the disallowance is made. The primary reason for making such disallowance is that the assessee has not furnished details of recipients of the gift articles. The assessing officer presumes that there might be an element of non-business use. The assessee explains that it distributes its product through various medical representatives who inter......... got in touch with a very large number of doctors., etc. who are contacted for improving the marketing and distribution of the assessee's products. He states that the total list of doctors, who received the gifts are extremely voluminous and hence cannot be attached. A list of representatives was furnished to the CIT(A). He also submits that the CIT(A) was wrong in stating that there is no procedure or system in place to monitor, control, supervise, guide or even to veto the distribution of samples. The assessee submits that it is an internal procedure of approval and a copy of the same is attached as Annexure-II. Thus, submissions of the assessee on facts are not controverted by the revenue. There is an internal control procedure in place. On this factual matrix we are of the....
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.... At the outset, the Ld. Counsel for the assessee submits that the Co-ordinate Bench has decided this issue in favour of the assessee in assessee's own case for Assessment Years 2002-03 & 2003-04 by order dated 6.2.209 in ITA Nos. 428 & 429 of 2007. The Ld. Counsel submits that the Co-ordinate Bench relying on the decision of Hon'ble Bombay High Court in the case of India Supply Jewels Ltd. (284 ITR 389) has held that interest on current account is assessable as business income. He further submits that the Co-ordinate Bench relying on the decisions in the case of Lalsons Enterprises (89 ITD 25 (SB)] and Sriram Power Equipment held that only the net interest has to be eliminated under clause (baa) of Explanation to Sec. 80HHC of the Act. The Ld. Counsel submits that the Hon'ble Supreme Court in the case of ACG Associates Capsules Pvt. Ltd Vs CIT (343 ITR 89) has held that only the net interest should be excluded while computing the deduction u/s. 80HHC read with clause (baa) of Explanation. The Ld. Counsel for the assessee submits that the Ld. CIT(A) following the decision of the Hon'ble Supreme Court in the case of Liberty India Vs CIT (317 ITR 218) held that deduction u/s. 80HHC is....
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....head of profits and gains of business or profession. Such income would fall for classification as income from other sources. In applying the provisions of Sec. 80HHC(1), the Legislature has made a specific provision for the deduction of such profits of business as are derived from the export activity. The expression "derived from" has been construed to require a direct and proximate nexus with the business of export. Absent such a nexus, the income which results from the activity would have to be excluded from reckoning for the purposes of the formula prescribed by Sec. 80HHC". 12. In the case on hand, the assessee has received interest on current account balances. The interest earned on current account balances cannot be said to be derived on business of exports. Earning of interest income from current account balances cannot be construed to be a direct and proximate nexus with the business of exports. Respectfully following the said decision we hold that such interest income cannot be considered as income derived from business for the purpose of computing deduction u/s. 80HHC of the Act. However, the alternative argument of the assessee that only the net interest should be elimi....
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....mbai Bench in the case of Sandoz Pvt. Ltd., Vs ACIT in ITA No. 8489 of 2004 dated 9.11.2012 and the decision of Ahmedabad Bench in the case of Arvind Fashions Ltd. Vs ACIT (37 SOT 369) the Ld. Counsel for the assessee submits that 90% of such amount should not be reduced from business income while computing deduction u/s. 80HHC. 14.3. Coming to the service charges of Rs. 3,21,836/- he submits that in connection with the reimbursement of the shared cost charged by the assessee to its group company UCB Malaysia and this was related to employee salary and office administrative charges provided by the assessee as cost of these services. The assessee has charged UCB Malaysia 5% of the reimbursement cost as service charge or administrative charge which has been accounted under the head "Other Miscellaneous Income". The Ld. Counsel for the assessee placed reliance on the decision of Mumbai Bench in the case of Rishabh Instruments Pvt. Ltd in ITA No. 6694/M/07 dated 16th June 2009 and the decision of the Hon'ble Madras High Court in the case of T.T.G. Industries (209 Taxman 0014). 14.4. Coming to Cenvat credit, the Ld. Counsel for the assessee submits that assessee follows inclusive meth....
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....puting deduction u/s. 80HHC of the Act. This also supported by the decision of the Hon'ble Bombay High Court in the case of Pfizer Ltd (supra), Ahmedabad Bench in the case of Arvind Fashion (supra) and Mumbai Bench in the case of Sandoz Pvt. Ltd (supra). In so far as service charges are concerned, we are of the view that this income is not derived from the business operations of the assessee therefore, we uphold the action of the Assessing Officer in reducing 90% of such income while computing deduction u/s. 80HHC of the Act. Coming to Cenvat credit, we find that in the case of ACIT Vs The total Packaging Services in ITA No. 5364/M/09 for assessment year 2006-07 by order dt. 4.11.2011 held that the modvat credit is derived from industrial undertaking only for the purpose of computation of deduction u/s. 80IB of the Act while holding so, the Co-ordinate Bench held as under: We have heard the rival contention and carefully perused the relevant material on record. Undisputedly, the Modvat credit earned by the assessee during the earlier years could not be availed and set off because of the huge difference of excise duty rates on purchase of raw material and sale of goods. Upto 31st ....
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....arified that the refund is not on account of excess payment of excise duty but is basically designed to give effect to the exemption and to operationalise the exemption given by the notifications. In that sense, the Central excise duty refund does not appear to bear the character of income since what is refunded to the assessee is the amount paid under the modalities provided by the Department of Revenue for giving effect to the exemption notifications. There is also nothing to suggest that the assessee has recovered or passed on the excise duty element to its customers. Even assuming the refund does amount to income in the hands of the assessee, it is a profit or gain directly derived by the assessee from its industrial activity. The payment of Central excise duty has a direct nexus with the manufacturing activity and similarly, the refund of the Central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of Central excise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of Central excise duty and its refund. In the circumstances, we are o....
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....ion, the Assessee incurred e-connectivity charges of Rs. 20,04,718 being allocated to the Assessee by its parent company, UCB SA, annually for providing e-connectivity and systems services, viz SAP services, e-connectivity services and People Soft services, which primarily include: access/ usage of SAP modules and related functionalities; data security, data protection, backup/ restore facilities; capacity planning and performance tuning; e-mail capacity; connection to intranet sites; web browsing capacity; access to corporate portal and global resources; worldwide support via globalized helpdesk organization and access/ usage of people management software. 18.1. Ld Counsel submits that the assessee has claimed the said amount as revenue expenditure under section 37(1) of the Act. The learned AO held that the said expense is being incurred for acquisition of software and accordingly, is a capital expenditure which should be capitalised in the books of account. The depreciation @ 60% is allowed on the said expense treating the same as being incurred for acquisition of software. 18.2. Ld Counsel submits that the Ld. CIT(A) following the DRP directions for A.Y 2006-0....
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....by UCB SA is also done on a rational basis, i.e the number of employees in the assessee company and usage of the remote connections. Further, these expenses are in the nature of periodic (annual) charges, and are not one-time costs resulting in any long-term benefit. In addition, if the assessee does not pay the same, it would no longer have access to these services. Therefore, the assessee has neither acquired any enduring benefit nor does any new capital asset comes into existence and hence, the above expenditure is not capital in nature. 19. The Ld. Departmental Representative places reliance on the orders of the Assessing Officer and the Ld. CIT(A). 20. We have heard both the parties, perused the orders of the authorities below. The assessee is paying charges to its parent company UCB SA annually certain amounts towards following services: access/ usage of SAP modules and related functionalities; data security, data protection, backup/ restore facilities; capacity planning and performance tuning; e-mail capacity; connection to intranet sites; web browsing capacity; access to corporate portal and global resources; worldwide support via globalized helpdesk organ....
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....ssee's own case for Assessment Years 2002-03 & 2003-04 DRP rejected CUP method and considered segmental TNMM as the most appropriate method for Assessment Years 2008-09 & 2009-10 (Paper book 189 to 215). Referring to page No. 183 to 188, the Ld. Counsel for the assessee submits that order giving effect was passed by the TPO granting relief as per the directions of Hon'ble ITAT for the Assessment Years 2002-03 & 2003-04. The Ld. Counsel for the assessee further submits that TPO has accepted the directions of this Tribunal and accordingly no adjustments have been proposed in subsequent years i.e. 2010-11, 2011-12 & 2012-13. Thus he submits that for the Assessment Year under consideration CUP method should be rejected and TNMM should be considered as the most appropriate method for bench marketing the international transaction with its AE. 24. The Ld. Departmental Representative referring to para-88A of Tribunal's order submits that the Tribunal opined that assessee was in error in comparing the operational margin at entity level and terming it as Transaction Net Margin Method. It was also held that CUP method by the Revenue cannot be considered as the most appropriate method therefo....
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....ted to be changed following the decision of this Tribunal in assessee's own case for Assessment Year 2002-03 and 2003-04. The Ld. CIT(A) further held that Assessing Officer/TPO would be at liberty to factually verify the benchmarking analysis carried out by the assessee under TNMM on transaction to transaction basis in consonance with directions of ITAT while giving effect to this order of the Ld. CIT(A). While holding so, the Ld. CIT(A) observed as under: "Since the facts were identical in this year also, the matter as stated above was referred to the AO/TPO to verify the material submitted by the appellant as to whether the transactions of import of APIs (i.e. the margins of FDF segment) meet the arm's length test. In remand report the A.O. stated that the appellant has incorporated the other income on sale ratio of FDF on total sales and if the same is excluded the operating margin of FDF goes down at 28.42%. The AO/TPO further stated that the computation of operating margin for FDF segments which has adopted the cost of goods sold on the basis of consumption ratio of raw materials by FDF segment to total segment could not be verified. It was also stated that agains....
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....have gone through the orders of the ITAT for the A. Y 2002-03 and 2003-04 and the Transfer Pricing Report of the assessee, during the year under consideration. The assessee during the year has made transaction wise comparability analysis in the Transfer Pricing Report. The TPO without taking into consideration the directions of the ITAT in assessee's own case for the A.Y 2002-03 and 2003-04 still followed the approach of the then TPO and applied CUP method to benchmark the transaction of import of AP1 from AEs. The TPO has completely ignored the fact that during the year under consideration, the assessee had not followed the entity level comparability under TNMM, but has benchmarked every transaction separately under TNMM In view of the above, the Adjustment made by the TPO/AO using CUP As the MAM, is directed to be changed following the decision of the ITAT in assessee's own case for the A. Y 2002-03 and 2003-04. The TPO/AO are at liberty to verify the benchmarking analysis done by the assessee under the TNMM on transaction by in consonance with the directions of the 1TAT in the earlier years, while giving effect to these directions. As the adjustment proposed by the TPO u....
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....essee's appeal is that the Ld. CIT(A) erred in upholding the addition of Rs. 31,56,446/- by considering econnectivity charges as an expense incurred for acquiring Software and resulting in benefit of enduring nature and thereby classifying the expenses as Capital expenditure. 24. This issue is identical with the issue in Ground No.4 in ITA No. 6681/M/13 for assessment year 2004-05 from para 17 to 20.1. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 6682/M/13 for assessment year 2005-06 is allowed. 25. In the result, the appeal filed by the assessee is allowed. ITA No. 6455/M/2013 - A.Y. 2005-06 - Revenue's appeal 26. The only ground in Revenue's appeal is with respect of Transfer pricing adjustment. 27. This issue is identical with the issue in Ground No.1 in ITA No. 6454/M/13 for assessment year 2004-05 from para 22 to 26. Therefore, on similar lines and for similar reasons, the ground raised by the Revenue in ITA No. 6455/M/13 for assessment year 2005-06 is allowed. ITA No. 6558/M/2013 - A.Y. 2007-08 - Assessee's appeal 28. The only ground in assessee's appeal is that the Ld. CIT(A) erred in upholding the addition of Rs....