TaxTMI 
TaxTMI 
2017 (9) TMI 727
X X X X Extracts X X X X
X X X X Extracts X X X X
....ake of convenience and brevity. Assessment Year 2004-05 (Assessee's appeal ITA No. 117/Ahd/2012) 2. The assessee's first substantive ground pleads that both the lower authorities have erred in law as well as on facts in disallowing its Section 80HHC deduction claim of Rs. 18,85,093/-. There is no dispute that the Assessing Officer as well as the CIT(A) reject the above deduction claim by placing reliance upon legislative amendment in Section 80HHC by the Taxation Laws (Amendment) Act, 2005 with retrospective effect from 01.04.1998 inserting second to fourth proviso followed by fifth proviso thereto with retrospective effect from 01.04.1992 for re-working of the above deduction alongwith similar corresponding amendments in Section 28 of the Act by way of clauses (iiid) and (iiie) therein. The Assessing Officer's assessment order dated 22.12.2006 made the impugned disallowance for the reason that assessee's profits in question stated a negative figure. 3. The CIT(A) affirms Assessing Officer's action as under: "3.3 I have considered the facts of the case; assessment order and appellant's submission. Assessing Officer disallowed appellant's claim of deduction under s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The assessee pleaded to have debited the same in the relevant previous year only after settling all disputed issues pertaining thereto. Case file also indicates the very factual position. The Assessing Officer's view was that the assessee's mercantile system of accounting would not permit such a course of action. He therefore invoked the impugned disallowance. 6. The CIT(A) upholds Assessing Officer's action as under: "5.3 I have considered the facts of the case; assessment order and appellant's submission. Prior period expenses are allowable in the year in which the same are crystallized. Assessing Officer allowed opportunities to the appellant to give details of prior period expenses and to prove as to how these expenses were crystalized during the year. Appellant has not given details to the AO. No such details were filed in the appeal hearing also. Only mention of certain items of expenses is there. In absence of details and vouchers etc, one cannot reach to the conclusion that these expenses were crystallised during the year. It is not at all in dispute that only those expenses which were crystallised during the current year are allowable but onus to prove that pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llowed if an assessee is assessed at the same rate in the two sets of assessment years. We adopt the same analogy herein as well to delete the impugned disallowance. This second substantive ground is therefore accepted. 8. The assessee's third substantive ground seeks to delete transfer pricing adjustment addition of Rs. 38,14,000/- as proposed in the transfer pricing officer "TPO"s order dated 31.05.2006 and made in an assessment order dated 22.12.2006 as affirmed in lower appellate proceedings. The assessee had admittedly sold formulations and hospital product to its Kenya based Associate Enterprise. The authorities below noticed it to have charged average profit mark up of 16.57% in said Kenyan sales than @ 37.53% in case of unrelated party sales in Uganda and Congo. The assessee had applied the transactional net margin method "TNMM" in computing its PLI . The TPO however rejected the same. He applied cost plus method. He then adopted average PLI @37.53% to arrive at the impugned arm's length adjustment of Rs. 38.14lacs as affirmed right upto lower appellate proceedings. 9. The assessee's only plea before us is that this tribunal's order in preceding two assessment years 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... adjudicate the instant issue as the assessee had itself conceded its grievance in course of lower appellate proceedings. This substantive ground is therefore rejected. 12. The assessee's last substantive ground seeks to allow Section 80G deduction claim of Rs. 3,50,000/- in both the lower proceedings on the ground that it did not file the relevant receipts of donations as well as their nexus with its business as stipulated u/s.31of the Act. The very factual position continues herein as well. We therefore reject assessee's instant last substantive ground. Its appeal ITA No.1117/Ahd/2012 is partly accepted. Assessment year 2011-12 (assessee's and Revenue's cross appeals ITA Nos. 848 & 918/Ahd/2016 13. We come to assessee's appeal. Its first grievance therein challenges upward transfer pricing adjustment of Rs. 60,83,440/- pertaining to corporate guarantee fee; as made by the TPO and affirmed in dispute resolution penal; "DRP"s directions. The said lower authorities hold that the assessee ought to have charged @1.24% on corporate guarantee amount of Rs. 49,06,00,000/-. The assessee admittedly had provided the corporate guarantee in question to its associate enterprise in ear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5. The Revenue fails to dispute all the above facts as well as legal developments. We therefore conclude that both the lower authorities have erred in invoking the impugned disallowance of interest in assessee's strategic interest free advances made to its sister concerns. This second substantive ground is accordingly accepted. 15. The assessee's third substantive ground seeks to delete Section 35(2AB) deduction disallowance. The Assessing Officer had disallowed an amount of Rs. 6,53,96,880/- in draft assessment order. The DRP restricts the same to Rs. 4,59,11,880/-. The Revenue's corresponding second substantive ground in its cross appeal ITA No.918/Ahd/2016 seeks to revive the remaining disallowance as well to the tune of Rs. 1,94,85,000/- pertaining to clinical trial expenditure incurred outside the inhouse facility in question. We find that the Revenue's instant grievance has no merit as the assessee has already succeeded on the very issue before hon'ble jurisdictional high court in its own case Tax Appeal no. 39/2015 upholding tribunal's order deleting identical disallowance in ITA No.1146/Ahd/2011 for assessment year 2006-07. Revenue's second substantive ground is therefor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sets continue to be used in the normal course of business hence are eligible to depredation u/s 32. The Assessee Company is eligible to depreciation on Written Down Value of Rs. 7,02,42,834/- being the value on the date of change of use. 1,05,36,425 The Assessee Company hereby attaches the copy of 3CL issued by the DSIR reducing the weighted claim in AY 2009- 10 for the amount of Rs. 10,53,64,250/-Submitted vide Annexure 27 in Reply dated 15.02.2015 12 Plus: Depreciation offered to tax being incorrect amount claimed in Return 34,48,037 13=(10-11+12) Difference To be Disallowed In The Assessment (As Per Form 3CL Issued By The DSIR) 4,67,54,326 7.1.2 Assessee's submissions are on the following lines: (i) The assessee has not worked out any disallowance of Rs. 4,67,54,326/-. It only sought to provide reconciliation table between the claim as per the return of income and the amount as approved by the DSIR authority. (ii) The issue relating to the amount spent on the clinical trial expenses was decided in favour of the assessee by the Hon'ble ITAT, Ahmedabad in assessee's own case for A.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al submission, perused the material available on record and gone through the orders of the authorities below. The Hon 'ble High Court of Gujarat in the case of CIT vs. Cadila Healthcare Ltd. (supra) has held as under:- "11. Revenue has also suggested following question: "D. Whether the Appellate Tribunal has substantially erred in holding that the expenses incurred outside the approved R&D facility would also get weighted deduction based on the work under "on in house" interpreting contradictory to the finding of coordinate bench in Concept Pharmaceuticals Ltd v. ACIT (ITAT, Mum) reported at 43 SOT 423?" 12. We may record that question GBP' in the appeal memo is an additional question which has an element of above noted question. We have, therefore, not separately reproduced the same in this order. The issue is whether the assessee who has incurred expenditure for scientific research, which was not in the in-home facility, could be covered for deduction under section 35(2AB) of the Income Tax Act, 1961. " 11.1 The Hon'ble High Court- of Gujarat after examining the entire issue, came to the conclusion that the Tribunal committed no err....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 55,64,491/- u/s.14A in relation to exempt income of Rs. 5,808/- from dividends. It further seeks to raise an additional ground to withdraw even suo mottu disallowance of Rs. 2,82,07,492/- since having sufficient interest free funds. The same is admitted as it does not require any additional evidence. Relevant facts are already on record. We therefore reject Revenue's objections to admission of above additional ground. 20. Both the learned representatives inform us very fairly that a coordinate bench in assessment year 2007-08 has already restricted an identical disallowance to the extent of exempt income amount. We therefore follow the very course of action herein as well to restrict the impugned disallowance to Rs. 5,808/- only. The assessee's additional substantive ground as well as main ground pleaded herein partly succeed. 21. The assessee's fifth substantive ground challenges Section 80IB deduction disallowance of Rs. 16,34,58,692/- out of total claim of Rs. 53,25,79,553/-; as made by the lower authorities. The above disallowance figure involves excise duty refund amount of Rs. 8,12,71,702/-. The DRP quoted hon'ble apex court's decision in Liberty India vs. CIT (2009) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e distinct, deemed and overriding provisions and they, m the combination of s. 80-IB(1), advocate for special computation of 'profits and gains of the eligible business' in general and for considering all the expenses, both direct and indirect, among all the ongoing projects, if not exclusive against the profits and gains of the eligible business, the only source of income of the assessee. Further, the provisions of s. 80-IA/80-IB do not encourage the disclosure of the profits of the eligible business more than the ordinary profits. The provisions of s. 80-IB(1) read with the deemed provisions of sub-s. (5) (erstwhile sub-s. (7) of s. 80-IA with its overriding application, prescribe for the special model manner of computation of the profits and gains of the eligible business, which must be computed as if it the only source of income. When such computation is undertaken as per the same, all the expenses of the business including the indirect or common or head office expenses have to be booked to all the ongoing projects, if not to the s. 80- IB projects exclusively.- 11.2.4 In view of this, the DRP is of the considered opinion that no interference should be made on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nditions mentioned in the contract, it gets benefit in multiple of 1 million USD. When it fails to fulfill the conditions, it suffers losses in multiple of 2 million USD hence he held that such an activity, can never be called as hedging and is purely speculative in nature. 12.1.2 The AO further found that as per the copies of export bill payment advice obtained from the 2 banks Corporation Bank and Bank of Baroda, where the assessee had submitted these bills, the assessee has booked each and every export bill at the forward rate of exchange for the maturity/due date of export documents thus that the bank had remitted the amount which includes premium/gain as on the date of remittance i.e. along with the foreign currency gain/loss. 12.1.3 The AO thus concluded that the loss incurred by the assessee is in 'Currency Swap loss' which is a derivative loss and this loss has been incurred on account of hedging of US Dollars loan, wherein dollar loan is the underlying asset. He further observed that the currency swap made by the assessee was by way of 'over the counter' contracts entered into with the banks and settled on maturity by issue of debit/credit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....;2,21,62,08,652 Export Exposure SBI per Year (4 Million USD per Month'12 Month ),this exposures have taken place at the end of each month thus hedging over the above operations of the assessee Company. 1,96,80,00,000 Copy of the Bank statement of SBI wherein respective debits has been made vide Annexure 5 12.2.2 The assessee submitted that its Foreign Currency Fluctuation exposure on account of Forex Contract is in line with its Exports Turnover and Export Realization and claimed that it has not engaged in any kind of speculative transaction and the fluctuation loss has incurred during the course of business which is allowable as deductible expenditure under section 37 of the Income Tax Act. 12.2.3 The assessee further claimed that fluctuation loss or gain incurred by it falls under the provisions of clause (a) of Section 43(5) which reads as under: "Section 43 (5) 24"speculative transaction" 25 means a transaction in which a contract for the purchase or sale of any commodity25, including stocks and shares25, is periodically or ultimately25 settled25 otherwise than by the actual delivery....
X X X X Extracts X X X X
X X X X Extracts X X X X
....brought on record that the copies of export bill payment advice obtained from the 2 banks Corporation Bank and Bank of Baroda, where the assessee had submitted these bills, shows that the assessee has booked each and every export bill at the forward rate of exchange for the maturity/due date of export documents and that the bank had remitted the amount which includes premium/gain as on the date of remittance i.e. along with the foreign currency gain/loss. He has clearly brought on record the fact that the loss has occurred on account of an independent Put Call contracts with SBI where underlying exposure for export turnover was 2 million USD which was not dependent on actual delivery25 or transfer of the commodity. Therefore the plea of the assessee that foreign currency fluctuation has ben incurred during the course of business as prescribed under the provisions of Clause (a) to Section 43(5), hence it should be granted as business expenditure, can not be accepted. 12.3.3 The objection raised by the assessee is thus rejected." 26. We have heard rival submissions. The assessee's case throughout has been that it had entered into a forex contract with the State Bank of In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis-à-vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance. 27. The assessee's last substantive ground seeks to reverse the Assessing Officer as well as DRP's action disallowing its sales promotion expenditure of Rs. 10,89,29,928/- u/s. 37(1) of the Act. We deem it appropriate at this stage to reproduce learned DRP's discussion as under: "13.2.1 The DRP has considered the submissions of the assessee company on this issue, the legal position under the I.T. Act 1961. 13.2.2 In this regard, reference may be made to the CBDT's Circular No. 5/2012 dated 1 Aug 2012, which clearly states that freebies in the nature of gift, travel facility, hospitality, cash or monetary grant received by medical practitioners and their professional associations from the pharmaceutical and allied health sector are to be disallowed under the Explanation to Section 37(1) of the I.T. Act 1961. The content of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. 13.2.3 The assessee has submitted that a circular beneficial to the assessee will be applicable retrospectively, while an oppressive circular will be made operational prospectively and in absence of any specific mention of its effective date of application, the circular is effective from its date of issue i.e. from the financial year 2012-13 relevant to the A.Y.2013-14. The argument of the assessee is not acceptable as Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 which forms the basis of the disallowance by the AO was very much in existence during the year. The claim of deduction by the assessee is determined on the basis of provisions of the Income Tax Act and not on the basis of the Circular issued by the board. The Circular is merely clarificatory in nature. 13.2.4 As regards the claim of deduction by the assessee the panel finds that the assessee was asked to submit sup....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which states as under: (g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. 13.2.7 The assessee is engaged in Manufacturing and trading of drugs and pharmaceuticals. The assessee could have engaged the doctors as consultants, as researchers, as treating doctors or in any other professional capacity for its business. The doctors have not been engaged for any of the purpose specified. Therefore the claim of the assessee is not bonafide and hence rejected. 13.2.8 The Hon'ble High Court of Karnataka in the case of J.K.Panthaki & Co. Vs. ITO reported in(2012) 246 CTR 0059 : (2011) 64 DTR 0283 : (2012) 344 ITR 0329 has held that if the assessee commits an offence under any law in the course of his business and incurs expenditure for any purpose in connection with the said offence, the said amount is not deductible under Section 37 of the I.T. Act 1961. The relevant excerpts of the judgment are reproduced here under:- "The commission said to have been paid is not compensation to the direc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on. (Para 19) The Explanation to s. 37 declares that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The word offence has not been defined under the Act, However, Chapter XXII deals with offences and prosecutions. It refers to various sections under the Act and noncompliance with those provisions are punishable with punishment 'as prescribed therein. Willful attempt to evade tax is an offence under the Act. The word 'offence' has to be understood in the context of an offence generally under any Act. It follows that if the assessee commits an offence under any law in the course of his business and incurs expenditure for any purpose in connection with the said offence, the said amount is not deductible under s. 37. No expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. Anything done which is an infraction of the law and is visited with a penalty c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....said agreement is void. Then the said agreement is not enforceable by law. Illustration (j) to s. 23 of the Contract Act, brings home the point explicitly, therefore, under the Indian law an agreement to pay illegal gratification is expressly declared as immoral and consequently such an agreement is void and not enforceable. It is not the Judge or the Court which is declaring such act as immoral. The law declares it as immoral. Though law is different from morality, in the case of illegal gratification payable under an agreement there is convergence of views. There are laws in the country expressly declaring payment of bribe and receipt of bribe by public servants as an offence and punishable under the criminal law of the country. The civil law has wider application and it declares that such payment of bribe is immoral and the agreement is void ab initio. In this context the phrase "prohibited by law" used in the Explanation to s. 37, has wider connotation. It includes expenditure incurred by way of payment of bribe, although it is laid out or expended wholly or exclusively for the purpose of business. As the Indian laws declare such agreements as void, it is unenforceable. The doc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iamentary legislation cannot be extended to such persons or to such expenditure. Such a question would fall within the Explanation-of s. 37 and is not deductible under s. 37.- J.K Panthaki & Co. vs. ITO (2011) 57 DTR (Bang) (Trib) 233 : (2011) 139 TTJ (Bang) 337 affirmed." (Para 45) 13.2.9 In view of the discussion as above, the objection raised by the assessee is rejected." 28. We have heard both the parties. Mr. Soparkar is very fair in pointing out at the outset that this tribunal's decision in ACIT vs. Liva Healthcare Ltd. 161 ITD 63 (Mum) upholding such a disallowance in case of pharmaceutical companies offering free samples to doctor post introduction of the relevant product in market after establishing end use; is hit by Section 37(1) explanation. He however refers to another co-ordinate bench decision in Macleods Pharmaceuticals Ltd. vs. ACIT (2016) 161 ITD 291 (Mum) holding that the above Board's circular dated 01.08.2012 would not have any retrospective effect since not operating in assessment years 2010- 11. He further quotes another co-ordinate bench decision in DCIT vs. PHL Pharma Pvt. Ltd. (2017) 184 TTJ 1(Mum) distinguishing the above case law in Revenue'....