TaxTMI 
TaxTMI 
2017 (9) TMI 727
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.... 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 section 80HHC on the ground that after reducing DEPB inc....
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....nt 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 prior period expenses were crystallised during the year is on the appel....
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....ears. 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 2002-03 & 2003-04 has remitted the very issue back to the CIT(A) for a reasoned adjudic....
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....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 earlier assessment years. There is no quarrel that relevant factual backdrop remains the same in t....
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....onclude 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 therefore rejected. 16. We now advert to assessee's grievance. It had claimed total weighted deduction of ....
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....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.Y. 2006-07. The assessee further mentioned that the Departmental appeal in that case was also dismissed by the High Court vide order dated 23.01.2015. 7.2 Discussion and Directions of DRP: 7.2.1 The DRP ha....
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....g 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 error. Respectfully following the judgement of Jurisdictional High Court in the- case of CIT vs. Cadila Healthcare Ltd. (supra), we hereby direct the AO to follow the claim of the assessee. Thus, this ground of assessee's appeal is allowed. 4. The aforesaid shows that the Tribunal for al....
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....ant 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) 317 ITR 218 in concluding the above excise refund to be not an income derived from the eligible industrial undertaking. We find that earlier co-ordinate bench in assessment year 2007-08(supra) had followed hon'ble apex court's recent decision in CIT vs. Meghalaya Steels Ltd. Civil Appeal no 7622/2014 in holding ....
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....s 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 the addition proposed by the AO/TPO on this ground. The objection raised by the assessee is rejected." 24. We have heard both the parties at length. The assessee admittedly has three production divisions at Jammu, Ankleshwar and Dholka; respectively. Case records at page 396 indicate the same to be operating exclusively for formulati....
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....d 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 advice by the banks. Therefore as per explanation to clause (d) of section 43(5) of the Act, was not an eligible transaction, and hence speculative loss' not allowable as business expenditure "The assessing officer thus disallowed foreign currency loss of Rs. 25,39,60,000/- treating the same as speculation loss". 12.2 Assessee's Submission: 12.2.1 The Assessee ha....
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....ne 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 delivery25 or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or ......................... ......................... shall not be deemed to be a speculative transaction."....
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....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 India on the basis of its foreign currency exposure in import/export transactions with public sector banks to cover fluctuation risk upto Rs. 200crores. One of the bank namely Bank of Baroda is stated to have issued a certificate dated 12.02.2015 claiming realization of Rs. 123,71,57,417/- which could be realized to the tune of Rs. 111,72,18,092/- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learned Departmental Representative do not rebut this factual position. The assessee claims to have been inter alia recording ....
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....ned 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 the Board's Circular being clearly applicable is reproduced below: - "CIRCULAR NO. 5/2012, DT. 1ST A UGUST, 2012 Inadtnissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry 01/08/2012 Business Expenditure SECTION 37(1), It has been brought to the notice of the 'Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Counci....
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....cal 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 supporting evidence by the assessee vide order sheet entry, and it made a detailed submission before the AO to justify the claim of expenditure and further furnished the following details: Particulars Total Amount Rs. Nature of Expense Expenditure related to Business Conference 10,19,12,419 Expenditure incurred on Employees, Speakers & Faculties for attending business related conferences and seminars. This also includes expenses incurred for conferences for skill upgradation workshops hence the same is beyond the scope of Circular 5/2012 dated 1st August 2012. Considering large volume of the transactions we have furnished the sample evidences vide submission ....
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.... & 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 directors of the company for any service rendered to the assessee. From the undisputed facts it is clear that a higher amount was agreed to be paid for performing the contract. Subsequently, the consideration for the contract was reduced. However, before the said reeducation in cost, the assessee had been paid the entire cost of the contract. If the construction cost was reduced the excess amount received had to be returned. The assessee should have returned the said money to the person who paid it i.e., the company. Therefore, payment by the assessee is of an amount legally liable to be returned to the company. Instead of returning to the company, same may be taken as returned to directors for/on behalf of the company. Ther....
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....ct. 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 cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that of a trader. A. penalty cannot be regarded as an expenditure wholly and exclusively laid for the purpose of the business. (Paras 35 & 36) Infraction of the law is not a normal incident of business. Only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. It is well sett....
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....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 doctrine or rule of pan delicto is the embodiment of the principle that the Courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to an illegality or fraud. It is a maxim of law, established, not for the benefit of either of the parties to the litigation, but is founded on the principles of public policy, which will not assist a party who has paid over money, or handed over property, in pursuance of an illegal or immoral contract, to recover it back; for 'the Courts will not assist an illegal transaction in any respect'. The maxim is therefore, intimately connected with the more comprehensive rule of law, ex turpi causa non oritur actio, on account of which no Court will allow itself to be....
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....planation. 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's favour whilst deleting an identical disallowance on the ground that such business promotion expenses are allowable as business expenditure not hit u/s. 37(1) explanation. We afforded ample rebuttal opportunity to the Revenue. Learned Departmental Representative fails to indicate any distinguishing features therein. We find that the above latter co-ordinate bench has elaborately discussed all case laws, IMC regulations as well as Board's circular in deciding the issue. We therefore adopt the very reasoning herein as well to delete the impugned disallowance. The assessee succeeds in its instant substantive ground. Its appeal ITA No.848/Ahd/2016 is partly accepted. 29. This leaves us with Revenue's cross appeal ITA No.918/Ahd/2016. Its first substantive gr....