TaxTMI 
TaxTMI 
2018 (6) TMI 604
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....income, the assessee-company placed a copy of balance sheet, trading account and P & L Account. The case was selected for scrutiny under CASS. During the course of scrutiny assessment proceedings, the Assessing Officer called upon the assessee to furnish details with regard to the claim of deduction u/s 10A / 10AA / 10B / 10BA by stating that the claim of deduction is not proper. The Authorised Representative of the assessee appeared on 21st June, 2011 and furnished all the details. 3. It was noticed that certain Transfer Pricing adjustments were required to be made in the instant case. It was also noticed that the claim of expenditure on ESOPs is not proper since it is notional and capital in nature. Assessee was also called upon to furnish details of Research and Development (R & D) expenses in connection with the claim of weighted deduction. Accordingly, the assessee furnished the details of R & D expenditure. Pages 97 & 98 of the paper book refers to the explanation offered by the assessee with regard to the show-cause notice issued by the Assessing Officer. After obtaining the details of R & D Expenses etc., the Assessing Officer completed the assessment on a total income o....
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....nt of income. It was also submitted that during the course of scrutiny assessment proceedings, the assessee furnished all material facts and disclosed true and fair taxable income. Since the details called for by the A.O, from time-to-time, were furnished, based on the said material, the assessment was completed. In fact upon receipt of direction of DRP AO passed a final assessment order u/s 143(3) r.w.s 144C of the Act. Therefore, no action can be taken at this stage since it is beyond the period of four years from the end of the assessment year. 8. Assessing Officer observed that reopening of assessment is very much within the time limit since notice was issued after obtaining prior approval of the Principal Commissioner of Income Tax and he further stated that the plea of the assessee that all necessary information was furnished as required by the A.O. from time-to-time, does not have any merit for the reason that the information furnished by the assessee does not specifically contain the bifurcation of expenditure on R & D with regard to exempted and non-exempt units. It was also stated that the annual report and other documentation did not specifically indicate the R & D ex....
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....ning to special unit is not in accordance with Law. 11. During the year, the assessee-company claimed to have incurred R & D expenditure aggregating to Rs. 322 Crs to develop branded formulations, generic drugs etc., in addition to niche products such as bio-similar and new chemical entities. Therefore, the assessee objected to the allocation of R & D expenditure to special units. A.O. observed that the work done by the R & D unit is a continuous process and it is for the benefit of all the units of the assessee. Just because one unit did not manufacture any of the products developed by the R & D unit during the year it does not mean that the expenditure incurred in connection with R & D is not attributable to exempt units of the assessee. He was therefore of the opinion that the expenditure incurred on R & D as well as the ESOP should be treated as an indirect expenditure, which has to be apportioned for determining the correct income of special units. In the assessee's own case for the assessment year 2003-04, the Tribunal held that the Assessing Officer should apportion indirect expenditure on the basis of total turnover of various units. Keeping in mind the decision cited (s....
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....eyond the scope of sections 10B, 80IB and 80IC while allocating the ESOP cost and R & D expenditure to the said units. 15. During the course of hearing, Learned Counsel for the Assessee relied upon a decision of the Apex Court in the case of ITO vs. L.M. Das (103 ITR 437) which was also reiterated in the case of Parashuram Pottery Works Co. Ltd vs. ITO (160 ITR 1) to contend that in order to invoke the provisions of section 147 read with section 148, essentially two conditions have to be satisfied ie., (a) there should be a reason to believe that income has escaped assessment and (b) such escapement of income should be on account of omission or failure on the part of the assessee to disclose fully and truly all material facts. Learned Counsel for the Assessee submitted that both the conditions were not fulfilled in the instant case. In respect of A.Y. 2008-09, the first reason given was that one of the units eligible for deduction u/s 10B had reported loss but the assessee had not made adjustments to exempt income in that year, whereas the fact remains that the loss of one unit had been set off against the profits of the other units, as per section 70, in line with the CBDT circ....
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....hich finds place from pages 32 to 39 in the CIT (A) order. 19. The case of the assessee was that the company is carrying on R & D activities under three business segments i.e., Finished Dosage Formulations (FDF), Biologics and Proprietary Products. R & D of a product would be initiated in a common location namely Integrated Product Development Organisation (IPDO). Expenditure incurred on this unit cannot be attributed to any specific plant. When the product reaches to a development phase, the company applies to regulatory authorities for an approval to launch the product. Depending on the geographical location, where the product is intended to be launched, exhibit batches of the product would be produced from that manufacturing plant, either new or old and the expenditure incurred at this stage is debited to the manufacturing plant where the exhibit batches are to be produced. In otherwords, there is no nexus between R & D expenditure and the existing units wherein there is production of Finished Dosage Formulations, Biologics and Active Ingredients. 20. In this regard, it was stated that the products manufactured from special units are different from the products, on which R....
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....nected to the assessee, may not derive any benefit out of R & D activity carried out by the assessee. Therefore, the conclusion of the A.O that it has to be spread over to the existing units is logically incorrect. 23. The assessee also highlighted the expression "profit derived" under the provisions of sections 10B, 80IB and 80IC of the Act to submit that if benefit is given to the assessee only in respect of the profits directly attributable to the said unit, on the same lines expenditure also should be directly attributable to the special units as otherwise the same cannot be set off against the profits of that unit. 24. With regard to the validity of reopening of assessment, the Ld. CIT(A) considered this issue in para 5 of his order wherein he observed that the changes made to section 147 w.e.f 1.4.1989 widens the scope of powers of the A.O. in respect of re-assessment subject to only restriction i.e., "reason to believe". In otherwords, expression "reason to believe" refers to the belief which prompts the Assessing Officer to apply section 147, depending on the facts of each case so long as the belief is based on reasonable grounds; the AO is required to act, not on sus....
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.... & D Expenditure and ESOP is also an indirect expenditure. But as seen from the computation of total income, the assessee has not apportioned any expenditure to special units in this regard. Therefore, the Assessing Officer had reason to believe that the income chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961, for the A.Y. 2008-09. In view of this, the assessment for the A.Y. 2008-09 was reopened after obtaining the sanction of the Pr. CIT -5, Hyderabad on 30.03.2015 and a notice u/s 148 of the Income Tax Act, 1961, dated 30.03.2015 was issued and duly served on the assessee." 28. Ld. CIT(A) also noted that though the assessee challenged the jurisdiction of the A.O. in issuing notice u/s 148, during the course of assessment proceedings the assessee did not file any objections which implies that the assessee did not have any objection to the reopening. He also observed that the sufficiency of reasons for forming a belief is not for the Courts to judge as held by the Apex Court in the case of L.M. Das (103 ITR 437) wherein the court observed that there should be an appropriate reason for reopening the assessment and it....
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....t ratio returned in the taxable zone is very low compared to the profit ratio in the special units. He further observed that the obvious reason for the above anomaly is due to the fact that common expenditure like R & D and ESOP etc., are not apportioned to special units. He went on to observe that R & D expenditure is common in nature and to curb the practice of claiming deduction of the expenses incurred in relation to exempt income, against the taxable income, as well as on the principles of equity, the expenditure has to be apportioned both amongst taxable units as well as exempted units. 31. He relied upon the decision of the ITAT in the assessee's own case, with regard to corporate overheads to highlight that even R & D expenditure is also utilised and / or will be utilised in future by all the units and therefore, it has to be treated as a common expenditure which needs to be apportioned to all the units, irrespective of the fact whether they are exempted or taxable units. 32. The contention of the assessee was that computation of profits and gains of eligible business undertakings are governed by special provisions i.e., 80IB and 80IC etc., which are Code by themselve....
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....profits and if such possibility is inevitable (in his opinion the indirect expenses were booked only against taxable profits and not against tax free profits) such computation of excessive profits is against the provisions of section 80IC of the Act and the only method to correct the same is to distribute the R & D expenditure amongst the exempt units. He has also exhaustively reproduced the contentions of the assessee but concluded that he is not in agreement with the contention of the AR that the products manufactured from the New Chemical Entities (NCE) are different from the products manufactured by the special units and therefore, does not call for apportionment. He thus concluded that both R & D and ESOP expenditure has to be apportioned between taxable and exempted units except for the R & D expenditure attributable to Biologics. 36. Further aggrieved, assessee-company preferred appeals before the Tribunal contending inter alia that the procedure followed for reopening the assessment is bad in law and consequently the assessment made therein does not stand and it was also contended that the A.O. as well as the CIT (A) erred in allocating ESOP and R & D expenditure to the ....
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....its (tax holiday units). 1.2 It may however be noted that the Appellant has submitted all the details with respect to R&D and ESOP expenses before the AO during the regular assessment proceedings itself. Further, the AO has specifically examined the details of R&D expenditure and ESOP expenditure at the time of regular assessment. Apart from the above, the AO has specifically applied his mind to the issue that corporate overheads will have to be allocated to tax holiday units and reduced the quantum of deduction at the time of regular assessment. Accordingly, all the issues have been examined and considered at the time of regular assessment. Even in the reassessment proceedings, the AO has not alleged or indicated that the same is based on new material or information he is proposing to reopen the assessment. It is based on existing information already available on record at the time regular assessment. Therefore, the reassessment is purely on the basis of change of opinion. Further, the AO has not proved failure on the part of the Appellant to disclose fully and truly all necessary information and as such the reassessment beyond 4 years is barred by limitation. 1.....
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....ce, there is no question of allocation of the R&D expenditure & ESOP expenses to the exempted units. Therefore, expenses which are not directly related to the undertaking should not be allocated on ad hoc basis. 2.4 The above view is squarely covered in favor of the Appellant in the following cases:- * Madras HC decision in the case of CIT Vs Hindustan Unilever Ltd. [2014] 42 taxmann.com 132 (Mad) * AAR in National Fertilizers Ltd., In Re (142 Taxman 5) has held that when other income cannot be considered as derived from 801 unit similarly other corporate office expenditure should also not be allocated to 801 unit. * CIT Vs Kanmani Metals & Alloys Ltd 183 ITR 327 (Bom) it was held in the context of Section 80J that for the purpose of deduction only liability pertaining to the unit should be considered and not the overall liability of the Appellant * Tide Water Oil Co (India) Ltd Vs CIT 353 ITR 300 (Cal) held that no expenditure at the corporate level which is remotely or indirectly related should be taken in to account while computing the deduction u/s.80IC 2.5 Further, with respect to allocation to R&D expenses, we wish to subm....
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....n India Market 80 IC 2. Dr. Reddy's Laboratories Limited, Adavipolam, Yanam, Pondicherry. (hereinafter referred as Yanam Unit) Manufacture and sale of Pharmaceuticals Formulations 80 IB 3, Dr. Reddy's Laboratories Limited, Export Ori9ented Unit. Bulk Active Division, Pydibheemavaram (hereinafter referred as BD 9 Unit Manufacture and Export sale of Bulk Drugs 10B 2.7. The following is the abstract of the business wise R & D expenditure incurred:- Sl No. Particulars of R & D Remark AY 2008-09 AY 2009-10 AY 2010-11 1 Finished Dosage Formulations R & D is incurred for generics for US markets and formulations 135 179 169 2 Pharmaceutical Services and Active Ingredients (PSAI) Active Pharmaceuticals Ingredient 71 72 85 3 Biologics R & D is for new products based on bio-similar (for biological products based on living organism) which does not manufacture any of the special units 29 34 23 4 Proprietary Products (NCE / Speciality) Innovative products (Not generics in nature & creating the product for the 1st time) 87 100 87 Total 322 385 ....
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....nors that since, the R&D expenses and ESOP expenses are not derived/linked from special units and not having a direct nexus between products manufactured in special units and products being developed in R&D units, the addition made towards allocation of R&D expenses and ESOP need to be deleted." 38. On the other hand, Learned Departmental Representative relied upon the orders passed by the Tax Authorities. 39. We have carefully considered the rival submissions and perused the record. We have also carefully analysed the cases referred to by A.O. as well as CIT (A). 40. We shall first deal with the justification of issuing notice u/s 148 of the Act since the assessee challenged the very basis for reopening of assessment. As per section 147 of the Act, Assessing Officer should furnish reasons which prompted him to reopen the assessment. The expression "reason to believe" was subject matter of consideration by various Courts. The words 'reason to believe' is distinct from 'reason to suspect'. In otherwords, reopening should be based on 'objective satisfaction' and not on the subjective inferences purely on surmises and suspicion. 41. If no action has been taken within four ....
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....hat he arrived at an erroneous conclusion earlier, the same cannot be a reason for reopening of assessment so long as primary facts are disclosed to the Assessing Officer during the course of original assessment proceedings. In otherwords, while initiating proceedings u/s 147 of the Act, Assessing Officer has to take an appropriate decision as to whether there is a reason to believe that income escaped assessment and it is on account of non-disclosure of true and correct particulars of income. The reasons recorded by the Assessing Officer, as could be noticed from page 203 of the paper book is as under:- "With reference to the A.Y. 2008-2009 the reasons for reopening assessment u/s 147 of the IT Act is communicated as under: It was found during the assessment proceedings for the A.Y. 2011-12 that this assessee has booked a loss of Rs. 3.88 Crores as business loss from the 100% generic EOU situated at Hyderabad. During the course of assessment proceedings for A.Y. 2011-12, it is found that the assessee had not reported the said loss. The assessee's computation of income for A.Y. 2008-2009, submitted during the assessment proceedings is not reflecting the loss from ....
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....rejudiced apprehension that the assessee might have purposely followed the practice of claiming deduction of expenses incurred in relation to exempted units against the taxable income. In fact, the CIT (A) also mentioned that even on the principle of equity, the expenditure has to be apportioned both amongst taxable units as well as exempted units, overlooking the fact that equity and taxation are strangers and one has to go by strict interpretation of provisions. Merely because the assessee claimed exemption on certain units it should not have been assumed that expenditure claimed against taxable income is attributable to the exempt units. Ld CIT (A) also observed, vide para 5.13, that "cases of excess deduction / exemption of income chargeable to tax would warrant formation of requisite belief to initiate proceedings where full disclosure were made and yet an income chargeable to tax had escaped from being included in the assessment order". In our humble opinion, Ld CIT (A) has considered the issue from a prejudiced point of view overlooking the fact that it is a duty of the Assessing Officer to assume jurisdiction only upon arriving at a reasonable belief that income has escaped....
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.... the case i.e., with regard to correctness of apportionment of R & D expenditure and ESOP cost between taxable and exempted units and also in view of the fact that it is a recurring issue, we proceed to consider this issue also on merits. 49. The case of the assessee, all through, was that R & D expenditure was incurred by the assessee in a separate unit known as 'IPDO', which is meant for carrying on R & D. It is also not in dispute that formulations / products arising out of it may or may not be utilised in the special units wherein the assessee is eligible for deduction / exemption. It is not controverted that formulations / products arising out of it can be sold in the open market and need not necessarily be utilised in the existing special units. The Hon'ble Bombay High Court in the case of Zandu Pharmaceuticals Limited (350 ITR 366) considered an identical issue wherein the assessee carried on business of manufacture of Ayurvedic medicines which had four units in Uttar Pradesh and Head Office separately. Each of the units had their own R & D unit equipped with laboratory. The Head Office also had their own R & D Department. The AO allocated R & D expenditure, debited to th....