TaxTMI 
TaxTMI 
2018 (7) TMI 1887
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....he assessee has challenged the decision of the learned Commissioner (Appeals) in upholding disallowance of deduction claimed under section 80IC of the Income Tax Act, 1961 (for short "the Act") in the final assessment order without such disallowance having been made in the draft assessment order. 6. Brief facts are, the assessee an Indian company is engaged in the business of manufacturing and sale of Pharmaceutical products including bulk drugs, chemicals and skin care products. For the purpose of its manufacturing activity, the assessee has set-up units at Baddi, Pithampur, Mahad, Thane, Chennai and Medak. For the assessment year under dispute, the assessee filed its return of income on 29th September 2008, declaring total income of Rs. 58,66,63,489. In course of the assessment proceedings, the Assessing Officer, after calling for books of account and other information and verifying the same ultimately framed the draft assessment order under section 143(3) r/w 144C of the Income Tax Act, 1961 of the Act on 29th December 2011. While framing the draft assessment order, the Assessing Officer allowed deduction under section 80IC of the Act for an amount of Rs. 233,47,00,000. It is....
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...., the Assessing Officer had made the addition / disallowance in the final assessment order after affording full opportunity of being heard to the assessee. Accordingly, he rejected assessee's objection with regard to the variation made in the final assessment order in respect of deduction claimed under section 80IC of the Act. 8. Shri J.D. Mistry, learned Sr. Counsel appearing for the assessee drew our attention to the copy of the draft assessment order and submitted that the only disallowance made by the Assessing Officer with regard to the deduction claimed by the assessee under section 80IC of the Act is for an amount of Rs. 13.63 crore out of deduction claimed of Rs. 247.10 crore claimed by the assessee. In the process, the Assessing Officer allowed deduction of Rs. 233.47 crore under section 80IC of the Act while completing the draft assessment order. He submitted, against the draft assessment order so passed the assessee did not file any objection before the DRP and the Assessing Officer within the prescribed time as per sub-section (2) of section 144C of the Act. Drawing our attention to section 144C of the Act, the learned Sr. Counsel submitted, in a case where the asses....
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....by disallowing an amount of Rs. 13.63 crore out of the deduction claimed under section 80IC of the Act. However, the Assessing Officer did mention in the draft assessment order that it is subject to the outcome of cross verification as per the notices issued under section 133(6) of the Act. Thus, he submitted, the disallowance of deduction under section 80IC of the Act made in the draft assessment order was not final and was subject to further enquiry. He submitted, subsequently, on the basis of information received under section 133(6) of the Act, the Assessing Officer having found that the assessee is not eligible to claim deduction under section 80IC of the Act in respect of Baddi unit, he disallowed the deduction in the final assessment order. However, he submitted, such disallowance made in the final assessment order is on the basis of discussions made by the Assessing Officer in the draft assessment order. The learned Departmental Representative submitted, in a case where the Assessing Officer has to pass the final assessment order in pursuance to the directions of the DRP, he cannot make any variation on his own, except, implementing the directions of the DRP. He submitted, ....
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....ion / disallowance in the final assessment order which was not proposed in the draft assessment order? Before venturing to decide the issue, it is necessary to look into the provision of section 144C of the Act under which the Assessing Officer has proceeded in the instant case. Section 144C(1) of the Act empowers the Assessing Officer to pass a draft assessment order if he intends to make a variation in the income or loss returned by an assessee in whose case such variation arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA of the Act. Thus, it becomes clear, the Assessing Officer can pass a draft assessment order under section 144C(1) of the Act only in a case where he proposes to make addition on the basis of transfer pricing adjustment suggested by the Transfer Pricing Officer. Once such a draft assessment order is made, the assessee has the option to either object to the draft assessment order before the DRP and Assessing Officer or accept the variation made in the draft assessment order. Sub-section (2) of section 144C of the Act provides, if the assessee within 30 days of receipt of the draft assessment order fil....
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....addition / disallowance made before the DRP. Thus, the assessee is divested of a valuable statutory right of challenging the addition / disallowance made, since, the DRP as per the scheme of section 144C functions like a first appellate authority. This is in complete violation of rules of natural justice. In such situation it is immaterial whether before making such addition / disallowance in the final assessment order, the assessee was given opportunity of being heard or not. What is material is, the assessee must be given a fair opportunity to redress its grievance as per the mechanism provided under the statute. Addition / disallowance of a item of income in final assessment order which was not proposed in the draft assessment order deprives the assessee from redressing its grievance before the appropriate authority as per the statutory provision. Statute provides sufficient time to the Assessing Officer to make assessment. Therefore, we are unable to accept the plea of the department that, since, at the time of passing of draft assessment order enquiry was incomplete, hence, Assessing Officer is competent to make addition/disallowance in variance with draft assessment order. Th....
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....ired to be given an opportunity to raise objection against such addition and/or disallowance. Under the circumstances, considering the entire scheme of Section 144C of the Act, the Assessing Officer cannot make any addition and/or disallowance then what is proposed in the draft assessment order. 14. The contention raised on behalf of the Revenue that the aforesaid lapse can be said to be a procedural lapse has also no substance. Such additions/disallowances other than those proposed in the draft assessment order cannot be said to be a mere procedural lapse. 14.1 Under the circumstances, we are of the opinion that the learned Tribunal has not committed any error in deleting the disallowance made by the Assessing Officer with respect to the claim of the assessee under Section 10AA of the Act, as the same was not proposed by the Assessing Officer in the draft assessment order and for which, no opportunity was given to the assessee to submit the objections against such disallowance." 12. The Special Leave Petition filed by the Department against the aforesaid decision of the Hon'ble Gujarat High Court has been dismissed by the Hon'ble Supreme ....
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....it upon himself to include in the final order of assessment such additions/disallowance/variations that do not form part of the order of draft assessment. 10. Further, we do not agree with the submission of the Learned Counsel for the Appellant to the effect that since the provisions of s.10A have been dealt with in the order of assessment, albeit in another context, the Assessing Officer is at liberty to consider any and all aspects relating to s.10A including the issue of priority in the set off of losses at the stage of final assessment. The proposition sought to be put forth is too wide to be accepted and would distort the scheme of s.144 C as noted above. We now advert to the provisions of s.144B and the judgments cited at the Bar in support of their respective submissions." 14. The ratio laid down in the aforesaid decisions, if applied to the facts of the present appeal, clinches the issue in favour of the assessee. Thus, in the aforesaid view of the matter we hold that the disallowance of deduction under section 80IC of the Act made by the Assessing Officer in the final assessment order, over and above the amount disallowed in the draft assessment order, should b....
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....not for the purpose of business. The assessee challenged the disallowance before the first appellate authority. 18. The learned Commissioner (Appeals) after considering the submissions of the assessee, though, agreed with the assessee that the Assessing Officer has committed error while adopting the rate of percentage of allocation and the total service charges of Rs. 1,250 lakh between various group companies, however, he directed the Assessing Officer to examine assessee's claim that out of expenditure of Rs. 1,250 lakh allocable to group companies, assessee's share @ 54% comes to Rs. 675 lakh and the balance amount of Rs. 147 lakh was towards royalty. He also directed the Assessing Officer to examine whether such payments requires deduction of tax at source. 19. The learned Sr. Counsel for the assessee submitted, it is a composite payment made to PEL for reimbursement of expenses and royalty. Drawing our attention to the submissions made before the learned Commissioner (Appeals) the learned Sr. Counsel submitted, the payment made constitutes of reimbursement of expenses and royalty. He submitted, reimbursement of expenses is @ 54%, whereas, the balance amount of Rs. 147 la....
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....f Rs. 1.47 crore towards royalty. When the terms of the agreement specifically provide for payment of royalty and royalty was paid in compliance to such term, there is no justification for disallowance of royalty payment. Disallowance made is deleted. 22. In ground no.V, the assessee has challenged the disallowance of deduction claimed under section 35(2AB) of the Act amounting to Rs..12,59,65,265 in respect of its research and development facility at Ennore and Goregaon. 23. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed weighted deduction under section 35(2AB) of the Act called upon the assessee to furnish the approval of the R&D facility by the appropriate authority i.e., Department of Scientific and Industrial Research (DSIR) as required under the statute. In response, it was submitted by the assessee that the R&D facility has been approved by the DSIR. He also furnished copy of such approval before the Assessing Officer. However, the Assessing Officer called upon the assessee to furnish approval of the DSIR in Form no.3CM. As stated by the Assessing Officer the assessee expressed his inability to furnish t....
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...., considering the contention of the learned Sr. Counsel that the assessee has applied for approval in Form no.3CM which is still pending, we are inclined to restore the issue to the Assessing Officer for providing an opportunity to the assessee to furnish the approval of the competent authority in the prescribed manner for claiming deduction under section 35(2AB) of the Act. This ground is allowed for statistical purposes. 28. In ground no.VI, the assessee has challenge disallowance of depreciation amounting to Rs. 20,60,508. 29. Brief facts are, during the assessment proceedings, the Assessing Officer while examining assessee's claim of depreciation found that the assessee has claimed depreciation on the assets taken over as part of the merger of Boehringer Mannheim India Ltd. (BMIL) with the assessee w.e.f. 1st April 1996. However, he observed, as per the schedule of depreciation the assessee has claimed depreciation on the written down value (WDV) without adjusting the depreciation allowable for assessment years 1995-96 and 1996-97 in the hands of BMIL. The Assessing Officer observed, BMIL had not opted to claim depreciation in assessment year 1995-96 and 1996-97, though, ....
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....lly reducing the depreciation for assessment year 1995-96 and 1996-97 from the WDV for computing depreciation for the impugned assessment year. This view has also been expressed by the Co-ordinate Bench, in Nicolas Piramal India Ltd. 147 ITD 675. In view of the aforesaid, we allow assessee's claim of depreciation. This ground is allowed. 34. In ground no.VII, assessee has challenged disallowance of expenditure under section 14A r/w rule 8D. 35. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has earned exempt income by way of dividend, called upon the assessee to explain why it has not disallowed expenditure for earning exempt income in terms of section 14A of the Act. In response, it was submitted by the assessee that since the dividend earned of Rs. 2,00,52,200, was received from the investments made by the company in earlier years, no expenditure is attributable for earning of such exempt income. Without prejudice to the aforesaid submissions, it was also submitted that the assessee has sufficient interest free surplus fund to take care of the investment, hence, no disallowance should be made. The Assessing Officer....
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....owed funds available with the assessee are mixed funds, however, he has concluded that in such circumstances, disallowance under section 14A of the Act has to be made under rule 8D. In our view, such decision of the learned Commissioner (Appeals) is inappropriate and against the settled legal principle. The Hon'ble Jurisdictional High Court inCIT v/s HDFC Bank Ltd., 366 ITR 505 (Bom.), following its own decision in CIT v/s Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.), has held that when an assessee has sufficient interest free fund available, no disallowance under rule 8D(2)(ii) r/w section 14A of the Act can be made. The same view was again expressed by the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. v/s DCIT, 383 ITR 529 (Bom.). In view of the ratio laid down in the decisions referred to above, we direct the Assessing Officer to verify assessee's claim of availability of sufficient interest free fund for the purpose of making investment in exempt income yielding assets. After verification if assessee's claim is found to be correct, no disallowance of interest expenditure can be made under rule 8D(2)(ii). As regards disallowance of administrative expenditure....
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....ted to the Baddi unit, it was submitted by the assessee that the Baddi unit was set-up with the aid of internal accruals and no borrowed funds was utilized. The Assessing Officer however, did not accept the submissions of the assessee. The Assessing Officer observed, if source of fund is to be equated to application of fund on first in first out (FIFO) basis, most part of the interest expenditure would be related to the unit at Baddi, since, it is the last amongst all the units. Accordingly, he proceeded to allocate a part of the interest expenditure to the Baddi unit which works out to Rs. 5.25 crore. Similarly, the Assessing Officer noticing that out of the research and development expenses, the assessee has not allocated anything towards the Baddi unit, applying the same principal as in the case of interest expenditure, he allocated an amount of Rs. 8.38 crore to the Baddi unit out of the total research and development expenses of Rs. 27.59 crore. Thus, out of the deduction claimed under section 80IC of the Act by the assessee in respect of Baddi unit, the Assessing Officer reduced an amount of Rs. 13.63 crore which resulted in addition of an equal amount at the hands of the ass....
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....ils in support of its claim that the Baddi unit was set-up through cash / fund generated by the assessee from its internal accrual and no borrowed funds were used. He submitted, the allocation of expenditure between Baddi and other units was made by the assessee on a rational basis supported by sound reasoning. He submitted that the basis for allocation of expenditure between the Baddi and other unit was also furnished before the Departmental Authorities. As regards research and development expenses, the learned Sr. Counsel submitted, the assessee has not undertaking such research and development activity for its own products but it is a contract manufacturing activity for others. Therefore, the R&D expenditure incurred towards such contract manufacturing activity has no relation either directly or indirectly with the manufacturing activity carried out at Baddi unit. Thus, he submitted, no part of either the interest expenditure or R&D expenditure can be allocated to the Baddi unit. In support of his contentions, the learned Sr. Counsel relied upon the following decisions:- i) Proctor & Gamble Hygiene & Healthcare Ltd. v/s DCIT, ITA no.1499/Mum./2005, affirmed by Hon'b....
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....ed is as per the accounts. Therefore, if the expenditure is allocated to each unit as per the account maintained such expenditures are backed by evidence, then, there is no reason why a part of it is to be allocated to Baddi unit. In view of the aforesaid, we restore the issue to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. 46. In ground no.IX, the assessee has challenged the addition of Rs. 3,14,14,000 on account of transfer pricing adjustment on Corporate Guarantee given to the Banks by the assessee for the loans taken by the Associated Enterprises (AEs). 47. Brief facts are,in course of proceedings before the Transfer Pricing Officer, he found that the assessee has provided Corporate Guarantee towards loan taken by the AEs from banks. The Transfer Pricing Officer observed that the assessee has not mentioned such transactions in the audit report filed in Form no.3CEB. When the Transfer Pricing Officer called upon the assessee to explain why an adjustment in respect of guarantee commission should not be made, the assessee submitted that since Corporate Guarantee....
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....in view of a number of decisions of different Benches of the Tribunal including Mumbai Benches rejecting such claim. However, we find merit in the alternative contention of the learned Sr. Counsel that commission rate of 0.5% should be applied to Corporate Guarantee. In this context, we refer to the following decisions:- i) Everest Kanto Cylinder Ltd. v/s DCIT, 34 taxmann.com 19; approved by the Hon'ble Jurisdictional High Court in CIT v/s Everest Kanto Cylinder Ltd. 378 ITR 57; ii) CIT v/s Glenmark Pharmaceuticals Ltd., 85 taxmann.com 349 (Bom.); iii) Thomas Cook India Ltd. v/s DCIT, (49 191-212 ITR(T) 178 (Mum.); iv) Aditya Birla Minacs Worldwide Ltd. v/s JCIT, 75 taxmann.com 79 (Mum.); v) Videocon Industries Ltd. v/s DCIT, 168 TTJ 353 (Mum.); & vi) Girabal Alok Impex Ltd. v/s ACIT, ITA no.1776/Mum./ 2015 (Mum.). 52. Keeping in view the aforesaid decisions, we direct the Assessing Officer to charge commission on Corporate Guarantee @ 0.5%. This ground is partly allowed. 53. In ground no.X, the assessee has challenged the disallowance made under section 14A r/w rule 8D while computing book profit under section 115JB o....
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....the deduction claimed was denied earlier in case of SPPL and thereafter in case of assessee. However, he observed that the learned Commissioner (Appeals) and ITAT have allowed assessee's claim in further appeal and the issue is pending before the Hon'ble Jurisdictional High Court. Thus, the Assessing Officer following the decision taken by the Assessing Officer in the earlier assessment years held that expenditure incurred towards trade mark will not come within the purview of section 35A of the Act. Accordingly, he disallowed assessee's claim. Being aggrieved of such disallowance, assessee filed appeal before the first appellate authority. 62. The learned Commissioner (Appeals) considering the submissions of the assessee and taking note of the decisions of the Tribunal in assessee's favour in earlier assessment years allowed assessee's claim of deduction. 63. We have considered rival submissions and perused materials on record. Undisputedly, SPPL has paid an amount of Rs. 34 crore towards purchase of trade mark from ASE as per agreement dated 3rd October 1997. It is a fact on record that after making the aforesaid payment, SPPL and thereafter the present assessee have am....
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....t the relief in the assessment year to the extent of Rs. 2,42,85,714/- out of the total expenditure of Rs. 34 crores on acquisition of trademark and if the alternate argument of the assessee is accepted, then the assessee would be entitled to deduction of Rs. 34 crores incurred on acquisition of trademark in the assessment year in question. Since the decision of the [TAT on the alternative claim of the assessee has not been challenged in the appeal, counsel for the revenue on instructions from the Officers Mr. Arun C. Bharat, CIT 7(1) and Mr. Ashish Pophare, DCIT 7(1) present in Court states that he is not pressing the second question, because in the facts of the present case, the revenue stands to loose if the decision of the ITAT on the applicability of Section 35A is set aside and the decision of the ITAT on the alternate claim is sustained. Accordingly, the second question cannot be entertained. However, it is made clear that the question as to whether deduction under section 35A is allowable on the expenditure on acquisition of trademark is kept open to be decided in an appropriate case." 64. On a careful reading of the aforesaid extracted portion from the judgment of the H....
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....plying the PLR of 14.625%. In response, it was submitted by the assessee that the loan given to AE was in foreign currency. It was further submitted that while borrowing the funds the assessee has paid interest at the average rate of 8.5%, whereas, it has charged interest to the AE at 10.24%. The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to determine the arm's length price of the interest charged to the AE by applying the rate of 11.57% resulting in upward adjustment of Rs. 26,76,631 to the ALP. The adjustment made by the Transfer Pricing Officer was added by the Assessing Officer. 67. When the issue came up in appeal, learned Commissioner (Appeals) after considering the submissions of the assessee deleted the addition made. 68. The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer. 69. The learned Sr. Counsel for the assessee strongly supporting the order of the learned Commissioner (Appeals) submitted that when the AE is situated in Switzerland and the loan was availed in the currency of the country of residence of the AE, PLR prevailing in India cannot be applied for....