TaxTMI 
TaxTMI 
2021 (4) TMI 998
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny through CASS and notice u/s. 143(2) of the Act was issued on 6th August, 2012. The assessee was having international transaction with associated enterprise as per form 3CEB report. Therefore, the case was referred to the transfer pricing officer and the TPO had passed order u/s. 92CA(3) of the Act on 30th January, 2015. The assessee company was engaged in the business of manufacturing and sale of pharmaceutical products. The assessee company has also carried out R & D activities for developing new drugs and involved in quality control process etc. The company was also engaged in trading activity. In the case of the assessee, draft assessment order u/s. 143(3) r.w.s.144C of the Income Tax Act, 1961 was passed and computed the total income at Rs. 9,16,04,08,572/-. Against the draft assessment order, the assessee has filed objections before the DRP. The DRP has issued direction vide their order u/s. 144C(5) of the Act on 23rd No, 2015. Thereafter, taking into consideration, the direction issued by the DRP, the Assessing Officer has passed assessment order u/s. 143(3) r.w.s. 92CA r.w.s. 144C(3) of the Act on 26th Jan, 2016 and total income was determined at Rs. 9,38,19,42,897/- a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt has not been admitted. 2.2 The L.d. Assessing Officer grossly erred in disallowing the amount by misconstruing the directions of the DRP without appreciating that in previous year the DRP had allowed the claim of the Appellant u/s 37(1), however the amount was eventually disallowed on the ground of non deduction of TDS u/s 40(a)(ia). 2.3 Without prejudice to the above, the Ld. Assessing Officer / DRP ought to have appreciated that since the payments had already been made during the year under consideration and nothing was payable as at the end of the relevant year, the provisions of section 40(a)(ia) of the Act were not applicable and consequently the entire amount was allowable as deduction u/s 37(1). 2.4 Without prejudice to the above, that the Ld. AO / DRP failed to appreciate that since the payments were not taxable in the hands of RCI IS, there was no requirement to make any disallowance under the provisions of section 40(a)(ia) of the Act. 2.5 Without prejudice to the abvoe, the Ld. AO / DRP grossly erred in not allowing deduction under section HOG in respect of contribution made to RCHS. 3. Re: Addition on aecount Transfer Pric....
X X X X Extracts X X X X
X X X X Extracts X X X X
....certain non-operating expenses as operating expense and certain operating income as non-operating income, i. The AO grossly erred in disregarding the specific directions of Ld. DRP and considering unclaimed balance written back (23.1 Cr) and reversal of deferred employee compensation (0.33 Cr) as part of non-operating income. The AO ought to have appreciated that directions of ld. DRP are binding on AO. c. In starting afresh the process of determining the comparables, without appreciating that the Appellant had carried out its supplementary analysis diligently and based on the available records, hence the same cannot be rejected. d. In considering companies which are dissimilar in function in the final list of comparables. c. In disregarding the approach adopted by the Appellant of using the multiple year/ prior available year's data in the supplementary economic analysis and holding that current year (I.e. Financial Year 2010 11) data for comparable companies should be used despite the fact that [he same was not necessarily available to the Appellant at the time of preparing TP documentation, Further, in disregarding the CBDT Notification No....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0TB ck 80-IC of the Act in the assessment year under consideration and merely relying on the findings of Ld. DRP for previous assessment year. The Ld. DRP ought to have appreciated that AO had misinterpreted the applicable legal provisions while proposing the disallowance of entire deduction under sections 8O-IB and 80-1C of the Act. 5.2 The AO grossly erred in stating that Appellant had not submitted balance sheet and profit and loss and hence was not eligible to claim deduction as per S. 80IA(7) of the Act r.w.r. 18BBB(2) of the Income Tax Rules, 1962, without appreciating that revised certificate in Form 10CCB submitted by Appellant already contained the requisite information and therefore requirement of S. 801A(7) of the Act r.w.r. 1 8BBB(2) of the Income Tax Rules, 1962 was fulfilled. 5.3 The Ld. DRP erred in law in upholding the actions of AO to deny the deduction u/s 80- IB & 80 1C of the Act, without appreciating that AO had exceeded jurisdiction and that on identical facts, deduction had always been allowed in the earlier year(s) (except for assessment years 2008 09, 2009-10 and 2010-11). The ld. DRP ought to have appreciated that determination of eligibi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wing MTM loss in AY 200940. Further, the Ld. DRP ought to have appreciated that gain recognized during the year was merely reversal of MTM loss accounted in previous assessment years. 7. Re: Disallowance of Non-Compete fees (Expense)- Rs. 10,00,000/- 7.1 The Ld. DRP erred both on facts and in law in in disallowing Rs. 10,00,000/- being the amount of non-compete fee (expense) on the ground that it is capital in nature without appreciating that amount paid was for carrying out its business more efficiently and effectively. 8. Re: Disallowance of Premium paid on FCCB- Rs. 5,945,459,801/- 8.1 The Ld. DRP erred both on facts and in law in disallowing the premium paid on redemption of Xero Coupon Convertible Bonds ("FCCB") amounting as capital expenditure without appreciating that treatment given in books of accounts as per provisions of Companies Act cannot be considered as the basis for deciding the allowability of premium on FCCBs under the- Income Tax Act, 1961. 8.2 The Ld. DRP ought to have appreciated that the FCCBs were in nature of debt and once they were not converted into equity shares, any premium paid on redemption would be allowab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....act that the Hon'ble High Court of Delhi in AY 1998 99 and Hon'ble Delhi ITAT in AY 1999-00, 2002-03 to 2005-06 have allowed the Appellant's claim of weighted deduction in respect of capital assets provided to R&D employees. 11. Re: Non-adjudication of claim of hedging charges incurred Rs. 13,25,11,156/- 11.1 The Ld. DRP erred both on facts and in law in not adjudicating the claim of Rs. 10,00,30,513/- being hedging charges towards investment made by the Company in overseas subsidiary expenses incurred to protect against foreign exchange rate volatility as deductible under section 37(1) of the Act, without giving any cogent reason for same.. 11.2 The Ld. DRP erred both on facts and in law in not adjudicating the claim of Rs. 3,24,80,643/- on account of adjustment of hedging charges pertaining to the cost of fixed assets against their cost and allowing depreciation thereon under the provisions of the Act. 11.3 Without prejudice to the above, hedging charges amounting to Rs. 10,00,30,513/- incurred towards investment made by the Company in overseas subsidiary companies should be adjusted to the cost of acquisition of such investment. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... grounds of appeals contested by the assessee in its appeal and contested by the revenue in their appeal are covered in favour of the assessee as per assessee's own case adjudicated by the ITAT and also covered by the decision of Hon'ble Jurisdictional High Court and other courts. The ld. Departmental Representative is fair enough not to controvert these undisputed facts reported by the ld. counsel in its submission that all issues contested in the grounds of appeal are covered by the decision of ITAT and other courts in its favour. Taking into consideration the aforesaid facts and circumstances, the various grounds of appeal filed by the assessee and revenue are adjudicated as under:- ITA No. 702/Ahd/2016 A.Y. 2011-12 filed by assessee 4. Ground No. 1 is of general nature of ground of appeal not specifically contested by the assessee, therefore, the same stands dismissed. Ground No. 2.1 to 2.2 (contribution to Ranbaxy Community Healthcare Society (RCHS) of Rs. 30,992,839/- u/s. 37(1) of the Act and disallowing on the ground of non-deduction of TDS u/s. 40(a)(ia) of the Act) 5. During the year under consideration, the assessee has made contribution of Rs. 3,09,92,839/- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Bench of the ITAT Ahmedabad for assessment year 2009-10 vide ITA No 1782/Del/2014. The ld. Departmental Representative is fair enough not to controvert these undisputed facts that the instant issue in this ground of appeal is covered by the aforesaid cited decision of the ITAT. With the assistance of ld. representatives we have gone through the aforesaid cited decision of the Co-ordinate Bench of the ITAT and the relevant part of the decision is reproduced as under: - "23. The issue raised by the assessee in ground no 7 is that the Ld. DRP erred in confirming the disallowance of deduction in respect of contribution of Rs. 22,50,000/- and Rs. 50,00,000/- made to Ranbaxy community healthcare society ( for short RCHS) and Ranbaxy Science Foundation (for short RCF). 24. The assessee company made a contribution of Rs. 22,50,000/ to RCHS and Rs. 50,00,000/- to RSF and claimed as deduction u/s 80G but the deduction has not been set off due to a loss in the return. 24.1. Further, the assessee claimed the same as business expenditure u/s 37/35 of the Act. The assessee in this connection submitted that the Hon'ble ITAT, New Delhi on the same issue in the assessee'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore, we also hold that in absence of specific section under which the tax is required to be deducted on such contribution without their being any service rendered by the recipient of the contribution disallowance u/s 40a(ia) also cannot be made. In the result ground no.9 of the appeal is allowed." 30. In view of the identical issue raised before us in the ground of appeal no. 7 which has already been considered by the ITAT Delhi as discussed above, we are taking the same view. Accordingly, we allow the ground of appeal of the assessee." Respectfully following the decision of the Co-ordinate Bench of the ITAT on identical issue as cited above after taking the same view, we allow this ground of appeal of the assessee. In the result, this ground of appeal is allowed. Ground No. 3 ( Erred in not considering overseas associated enterprise as tested party being the least complex of the transacting entities and instead considering assessee as tested party thus violating basic principles of transfer pricing) 6. During the course of assessment, the Assessing Officer stated that as per audit report in form no. 3CEB filed by assessee, the total value of internationa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on before us in the form of two paper book volumes, One supplementary paper book and one decision paper book on transfer pricing issues. 19. Generally, in transfer pricing comparability analysis, the tested party is usually the party participating in a transaction for which profitability most reliably can be ascertained and for which the reliable data of comparables can be found and the tested party will typically be the party with least intangibles. 20. As per section 92C(1) of the Act, ALP of the international transact is required to be determined using any of the profit based prescribed methods, being the Most Appropriate method (MAM) having regard to the nature of transaction or class of transactions. However, in order to determine the MAM for determining the ALP, it is first necessary to select the 'tested party'. The transfer pricing legislation in India does not provide any guidance on the concept of 'tested party'; however, there are some decisions on this issue, which can be of great help. 21. In order to understand the concept of tested party, one need to refer to the transfer pricing legislations of developed countries ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method." 24. The OECD guidelines at Para no.3.18 provides as under:- "3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rules, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found i.e. it will most often be the one that has the less complex functional analysis. 3.19 This can be illustrated as follows. Assume that company a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the party than the volume of comparable data. In this background, we proceed to decide the issue. 26. Appellant has entered into advance pricing agreement under section 92CC of the Act on 07 August 2015 with CBDT for AY 2014-15. According to Para, 1(F) of that agreement tested party means associated parties as listed in Appendix 1. According to the annexure-1, it has been agreed between the parties that the TNMM with PLI of operating profit margin computed based on audited financials of AE, being the tested party, shall be the method to benchmark the covered transactions in the case. In order to select the comparables regional benchmarking shall be applied in case country-by-country benchmarking is not feasible the same shall be preferred over regional bench marking. In that appendix, CBDT has agreed to benchmark South African, Ireland and Romania AEs benchmarking region as Europe. In case of Nigeria, Malaysia and Morocco the regional benchmarking has been accepted of Asia. In case of South Africa, Peru the benchmarking of Europe and in case of Egypt, Brazil and Thailand benchmarking of Asia is accepted. According to Parano.5, it is also emphatically mentioned th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he methodology laid down in APA can have the guidance value for the revenue authorities for the purposes of comparability analysis. The main intent of the advance pricing agreements is to protect the fair share of the revenue of the states in simple and efficient manner and to protect the tax base. Need for Advance pricing agreements are emerging out of current global complex economic situations and its impact on revenue of tax compelling governments to intensify and streamline their transfer pricing compliance efforts to reduce the disadvantage in staking their claim for tax. Higher risk of disputes may be reduced by the advance pricing agreements. On the same intentions and objects, the ld. TPO is also required to compute the ALP of the International transactions of the Assessee for this year. Therefore, the agreement entered into by CBDT with the assessee, which has considered all the aspects of the manner of determination of ALP which are also similar for the this year, should be given highest sanctity and therefore mechanism suggest in that agreement should be necessarily followed in determining ALP of the transactions for this year. 29. Though in the APA signed by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... allowed to the assessee on certain normal condition of filing return of income, Report of accountant and a request in specified format. Off course, it has also normal revenue safeguarding exclusion clauses of income going below the returned income and where ITAT has passed an order on the subject. Therefore even the rules provide that if the International Transactions are same in the year of APA and in the past year than both the parties, assessee and CBDT may agree for applying the agreements contained in APA agreed. In the present case, it is not disputed that the international transactions in both the years are not same. Therefore, we draw support from Rule 10 MA of Income tax Rules 1962 in applying the methodology as accepted in APA for the impugned year in appeal. 30. As the FAR Analysis of the year under APA as well as the year under appeal are similar and it is also an established fact that the tested parties selected by the APA i.e. foreign AEs are least complex and adequate financial data for comparison on region basis/country basis are available and further the financial transactions are same, we hold that based on APA for A Y 2014-15 the selection of tested par....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in majority of the decisions were considered on the issue of selection of 'tested party' and it held as under :- '11.1. We shall now proceed to peruse the judicial views on the issue. The case laws relied on by the assessee is as under: (i) Mastek Limited v. Addl. CIT in ITA No.3120/Ahd/2010 dt.29.02.2012: In this case, the question came up for consideration before the earlier Bench of this Tribunal was as to whether a minute examination of functional profile is necessary for the selection of comparables and the answer given was that functional profile must be first examined and after that proceed to select the comparable. In this case, the comparables chosen by the assessee were discussed by the TPO and those were discarded for the basic reason that the companies those quoted by the assessee were dealing in product distribution whereas the TPO was of the view that the AE was nothing but 'front office' of the assessee and simply engaged in marketing activity. After due consideration of the issue, the Hon'ble Bench had observed thus: "16.1 (on page 47) It is clear that arm's length price is to be determined by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables." We are in agreement with the findings of the earlier Bench (supra) that such a selected party should be least complex and should not be unique. (ii) Development Consultants (P.) Ltd. v. ACIT 136 TTJ 129 & followed by Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448/315 ITR 150 (Delhi): The issue before the Tribunal was that the CIT (A) had confirmed the adjustments to the international transactions of the assessee with its AEs based at Bahamas, USA without considering the submissions and the financial of the AEs explaining the facts etc. In case of the merits of the case for international transactions entered by the assessee with TKC, the submission made on behalf of the assessee was as under: "26, 1 to 3** ....4. TKS is the entrepreneur company and has created significant marketing intangibles over the years. It uses its marketing intangibles to generate the work and assumes all the market, price and product risks. TKC came out the work on its own, only parts of the job are sub-contracted to the assessee f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer." In substance, a foreign entity (a foreign AE) could also be taken as a tested party for comparison. 11.2. At this juncture, we would like to refer to the United Nation's Practical Manual on Transfer Pricing for Developing Countries wherein the selection of the tested party has been dealt with. This Manual has been the work....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l on Transfer Pricing also contradicts the TPO's argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn't fall within his jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts etc., 11.2.3 However, we find inconsistency in the stand of the TPO to the effect that while rejecting the assessee's approach for selecting GMDAT as the tested party by citing a reason that there was no reliable data available for both GMDAT and comparables and, therefore, GMDAT cannot be taken as the 'tested party', however, on the same breath, as rightly highlighted by the assessee, the TPO had taken GMDAT as the tested party while making adjustment to transaction relating to payment of royalty by GMI to GMDAT. 11.2.4 Rebutting the Revenue's allegation made during the course of proceedings that the segmental financial statement of GMDAT was not reliable, the assessee reiterates that the segmental data relied upon for benchmarking international transactions relating to import of CKD Kits and components was completely reliable and was based on sound....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the findings of the Hon'ble Mumbai Tribunals in the cases of (i) Aurionpro Solutions Ltd. v. Addl. CIT in ITA No.7872/Mum/2011 dated 12.4.2013; and (ii) M/s Onward Technologies Ltd. v. DCIT (OSD) in ITA No.7985/Mum/2010 dated 30.4.2013. (i) In the case of Aurionpro Solutions Ltd. (supra), the issue before the Hon'ble Bench was that the assessee engaged in the business of software development and web designing services and that the assessee had lent loans to its AEs stationed at USA, Singapore and Bahrain. The assessee had claimed that the said loans as working capital advanced to its 100% subsidiary outside India. When the issue was referred to TPO, the TPO took a view that as in a third party comparable situation, advances would bear interest and, therefore, need to charge a markup as per CUP method. Accordingly, the TPO proposed to benchmark the loans at dollar denominated LIBO [London Inter Bank Operative] rate plus mark up of 3%. When the issue landed up before the DRP, the DRP had, after analyzing the issue, directed the AO/TPO to compute the interest on loans to AE @ 14% per annum thereby enhanced the transfer pricing adjustment. Aggrieved assessee took u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention is, therefore, repelled." With have duly perused the findings of the Hon'ble Bench cited supra. In this connection, we would like to point out that various Tribunals have taken divergent views in respect of selection of 'tested party'. To illustrate, the earlier Bench of this Tribunal in the case of Mastek Limited ITA No.3096/Ahd/2010 (AY- 2006-07) (supra) had stressed that (at the cost of repetition) "we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be dist....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... accepted as 'tested party' being the least complex of the transacting entity for the year for comparability analysis of international Transactions of the assessee-appellant. 36. As we have already decided the first step of comparability analysis in ground no 2.2 of the appeal we set aside other grounds nos. 2 to 7 except 2.2 to the file of TPO to compute ALP of the international transactions accordingly. In the result ground nos. 2 to 7 except ground no.2.2 are allowed for statistical purposes. Needless to say that ld. TPO/AO shall give due weightage to the Advance pricing agreement signed by the assessee with CBDT on other issues also (other than the issue of 'selection of tested Party') for determination of ALP and in case of any divergent view, the assessee shall be granted an adequate opportunity to substantiate any claim/arguments on the manner of determination of ALP." 10. 1. As the facts in the case on hand are identical to the facts of the case as discussed above, therefore we are bound to follow the same. We cannot change the stand with the view taken by the ITAT in the own case of the assessee. Regarding this we find support & guidance f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch of the Tribunal consisting of three or more members for which there is provision in the IT Act itself." 10.2. We also find that the Hon'ble supreme court case of Ambika Parsad Mishra Vs. State of U.P.and Others vide writ petition no 1543 of 1977 vide order dated 09-05-1980 has taken the similar view as taken by the Hon'ble High court (supra) as under: "Thus we get the statutory perspective of agrarian reform and so, the constitutionality of the Act has to be tested on the touchstone of Art 31A which is the relevant protective armour for land reform laws. Even here, we must state that while we do refer to the range of constitutional immunity Art. 31Aconfers on agrarian reform measures we do not rest our decision on that provision. Independently of Art. 31A, the impugned legislation can withstand constitutional invasion and so the further challenge to Art. 31A itself is of no consequence. The comprehensive vocabulary of that purposeful provision obviously catches within its protective net the present Act and, broadly speaking, the antiseptic effect of that Article is sufficient to immunise the Act against invalidation to the extent stated therein. The extreme arg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his, if permitted, may well be a kind of judicial destabilisation of State action too dangerous to be indulged in save where national. crisis of great moment to the life, liberty and safety of this country and its millions are at stake, or the basic direction of the nation itself is in peril of a shakeup. It is surely wrong to prove Justice Roberts of the United States Supreme Court right when he said." 10.3 We also note that the impugned issue has been admitted by the Hon'ble Gujarat High Court in Tax Appeal No. 853 of 2016 against the order of the ITAT Delhi Bench "I" New Delhi bearing ITA No. 196/DEL/2013 for the AY 2008-09. The relevant proposed question of law as framed before the Hon'ble Court reads as under: [1] " Whether on the facts and circumstances of the case and in law, the ITAT was justified in directing to delete the addition of Rs. 238.16 crores holding that overseas Associated Enterprise can be accepted as "tested party" where there is no instances of transactions between unrelated parties ?" 10.4 Thus the impugned issue is pending before the Hon'ble Gujarat High Court, therefore we do not find any reason to refer the matter to the Specia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....objection before the DRP. The DRP has directed the Assessing Officer to compute the disallowance u/s. 14A in the light of the judgment of Delhi High Court in the case of Chem Investment Ltd. The Assessing Officer stated that in the case of Chem Investment Ltd., Hon'ble Delhi High Court held that section 14A will not apply if no exempt income was received or receivable during the relevant previous year. However, the Assessing Officer has stated that assessee was in receipt of long term capital gain of Rs. 225.50 crore as exempt and the assessee has itself admitted during the course of assessment that the investment in shares of Indian companies would yield dividend income that is exempt u/s. 10(34) of the act. 8. During the course of appellate proceedings before us, the ld. counsel submitted that assessee has not earned any dividend income during the year under consideration, therefore, no further disallowance u/s. 14A is required to be made in the case of the assessee as held by the Hon'ble High Court of Gujarat in the case of Corrtech Energy ltd. 372 ITR 97 (Guj). The ld. Departmental Representative could not controvert this undisputed finding of the Hon'ble High Court of Gujar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of NIUs basis which the assessee company has claimed deduction u/s80-JB&80-ICoftheAct. * The schedules provide assumptions and basis for computation of the profit of these undertakings which has been followed year after year after considering the actual sales by the NIU, direct expenses incurred in raw material, packing material & other expenses along with allocation of indirect common expenses on certain defined allocation keys. * The observation that assessee is claiming higher amount of deduction for newly NIUs as against losses in the NIUs set up earlier is incorrect which can be evidenced from the table below: S.No New Industrial Undertaking(s) Year of Establish ment Year or claim Prof it/ [loss] for the year Deduction claimed Percentage Amount 1 GOA Plant (New Clock) Y.E 31.03.2012 10lh 383,342,225 30% 115,002,668 2 New Tablet Plant-1 Y.E 31.03.2005 Y.E. (79,196,235) 30 % NIL 3 New Tablet Plant- II Y.E 31.03.2005 6^th (766,213,342) 30 % NIL 4 New SCG Plant Y.E 31.03.2007 5^th 702,849,827 100% 702,849,827 5 New Tablet Plant-Ill Y.E 31.03.2008 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Rule 18BB8(2) of the I.T. Rules, 1962 mandates as under for submitting the Form 10CCB: "A separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction u/s 80IB/IC and shall be accompanied by the P&L Account and Balance Sheet of the undertaking or enterprise as if the undertaking or enterprise were a distinct entity". 10.2.2 It is seen that the assessee has only submitted a self-serving Income arid Expenditure Account and not submitted the Balance Sheet and P&L Account of the undertaking as mandated by the prescribed Rules and mandatory report of the Auditor under Form lOCCB. Thus the claim submitted by the assessee is completely unreliable and devoid of merits. The Income & Expenditure Account casted for the submission of the claim is based an approximations, unreasonably less allocation of expenses by using magic figures of 75% and 30% without any bonafide evidence, basis and justification. The interest on cash flows has not even been accounted for with respect to each unit. 10.2.3 It is also pertinent to note the futility of the claim of the assessee by observing the P&L Account of the assessee. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....v. The assesses has a huge selling and a distribution network which itself is a profit centre in its own right and existence and to include its profits as profits of manufacturing activity will be completely irrational. Therefore, why the same should not be excluded xv. Why the income from export incentives (Rs. 645.63 million) and PDA provision written back (Rs, 1026 million) have not been netted in the common head "common expense from other divisions". These are common expenses and there is no reason why they should also not be pro rata attributed to the units claiming deduction u/s 80 IB. xvi. Why, while claiming allocable office expenses the expense under the head legal, secretarial, corporate affairs etc are excluded. These are common expenses and should also be pro rata allocated to the units claiming deduction u/s801B. xvii. Clarify as to on what basis the common expenses of other divisions and head office expenses have been debited to the account of various plants which have staked claim for deduction u/s SQ1B and given information w.r.t. clause 26 of Form 3 CD. The assessee replied while requesting to allow deduction u/s 6O-IB/IC of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfillment of the condition that it begins to manufacture or produce articles or things or to'operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2004 Unquote We would like to submit that the eligible unit of Assesses Company is entitled to claim deduction u/s 80IB of the Act, since the eligible unit satisfies the conditions provided by the section i.e. * The eligible units of the assessee firm manufactures Pharma products, not being any article or thing specified in the Eleventh Schedule to the Act. * The eligible units of the assessee company hove been set up in an industrially backward State specified in the Eighth Schedule to the Act. * The eligible unit has commenced production on 30th September 2001 i.e. within the period required under the sold section. Further, we would like to submit that the assessee has claimed deduction of Rs. 78,631,353/- during the year under consideration u/s 801B on the elig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lies to any undertaking or enterprise:- (a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any ankle or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning (i).............................. (ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or integrated infrastructure Development Centre or industrial Growth Centre or Industrial Estate or industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttarancnal: (iii)................................ (b)................................. (3) The deduction referred to in sub-section (1) shall be: (i)In the case of any undertaking or enterprise referred to m sub-clauses [i] and [in) of clause (a] or sub-clauses (i) and (iii) of c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hese certificates provide all the relevant data / information and basis relating to the deduction claimed u/s 80-IC of the Act. It is humbly submitted before your good self .that the company has been claiming such deduction in earlier years and the same have been duly allowed after verifying the facts during assessment proceedings of these years except for assessment years 2008-09 and 2009-10. There is no change in the facts and circumstances during the year under consideration with regard to deduction claimed u/s 80-IC of the Act. Query (II) Details of products manufactured u/s. 8OIB/IC Please find attached in Annexure-1 fa) & l(b), the list of products which arc manufactured by the Company during the year under consideration in its units eligible for deduction u/s 80-1B& 80-1C of the Act. Query (III) Why expenses which are indirect should not be allocated in the ratio of turnover for determining deduction u/s. 80IB/IC of the I.T. Act, 1961 for the units In this connection, we invite your kind attention to the audit reports u/s 80-IB/ 1C in Form No. 1OCCB submitted before your good self vide our letter dated 08/09/2011. In thes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duction of the existing pharmaceutical products in the industrial undertakings eligible u/s 80IB /'80IC. The NIUs are manufacturing products which were developed years back and have already been under production. However, some times, the R&D laboratories are assisting in improvement of the process or the existing products manufactured in the eligible industrial undertakings and therefore, 30% of the revenue expenses are considered to be reasonable and are accordingly apportioned to the existing industrial undertakings. It may kindly be noted that during assessment years 2001-02 and 2002-03, one of the reasons for reopening the. assessment u/s 147 was that while allowing deduction under section 80-I8/ 1C, the asscssee company had apportioned 30 percent of R&D expenditure whereas 100 percent of such expenditure was required to be apportioned. However, after verifying the factual position in this regard, the Assessing Officer accepted the contention of the Company and did not make any adjustment on this account while passing the orders of reassessment for aforesaid assessment years and accepted the basis of allocation of R&D expenditure @ 30 percent. Further, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... identified based on batch number find plant wise SKU codes, in view of the system employed by the Company, all the transactions (e.g. costs, revenues, etc.) for each product arid each level, viz. Business Area, Plant, etc are separately identifiable. In this regard, it may be noted that total cost inter alia includes the following: Direct costs i.e. cost directly related to manufacturing the product, Such costs include raw material cost, labor cost, packaging cost and excise duty. Your good self may note that such direct costs in majority of the eases form more than 60% of the total expenses during the year under consideration. b) Common Manufacturing costs Cost of common utilities made use of by manufacturing blocks located at a plant location are allocated to each block on the basis of raw material consumption/ value of assets. Such costs include the following: Power, fuel, boiler related expenses, stores and spares, consumables Plant administration expenses, for e.g. security, human resource, insurance of Inventories/ fixed assets, travel, printing .and stationery, rates and taxes, etc. Further, other overheads, nam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eligible for deduction u/s 801B/ 80IC [referred to as New Industrial Units '('NIU')]. It may be noted that the assessee has to buy various types of raw material, packing material etc- which is being supplied by the suppliers in corrugated boxes, MS drums, plastic drums, glass bottles, polythene, jute bags, etc. Further, during the manufacturing process, side cuttings of aluminum foils, defective tubes, plastic bottles, plastic caps are also generated. The aforesaid packing material as well as scrap generated during manufacturing process is not reusable, therefore, the same is sold and the realizations there against arc accounted for in the books as sale of scrap. Your goodself would appreciate that scrap is an incidental result of the activities carried on by the industrial undertaking and integrally forms part of the manufacturing activity of the industrial unit. The Company further submits that unclaimed balances written back and excess provision written back relate to expenses which have been deducted while computing eligible profits under section 80-IB/ 1C of the Act in the past. The company has not adjusted such write backs, etc with the related expense an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ove by your goodself; we would like to confirm that the basis adopted by the company for calculating the deduction is by considering profits from the manufacturing activities of the eligible units independently and does not include other income (other than scrap sales, unclaimed balances / excess provisions written back and power rebates etc.) / pure trading income. Query (xiv) It was observed that the sales from 80IB/IC units were not recorded within the meaning of provision of Sec. 80IA(5), applicable to compute deductions Response The provisions of section 801A[5} of the Act have been reproduced hereundcr for ready reference : "Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assesses during the previous year relevant to the initial assessment year ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he operations within the company and no separate income is earned by it from performance of Service to any third party. The term 'Undertaking' has only been defined in explanation 1 ro section 2(19AA) of the Act. The explanation defines 'undertaking' in an inclusive manner but in the context of demerger: "...include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity" From a careful reading of the above section, it appears that an undertaking is a self-sustained business activity which can run in an independent commercial manner. To be an independent commercial entity, it should be able to generate profits if run in isolation and its output should have ready commercial market and buyer. Additionally an analogy can be drawn from the meaning provided in legal dictionary, in the absence of specific definition of the terminology in the Act, Law Lexicon, a legal dictionary defines the term "Undertaking" as: * "It means the entire organization. A company w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rdingly totally unreasonable and uncalled for. Also, just because the S&D function has customer interface for a limited purpose of selling the manufactured products of the company, it cannot be considered as n separate business function. Accordingly it is submitted that the S&D function of the company is an integral function of the NIUs, therefore is not a separate profit center. > Interdependence of the functions We submit that there is total and complete unity, Interlacing, Interdependence and Interconnection of management, financial, administrative and marketing aspects amongst all departments. Accordingly, all the departments constitute part and parcel of the same business of the company as a whole. Since the S&D function is a support function to the manufacturing units, none of the conditions mentioned above are satisfied for the S&D function to be considered as a separate business function or a profit center. In view of the above, kindly appreciate that selling and a distribution S&D function is not a separate business segment/undertaking to be taxed separately, since it is only facilitating the operations within the compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l income of a business carried on by a non-resident in India. The assessee further submits that costs incurred in relation to Mergers & Acquisition ('M&A'), Legal and Secretarial, Corporate Affairs, etc. do not .have a direct nexus with the NIUs and arc accordingly not considered for determination of eligible profits. In this regard, your goodself may note that the Legal and Secretarial function looks after the following major activities: Shareholders servicing - Listing of shares at various Stock Exchanges Filing of periodical returns and other documents with Registrar of Companies, SEBI etc. - Arranging meetings of Board of Directors and Shareholders'; Ensuring other compliances in respect of various legal requirements. The above are independent activities and have no connection with the activities of the eligible industrial undertakings. Similarly, the Corporate Affairs expenses are incurred for the purpose of building and maintaining image of the company in the eyes of shareholder banks& financial institutions and general public, which have no relationship with the activities of the NIU....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-I 80 IC 31.03.2005 4th 2005-06 Rs. 220579510 It is eligible for deduction @100% of profit for the year New Tablet Plant-II 80IC 31.03.2006 3rd 2006-07 Rs. 156142930 It is eligible for deduction @100% of profit for the year New SGC plant 80IC 31.03.2007 2nd 2007-08 Rs. 376385228 It is Eligible for deduction @100% of profit for the year New tablet plant-III 80IC 31.03.2008 1st 2008-09 Rs. 523509006 It is eligible for deduction @100% of profit for the year 69. In case of Goa plant, the deduction was claimed firstly in AY 2002-03 and subsequently issue was reopened for verification of this claim u/s 147 of the Act and subsequently in order u/s 143(3) rws 147 of the Act, the claim of the assessee was accepted. Hence, the claim was examined and allowed for this unit in the initial year. 70. Regarding claim of deduction u/s 80IC of the Act in case of New Tablet Plant-I the initial year of deduction is AY 2005-06. During the course of assessment proceedings, the assessee submitted copy of audited accounts of New industrial undertaking and submitted the basis for computation of the profit eli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cepted that these deductions have not been examined. For this finding, we have material on record the assessment history in the form of assessment orders of the assessee for those years. However in case of New Tablet Plant-II and New SGC plant it is apparent that in absence of positive gross total income no deduction was claimed for AYs 2006-07 and 2007-08 and therefore the claim of deduction by the assessee for these two plants is the first year of examination of claim. Obviously new Tablet Plant-III has been set up during this year only and therefore AY 2008-09 is the first year of examination of the claim of the assessee by the AO. Before us the Ld. DR has not pointed out any changes in the facts or law relating to those yeas with the facts of this year with respect to deduction claimed by the assessee with respect to Goa plant and New tablet Plant -I. Therefore, deduction related to these plants cannot be questioned in this year afresh without disturbing the deduction in initial year of the claim. Our view is also supported by the decisions of various Hon'ble High courts, one of the leading judicial precedent quoted before us is of Hon'ble Delhi high court in c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter- and if there was not change it was in support of the assessee- we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the RadhasoamiSatsang was entitled to exemption under ss. 11 and 12 of the Income Tax Act of 1961." 72. The decision of the Supreme Court in the case RadhasoamiSatsang (supra) was on the facts where the question as to the entitlement for exemption under Section 4(3)(i) of the Income Tax Act, 192....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee has been allowed the benefit of Section 80J in the last three preceding years, there is no reason to deny the same for the instant assessment year. We, therefore, answer this issue also in favour of the assessee and against the revenue." 74. In the present case, the claim of the assessee under section 80-I of the Act was examined and allowed by the Assessing officer for three years preceding the assessment year 1991-1992. It is relevant to note that assessments in the earlier years i.e. relating to assessment year 1988-89, 1989-1990 and 1990-1991 has not been disturbed by the Assessing Officer and there has been no change that could justify the Assessing officer adopting a different view in the assessment years 1991-92 and thereafter. As stated hereinbefore, in certain cases where the issues involved have attained finality on account of the subject matter of dispute having been finally adjudicated, the question of reopening and revisiting the same issue again in subsequent years would not arise. This is based on the principle that there should be finality in all legal proceedings. The Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... In cases where deduction is granted under Section 80-I of the Act, the applicability of the Section is determined in the year in which the new industrial undertaking is established. The qualification as to whether any industrial undertaking fulfills the condition as specified under Section 80-I of the Act has to be determined in the year in which the new industrial undertaking is established. Although the deduction under Section 80-I of the Act is available for the assessment years succeeding the initial assessment year, the conditions for availing the benefit are inextricably linked with the previous year relevant to the assessment year in which the new undertaking was formed. In such circumstances, it would not be possible for an Assessing Officer to reject the claim of an assessee for deduction under Section 80-I of the Act on the ground that the industrial undertaking in respect of which deduction is claimed did not fulfil the conditions as specified in Section 80-I(2) of the Act, without undermining the basis on which the deduction was granted to the assessee in the initial assessment year. This in our view would not be permissible unless the past assessments are al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e other decisions cited by ld. AR that reiterates the same principles that in absence of any change in facts / law etc. during intervening period the deduction granted after examination in initial year of a tax holiday period it cannot be questioned in subsequent years. 75. Therefore, we hold that as the deduction with respect to Goa Plant u/s 80IB which is in the 7th year of its claim out of 10 years, has earned eligible profit of Rs. 300682774/- and deduction thereon is claimed at the rate of 30% thereof amounting to Rs. 90204832/- and New Tablet Plant-I u/s 80IC for which this is the 4th year of the claim and assessee has claimed 100% of the eligible profit amounting to Rs. 220579510/- as deduction, cannot be disallowed in this year. 76. Coming to the second argument that the revenue should follow the consistency and where position has been accepted and determined by the department after examination of the facts and where there is no change either in the facts or in law than the earlier decision taken by the revenue should be adhered to. Ld. DR did not point out any changes in the facts and/or law in the year in which deductions granted in earlier years with re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....king res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter - and if there was no change it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken." 31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the eligible undertaking is only to verify that whether the assessee has computed the eligible profits for deduction has some sanctity or not. Assessee has consistently followed allocation of 75% of head office expenses to the individual undertaking based on sales clocked by the individual units. This practice has been consistently followed by the assessee in past year and the revenue as stated by us earlier with respect to AY 2002-03 onwards, has accepted it. The Assessee has in brief and succinctly has explained the rationale behind allocation of each expenditure to the various units. Regarding R&D expenditure the Assessee has also followed the practice apportioning 30% to the individual undertaking in the ratio of sales. This methodology is based on logical reasoning and consistently followed by the assessee which has been accepted by the revenue in past in case of assessment of the Assessee. The ld. AO has held that the Assessee has maintained common books of accounts and therefore as separate books of accounts are not maintained therefore profit cannot be ascertain correctly. We have examined these arguments and we are of the view that as Assessee is maintaining its financi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ise as if the undertaking or the enterprise were a distinct entity. (3) In the case of an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining an infrastructure facility, the form shall be accompanied by a copy of the agreement of the enterprise with the Central Government or the State Government or the local authority for carrying on the business of developing or operating and maintaining or developing, operating and maintaining the infrastructure facility. (4) In any other case, the form shall be accompanied by a copy of the agreement, approval or permission, as the case may be, to carry on the activity signed or issued by the Central Government or the State Government or the local authority for carrying on the eligible business." This rule also does not provide for maintenance of "separate books of accounts".In view of the reading of section 80IA(7) and Rule 18BBB, we are of the view that law does not provide that for claiming deduction under those sections there is requirement to maintain separate books of accounts. 81. At this point of time we take note of the decision of Hon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....now the reason why separate accounts were not maintained for the raw material sold and for the income derived from manufacture of yarn." On reading of the above decision, it is apparent that the main purposes of the maintenance of separate account are to deduce correct profit eligible for deduction. Hon'ble Supreme court in above decision has also held in the background of the facts that assessee did not produce separate profit and loss account of the eligible undertaking. However, in the case of the assessee such profit and loss account was produced along with the report of the accountant since beginning. Therefore, assessee has maintained separate account of the profit eligible for industrial undertaking. In this case, an accountant has audited assessee's accounts of the eligible industrial undertakings and therefore it complies with the letter and spirit of the provisions of Income Tax Act. As mentioned earlier assessee has furnished the separate report of the undertaking which is accompanied by the profit and loss account of each of undertaking complying with the provisions of section 80IA(7) of the act and corresponding rule 18BBB of the Income tax Rules 1962.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inance of an entity and SAP is a name of software product and it's a company name too which a leading provider of these solutions, it is rather incorrect to say that separate books of accounts are not maintained by the assessee. Evidence led before ld. AO in the form of profit and loss accounts, before ld. DRP in the form of the profit and loss account and complete balance sheets of the undertaking, before 'accountant' who certified the deduction of the units, its balance sheet and profit and loss accounts and before us all these records are attached in the form of paper book which are quoted by us above. In view of such overwhelming evidence, we reject contention of ld. AO and Ld. DRP that assessee has not maintained separate books of accounts. We hold that assessee has maintained separate books of accounts from which correct profit can be deduced at any time of the each of the eligible undertaking. Our view also gets support from the decision of coordinate bench in case of in case of SMR builders (P) Ltd. (supra) where in it is held that:- "37. Section 80-IA(7) which is applicable to the provisions of Sec. 80-IB requires the accounts of the eligible undertaki....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vision of section 80A of the act which provides as under :- "Deductions to be made in computing total income. 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 48[80U]. (2) The aggregate amount of the deductions 49 under this Chapter shall not, in any case, exceed the gross total income of the assessee." The only condition that is prescribed u/s 80A of the act is that deduction allowable to the assessee under Ch VIA cannot exceed the gross total income of the assessee. Here as already mentioned gross total income of the assessee is Rs. 3347340467/- and out of which deduction u/s 80 G of the act is a claimed at Rs. 11672734/- and deduction u/s 80 IB and IC of the act of Rs. 1366821506/- of the act totaling to Rs. 1378494420/-. This results in to taxable income for Rs. 1968846227/-. Therefore this ground of objection of the revenue is unsustainable in view of the clear provisions of section 80A of the income tax act. 84. Regarding allocation key of 'sales' for allocat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. What we are concerned herein is the stage before that. We are concerned herein with the method by which the indirect or common expenses - expenses which are incurred for both the exempt and taxable units - are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified. 11. In Hukam Chand Mills Ltd. (supra), in the context of apportioning profits accruing to the assessee under the several categories of businesses carried on by him in British India, it was held that the question as to the method of apportionment was essentially one of fact depending upon the circumstances of the case. It was recognized that in the absence of any statutory or fixed formula, any finding on the question would involve an element of guess work and that "the endeavor can only be to be approximate and there ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....distort the profits. On the contrary, as we have already pointed out, distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the present one where the deduction under Section 10A is available over a period of ten years and only in some years the method of apportionment of income is disturbed. In other words, there is no "just cause" made out for abandoning the past method.' [Underline and Bold supplied by us extracted from taxmann.com] In view of the above decision of Honourable Delhi high court, allocation keys of R & d expenses as well as common expenses have rational, accepted by revenue in past years, there is no justification that how it distorts profit, in absence of compelling reasons to change i.e. 'just cause', we reject the stand of revenue in not accepting the above allocation methodology adopted by the appellant. 85. Coming to the next argument of the revenue that the sales recorded by the independent units are not Arm's length. For this argument of the revenue a deeper examination of sub-section 8 of section 80(IA) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that there cannot be any specific demarcation between manufacturing and selling activities of the assessee and profit accrues only at the time of sales of the goods only. Therefore, the contention of the revenue that selling and distribution function of the assessee is a separate profit center is required to be rejected at threshold. We have carefully considered the argument of ld. AR and of the revenue on this point as well as the ld. AO and Ld. DRP. We are of the view that this argument is almost similar to the argument raised by the revenue in the case of Cadila Healthcare Ltd. (supra) Coordinate bench has dealt with these arguments from all the angles of the controversy and has held as under :- '9.4 Ld. Counsel has asserted that undisputedly, it was an "inter-division transfer", hence it was expected to record the same at arm's length price. He has pleaded that the assessee is blowing hot and cold in the same breath. When it comes to transfer of services and goods, it opposes arm's length price adjustment and says that the expenses which have been incurred in past need not be taken into consideration. As discussed earlier, this logic do not commensurate wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee-company on sale of the products of the Baddi Unit. It was recorded on the presumption that the sales were executed by the Head Office by charging brand value, the name of the product and the goodwill of the Company. In any case, according to Ld. DR, a reasonable expenditure should have been provided, so that such an abnormal profit @ 58.66% could be checked. 9.6 In support of the above submissions, Mr. Srivastava has placed on strong reliance on the decision of Hon'ble Supreme Court in the case of CIT v. AhmedbhaiUmarbhai& Co. [1950] 18 ITR 472 for the legal proposition that, quote "The profits received relate firstly to his business as a manufacturer, secondly to his trading operations, and thirdly to his business of import and export. Profit or loss has to be apportioned between these businesses in a business like manner and according to well established principles or accountancy." Unquote. He has also placed reliance on Liberty India (supra) . 10. We have heard both the side at length. The controversy as raised by the Addl. CIT Mr. Mahesh Kumar, officiating as AO, has serious repercussions on the subject of computation of "eligible profit" while clai....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... an interval of a year. Thus fundamentally the meaning is that the amount of gain made by the business during the year. This can be ascertained by a comparison of the assets of the business at the two dates. To determine the "profit" of a manufacturing Unit the accounting standard has given certain guidelines, enumerated in short. In the accounting the "profit" is the difference between the purchase price and the cost of bringing the product to market. A "gross profit" is equal to sales revenue minus cost of goods sold or the expenses that can be traced directly to the production of the goods. Rather, the "operating profit" is also defined as equal to sales revenue minus cost of goods plus all expenses, except interest and taxes. Most of the manufacturing companies have 'Total Cost' based pricing method. Total Cost has, broadly speaking, two components; i.e. raw-material plus value addition (it includes all overheads). Therefore, profit margin is price minus total cost. In manufacturing Unit, thus cost of conversion is production overheads, such as, direct labour cost and inextricably linked expenditure of production. In general, every manufacturing concern has fixed manufa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Respected Coordinate Bench has concluded that it was not justified to disturb the working of profit merely because the profit rate of eligible unit was substantially higher than overall rate of profit of other Units of the assessee, more so when separate books were maintained by the assessee in respect of the said eligible Unit. In the present case as well the AO has proceeded to disturb the profit of the Baddi Unit and held that only 6% profit is eligible for deduction u/s.80IC.While doing so, identically, the AO has not pinpointed any defect in the working of the "profit" of the Baddi Unit. In such a situation, we can say that the legal proposition as laid down by Delhi Bench can also be applied in the present appeal as well. 10.4 The AO has also concluded that only the incremental profit, representing the difference between the profits earned earlier when the products were procured on P2P basis and the profits earned by the Baddi Unit, should be treated as a manufacturing profit. The AO has then said that earlier the assessee was procuring the products on P2P basis and showing the average profit at 80%, however, on the basis of average selling rate of the produces m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty. Contrary to this, there was no finding that upto the extent of 80%, the profit was attributed to the assessee-company. The segregation between 80% and 6% was not on account of any evidence through which it could independently be established that the major portion of the profit could be attributed to the assessee-company and rest of the profit could only be attributed to the Baddi Unit. 10.5 The AO has also made out a case that the book profit percentage of Baddi Unit was 58.67%, whereas the profit of the assessee-company as a whole was 11.88%. If we further elaborate this aspect, then the AO has also given a working through which the average selling rate was 86.36% of the Baddi Unit. Meaning thereby if we presume for example that the assessee has gross profit of 86%, then the net profit was disclosed at 58%. A question thus arises that what beneficial purpose could be served for the reduction of gross profit to a lower percentage of net profit, specially when the allegation of the A.O. was that there was an attempt to declare higher profit of Baddi unit to get more advantage of deduction. On perusal of the P&L account, it is an admitted factual position that the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." As per this section, the profits of an eligible undertaking shall be computed as if such eligible business is the only source of income of the assessee. In this section again, the Statute has used three terms, i.e. "profit", "business" and "income". As narrated hereinabove an 'income' has a wider expression than the 'profit'. Likewise, 'business' has also a wider meaning than the word 'income'. In the present case, manufacturing of pharmaceutical products is declared as "eligible business". Then the question is that what is the profit of such an eligible business? On careful reading of this subsection, it transpires that the said eligible profit should be the only source of income. If we examine the separate profit & loss account of Baddi Unit, then it is apparent that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s as follows:- 'Section 80IA(8) : Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation : For the purposes of this sub-section, "market value", in relation to any go....
X X X X Extracts X X X X
X X X X Extracts X X X X
....question has been raised by ld.AR Mr. Patel that what should be the line of demarcation to determine the sale price of a product if not the market price. As far as the present system of fixation of sale price of the product is concerned, a consistent method was adopted keeping in mind the several factors, depending upon the market situation, we have been informed. But if the assessee is compelled to deviate from the consistent method of pricing, then any other suggestion shall not be workable because no imaginary line of profit can be drawn, precisely pleaded before us. So the uncertainty is that on the production cost what should be the reasonable mark-up which shall cover up the margin of profit of a manufacturing unit. And why at all this complex working of computation be adopted by this assessee when a very simple method is adopted that on one side of the P&L A/c the production cost plus overheads were debited and on the other side of the P&L A/c sale price was credited to computed the profit. There are certain expenditure which are notional expenditure and there are certain expenditure which are self-generated to create the brand value of a product. Naturally, the all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. Only the Operational Profit has to be claimed for 80IC deduction. According to him, each of the eligible business constitutes a stand alone item in the matter of computation of profit. For the computation of profit of an eligible business the word used is "derived" in section 80IC which is a narrower connotation, as compared to the word "attributable". In other words, by using the expression "profits derived by an undertaking", Parliament intended to cover such sources not beyond the first degree, i.e. the first degree of manufacturing activity. The law pronounced by the Hon'ble Supreme Court is final and should not be disputed. However, a judgement is to be correctly interpreted. 10.11 Finally, on the question of segmentation of profit a vehement reliance was placed on an old precedent namely Ahmedbhai Umarbhai& Co. (supra). Facts of that case was that the assessee had owned three Mills at Bombay and one at Raichur (Hyderabad). The assessee was manufacturing oil from groundnuts. The produced at Raichur, Hyderabad is partly sold at Raichur and partly in Bombay. The question was in respect of the liability under Excess Profit Tax Act (EPT Act) for the oil manufacture....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmines also the place of accrual of profit. The act of sale is the mode of realizing the profits. If the goods are sold to a third person at Mill premises, one could have said that the profits arose by reason of sale. The Profit would only be ascribed to the business of manufacture and would arise at the Mill Premises. Merely because a Mill owner has started another business organization in the nature of sale depot, that cannot wholly deprive the business of manufacture of its profits, though there may have to be apportionment in such a case between the business of manufacture and business of shop keeping. The question which was answered was that whether in respect of the manufacturing business of the assessee in Raichur, profits accrue or arise and if so, at what place. One of the Hon'ble Judges has opined that the manufacturing profit arise at the place of manufacture and that the sale profits arise at the place of sale and that the apportionment has to be made between the two, though the place of receipts and realization of the profits is the place where the sales are made. Simultaneously it was also opined that the manufacturing profit could not be said to have accrued at t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... For the purpose of the said section, it was deemed to be a separate business. The whole of the profits of which accrue in an Indian State and the other part of the business be deemed to be a separate business. In para-44, the Hon'ble Court has discussed the problem with reference to certain decisions of English Courts and then made an observation that it had been held that if separation is possible in such cases, the proper course is to follow that sever the profits of the two businesses and assess accordingly. The result of the discussion was that the profits of the two businesses were directed to be apportioned. Simultaneously, the Hon'ble Court has also made an observation, quote "It is true that these are cases where several businesses were amalgamated and carried on together, or more of which were not liable to tax or excess profits duty; but the principle of apportionment upon which these cases were decided could, in my opinion, be applied with equal propriety to cases where one part of the business is distinct and separate from the other parts and is capable of earning profits separately." unquote. The Hon'ble Judge was therefore very much concern about the fact....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... this detailed discussion, we thus arrive at the conclusion that the principle of apportionment was the criteria for segregating the manufacturing profit if it was feasible to do so. As against that in the present case the assessee has computed the profit of the Baddi Unit on the basis of the well accepted principle of accountancy that a profit is accrued where a transaction is closed, meaning thereby the profit arises solely at the time of sale. 10.13 After the detailed discussion, before we close the controversy we would like to express that the AO's proposition of segmentation of eligible profit of the manufacturing unit was not altogether meaningless. This approach of the AO cannot be brushed aside on the fact of it. But at present, when the method of accounting as applicable under the Statute, do not suggest such segregation or bifurcation, then it is not fair to draw an imaginary line to compute a separate profit of the Baddi Unit. The Baddi Unit has in fact computed its profit as per a separately maintained books of account of the eligible manufacturing activity. To implement the method of the computation at stand alone basis, as conveyed by the AO, the manufact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m No.10CCB but has filed profit and loss accompanied with that audit report. Subsequently, before ld. DRP, those were filed and were available with ld. DRP as well as with AO at the time of framing final assessment order. Hence it is contended by the ld. AR that substantial compliances has been made by the assessee by filing the profit and loss account and complete compliance before passing of the final assessment order by filing the balance sheet. Hence, ld. AR contended that if the full details are available with the AO before passing of assessment order merely because there is some technical default deduction cannot be denied. This argument was examined and it is found that assessee has submitted the profit and loss account along with Form NO.10CCB and later on also the balance sheet before finalization of final assessment order i.e. those were filed before the DRP, we are of the view that assessee cannot be denied the deduction merely for this reasons. Further, the balance sheet filed later on by the assessee also did not contain any error or any fact, which could have shown that deduction claimed by the assessee, is erroneous. It is also important to note that no adverse remar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y us which are not on the issue of facts of the case but all of them are on legal grounds, which we have answered in preceding paragraphs of this order. In view of claim of the assessee supported by the audited certificate as provide u/s 80IA(7) of the act read with rule 18BBB and supported by the profit and loss account and balance sheets of the assessee, allocation of all the expenses based on the accepted formula which the assessee is applying for last several years and which has also not been disputed by the ld. AO in past years and allocation key of 'sales' of the units is also not disputed, it deserves to be accepted. We are also of the view that allocation of the expenses are on rational basis and accepted by revenue in earlier years with respect to eligible units claiming deduction for those years. Therefore, along with the old units i.e. Goa Plant and new tablet plant -I of the assessee along with the new tablet plant No -II and III and new SCG plant deduction u/s 80IB and 80IC is allowable as computed by the assessee. 90. Now we come to the last ground of objection raised by the revenue that this matter of examination of claim of the assessee sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....decisions in which it has been held that the Tribunal can base its decision on a ground not raised before the appellate authority or in the grounds of appeal before it but is not bound to do so. It is not precluded from considering a point which arises out of the appeal merely because such point had not been raised or urged by either party at the earlier stage of the proceedings. Some of these decisions, only to name a few, are CIT v. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 705 (Mad.), CIT v. AC Paul [1983] 142 ITR 811 (Mad.) and CIT v. Ice Suppliers Corpn. [1967] 64 ITR 195 (Punj.). In fact, the jurisdictional High Court has explained the ratio in the case of Hukumchand Mills Ltd. (supra) very elaborately. It has particularly explained the following observation of the Supreme Court in the case of Hukumchand Mills Ltd. (supra) : "The Tribunal has, however, discretion not to admit any fresh plea being put forward when it would involve investigation of facts." Explaining the above observation, the Madras High Court in the case of N.P. SaraswathiAmmal (supra) observed as follows at page 23 of the report : "We do not regard the last observation as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e during the course of hearing which is not taken by the LD. AO or Ld. DRP. On factual points, nothing has been alleged by revenue, which remains to be examined, which is brought to our notice. In absence of any fresh plea by the revenue, we are afraid that we cannot agree with the contention of revenue. Our this reason also gets the support from the decision of coordinate bench in Zuari Leasing & Finance Corpn. Ltd. v. ITO [2008] 112 ITD 205 (Delhi) (TM) where in its held that :- "10. It is clear from above that primary power, rather obligation of the Tribunal, is to dispose of the appeal on merits. The incidental power to remand, is only an exception and should be sparingly used when it is not possible to dispose of the appeal for want of relevant evidence, lack of finding or investigation warranted by the circumstances of the case. Remand in a casual manner and for the sake of remand only or as a short cut, is totally prohibited. It has to be borne in mind that litigants in our country have to wait for long to have fruit of legal action and expect the Tribunal to decide on merit. It is, therefore, all the more necessary that matter should be decided on merit without all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....market to market losses should not be treated as notional losses on open contract as opposed to crystalised losses. These loses being contingent liabilities are not available for deduction u/s. 37(1). Therefore, why these expenditure should not be added back to income for the relevant accounting period. In this regard, the assessee has made the following submission. "In this regards, the Company would like to submit before your goodself that during the Assessment Year 2009-10, the company had executed hedge and forward contracts to protect its export realizations from exchange rate fluctuations and incurred marked to market (MTM) loss of Rs. 33,316.14 Mn. in the return of Income for the assessment year 2009-10 filed on 27.09.2009, the aforesaid, loss suffered in the ordinary course of business was claimed as allowable deduction [Refer OT vs. Woodward Governor India (P.) Ltd: 312 ITR 254 (SCJ). In the previous year relevant to the assessment year 2010-11, the assessee company, consistent with its stand taken in the assessment year 2009-10, recognized MTM gain of RsJ ,983.86 crorcs on reinstatement of the forward contracts by way of crediting the said amount t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment has used the expression "any expenditure" in Section 37 to cover both. Therefore, the expression "expenditure" as in Section 37 may, in the circumstances, of a particular case, cover an amount which is really a " loss" even though the said amount has not gone out from the pocket, of the assessee. The quantum of allowances permitted to be deducted under diverse heads under Sections 30 Lo 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in Section 43{2), which is used in several Sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under Section 28/29. That is why in deciding the question as to whether the word "expenditure" in section 37(1) includes the word "loss" one has to read Section 37(1) with Section 28, Section 29 and Section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business ore to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an asset, on conversion into another currency, such profit or loss would, ordinarily, be trading profit or loss if the asset is held by the assessee on revenue account or as part of circulating capital embarked in the business. But, if on the other hand, the asset is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." Following the aforesaid decision of Supreme Court in case of .Woodward Governor (supra), the Special Bench of the Tribunal in the case of DC1T v. Bank of Bahrain & Kuwait: 41 SOT 290, also held that loss arising on unmatured derivative contracts, on mark to market basis, is allowable deduction, in accordance with the mercantile system of accounting, and could not be said to be contingent/notional loss. The relevant findings are reproduced as under: "42. We have considered the rival submissions and perused the record of the case. There is no dispute that if the date of maturity of the contract falls within the same financial year then the difference between the exchange rate as prevailing on the balance sheet date and contracted rate is an allowable deduction. The moot point for consideration is whether keepin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion, we allow the assessee's appeal for the following reasons:- I) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts. II) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31. iv) A liability is said to have crystallized when a pending obligation on the-balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing. v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. vi) The forward foreign exchange contracts have all the trappings of stock in- trade. vii) In view of the decision of Hon'ble Supreme Court in the wise of Woodward Governor India (1) P. Ltd., the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....narising as a result of restatement of the unmatured forward contracts entered into in the normal course of business at the end of the accounting period, on account of "mark to market" is allowable business deduction. It is respectfully submitted that the Company continues to bonafidely believe, in view of the aforesaid judicial pronouncements, that MTM gains/ losses on forward contracts represents crystallised gains/ losses and are, therefore, taxable/ allowable as deduction in the relevant year. The company has, therefore, rightly claimed MTM loss in the assessment year 2009-10 and also consistent with its stand, rightly offered for tax MTM gains in the assessment year 2010-11 and assessment year 2011-12. Strictly without prejudice to the aforesaid consistent stand of the Company, we humbly submit that pending adjudication of the appeal before the Tribunal, MTM gains offered for tax during the year under consideration of Rs. l,706.33Mn under the normal provisions andRs. 1,534.16 Mn u/s 115JB of the Income Tax Act, 1961 ('the Act')., may, consistent with and following the stand of the Department in the AY 2009-10, not be considered as taxable and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y treating the MTM gain of Rs. 1983,86,34,040/- as taxable income under the normal provision of tax, and Rs. 1969,12,65,001/- u/s 115JB of the Act. 97. At the outset, we note that the provision was created by the assessee for Rs. 3331.61 crores on account of MTM loss in the immediately preceding assessment year 2009-10 which was not allowed as a deduction in the assessment framed under section 143(3) r.w.s. 144C of the Act vide dated 30-1-2014 under normal computation of income. Similarly the provision for Rs. 1431.63 crores were treated as a contingent liability while determining the income under section 115JB of the Act in the assessment year 2009-10. The ld. AR before us claimed that a part of the aforesaid amount was written back in the year under consideration, therefore the same cannot be treated as income either under normal computation of income or under section 115JB of the Act as the same has already suffered the tax and such ground of appeal was not pressed before the ITAT in ITA 1782/AHD/2014. 98. On the other hand, the ld. DR before us agreed with the submission of the ld. AR if the amount written back correlates with the same provision which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing AY 2009-10. Accordingly, we hold that the amount written back by the assessee cannot be subject to tax either under normal computation of income or under section 115JB of the Act in the year under consideration. However, we find that the provision for Rs. 1431.63 crores was suffered to tax under section 115JB of the Act in the immediate preceding AY 2009-10 whereas it has been written back in the year under consideration for Rs. 1969.13 crores. Thus the difference between amount of provision disallowed under section 115JB of the Act in the immediate preceding assessment year 2009-10 viz a viz the amount written back in the year under consideration is of Rs. 537.50 crores ( 1969.13-1431.63 crores). Thus the assessee cannot claim the relief more than the amount suffered to tax in the immediate preceding AY 2009-10 while determining the income under section 115 JB of the Act. Thus we direct the AO to restrict the relief to the assessee while determining the income under section 115 JB of the Act to the extent of Rs. 1431.63 crores only. Hence the assessee get relief for part of the amount as discussed above. Thus the ground of appeal of the assessee is partly allowed." Followin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds * As per the offering circular, the Bonds constituted direct, unsubordinated, unconditional unsecured obligations of the assessee company and shall at all Limes rank paripassu and without any preference or priority among themselves. The payment obligations of the assessee company shall, save for such exceptions as provided, at all times rank at least equally with all of its present and future direct, unsubordinated, unconditional and unsecured obligation. A 3 Conversion of Bonds The Bonds were convertible by Bondholders in to shares which may subject to certain conditions, be represented by the CDS (each ODS representing one share), at any time on or after 27"1 April 2006 and prior to the close of the business on 8'hMarch 2011, unless previously redeemed, converted, or purchased and can cancelled. ` * The price at which shares of the company will be issued upon conversion will initially be Rs. 716.32 and subject to adjustment in the manner provided in Condition 5.3 of terms of issue in various events some which are as under: o Free distribution, bonus shores, division, consolidation and re-classification of shares; o Divi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted on the basis of 360 day year consisting of 12 months of 30 days each and in case of an incomplete month, the number of days elapsed. p=180 A.5 Utilization of proceeds of Bonds * The net proceeds from the Bonds (after meeting expenses on issuance of Bonds) are to be used for (i) financing international acquisitions fii) capital expenditure and (iiij any other use as may be permitted under applicable law or by the regulatory bodies, from time to time B. Redemption of Bonds in March 2011 i.e. during the year under assessment On the date of maturity i.e. March 2011, none of bond holders, exercised the option to convert the FCCBs into equity shores and hence the bonds were redeemed by the assessee company at the stated premium of 26-76,5%. Copy of notice for confirming such intention by bonds holders and subsequent, redemption of the amount with premium of US$ 117,766,000 (equivalent INR Rs. 5,317,767,883) along with issue price of USS. 440,000,000 is enclosed as Annexure-3. As per the terms of the issue, all payments of principal, premium and default interest (If any) made by the Assessee Company in respect of the Bonds will be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 5.3 of Offering Circular (iii) early redemption by the assessee company etc. However, in the tax returns for the preceding years, proper disclosure was mode by way of notes to the computation of total income as under (copy of the tax returns for past assessment years i.e. AY 2007-08 to AY 2010-11 is enclosed as Annexure-4): Quote "As per the terms of issue of the FCCBs, the bonds are redeemable at a premium of 26.765% on 18th March 2011, in case the bond holders do not opt for conversion thereof into shares. Accordingly, the prorated premium for the year amounting to Rs... being contingent, has not been claimed as a deduction and. the some will be claimed, to the extent redeemed, in the year of redemption". Unquote A. - Justification of claim A.I- Bonds are debentures It is imperative to understand the nature of FCCBs to determine the dcductibility of premium on redemption of said bonds. Bonds and Debentures are not defined in the Income Tax Act, 1961 [the Act) but the sold terms have been succinctly explained by the Bombay High Court in the case of GIT vs Enam Securities Pvt. Ltd. [ TS-324-HO 2012-Bom] as under: "a d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equivalent of debt; the debenture holder is the creditor and the company Is a debtor. * Debenture is in the nature of borrowed capital till its repayment or discharge. * Conversion of foreign currency debentures into equity shares is also a made of repayment or discharge of debt created by debentures. A. 2 Premium on redemption is "interest" The general idea of interest is that the lender is entitled to compensation for the deprivation of his money. The only compensation to the lender is the premium or the right to convert the debt into shares. In Lornax vs Peter Dixon and Son Ltd. 12 ITR (EC) ] , the Court held that where no interest is payable on borrowing, the premium will normally, if not always be interest. Further the Madras High Court applied the principles as pronounced in the Peter Dixon case in Canara Industrial and Banking Syndicate Ltd. vs CIT 21 ITR 96 and held that premium payable would be interest where the loan does not provide for any interest. Further, interest is defined in section 2{2SA) of the Act and is reproduced as under: "Interest means interest payable in any manner in respect of any m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of CIT vs. Rayond Ltd. vide 23 taxman.com 427 in favour of the assessee. On the other hand, ld. Departmental Representative is fair enough not to controvert this contention of the ld. counsel that the issue in appeal is covered by the above cited judicial pronouncement of Hon'ble High court of Bombay. With the assistance of ld. representatives, we have gone through the judicial pronouncement and noticed that in the case of CIT vs. Raymond Ltd. 23 taxman.com 427, the Hon'ble High Court of Bombay held that premium paid on redemption of debenture would be allowable as revenue expenditure. The relevant part of the decision is reproduced as under: - "9. In the present case the asscssee issued Non Convertible Debentures in the Financial Year ending on 31 Marc-1985, which were liable to be redeemed in Financial Year 1991-92 at a premium of Rs. 15 lakhs. The amount which was expended by the assessee towards the premium of Rs. 15 lakhs is, properly construed, a liability which the asscssee incurred for the purpose of its business in order to obtain the use of the funds for the period covered by the issue of Non Convertible Debentures. The payment of a premium at the end of the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onds and the assessee claimed deduction of premium paid on redemption of FCCB. The DRP has also not considers the terms of issues of bonds. The case of the assessee is pertained to issue of FCCB of the nature of debenture and not of the kind of issue of shares as cited by the DRP in their order as per section 2(12) of the Company Act, 1956 which defines debenture to include stock and bonds and any security of the company whether or not they constitute charge of the asset of the company. A bond is a formal document constituting the engagement of debt by an enterprise and normally contains a provision regarding payment of principal and interest. There is clear distinction between bonds and share capital because a bond does not represent ownership of equity capital. Bonds are interest bearing instrument which represents a loan. Therefore, FCCB issued by the assessee company were debt instrument issued by assessee company engaging its liability to pay the debt amount. These bonds are distinguishable from shares since bonds forms part of the loan and does not represent ownership in share capital. Therefore, the premium paid on redemption of FCCB is interest eligible for deduction. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....90/Ahd/2016 dated 22nd December, 2016. It is also submitted by the ld. counsel that aforesaid order of the ITAT was confirmed by Hon'ble Gujarat High Court vide Tax Appeal no. 541 of 2017 dated 14th August, 2017. The ld. Departmental Representative is fair enough not to controvert this undisputed fact. With the assistance of ld. representatives, we have gone through the decision of ITAT Ahmedabad in the case of assessee itself vide ITA No. 1390/Ahd/2016. The relevant part of the decision of ITAT is as under:- "6. We have heard both the parties. Case file perused. There does not appear to be any dispute that the assessee is admittedly an entity running the specified in house research and development facilities. The prescribed authority in the instant case is the "DSIR" i.e. Department of Scientific & Industrial Research, Ministry of Science & Technology, Government of India. This prescribed authority has undisputedly issued "Order of approval of in house Research & Development Facility u/s.35(2AB) of the Income Tax Act, 1961" in Form 3CM on 11.06.2009 as pertaining to the previous year relevant to the impugned assessment year. It further contains a list of assessee's variou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h and development amounting to Rs. 237,77,05,310/-. The Assessing Officer had rightly held it entitled for the above weighted deduction after verifying all necessary particulars during the course of scrutiny. 8. We make it clear before parting that the ld. Departmental Representative has referred to various case laws i.e. Addl.CIT vs. Mukur Corporation [1978] 111 ITR 312 (Guj.), Tejas Networks Ltd. vs. DCIT [2015] 60 taxmann.com 309 (Karnataka), Electronics Corpn. Of India Ltd. vs. ACIT [2012] 28 taxmann.com 280 (Hud.), DCIT vs. Mastek Ltd. [2012] 25 taxmann.com 133 (Guj.) & EIMCO K.C.P. Ltd. vs. CIT [2000] 242 ITR 659 (SC). We however find that the first one of the above decision defines the scope of CIT's jurisdiction vested u/s.263 of the Act. We refer facts of the instant case when once again wherein the ld. PCIT has observed in preceding paragraphs that the said jurisdiction is triggered if any Assessing Officer does not frame an assessment as per law. We have already held that the assessee's weighted deduction claim raised u/s.35(2AB) of the Act is very much allowable. The first decision cited at Revenue's behest is accordingly distinguished. Next juridical precedent....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The relevant part of the decision of the decision of ITAT Ahmedabad is reproduced as under:- "73. The issue raised by the assessee in the ground no. 15 is that the Ld. DRP erred in not adjudicating the claim of weighted deduction u/s 35(2AB) of the Act on the cost of assets provided to employees working in approved R&D facilities. 74. At the outset, we note that the similar grounds of appeal was raised before ITAT Delhi in the own case of assessee Vide ITA no 196/Del/2013. The Delhi Tribunal has set aside such ground of appeal to the AO by observing as under: "We have carefully considered the rival contentions and we are of the view that the issue is squarely covered in favour of the appellant by decision of ITAT in assessee's own case. However, neither the AO nor the ld. DRP has applied its mind to the facts of this case and has not adjudicated on the issue. Facts of this expenditure with adequate details are also not record before us. Therefore we set aside this ground of appeal to the file of AO to verify the claim made by the assessee and if the facts and circumstances are similar to the issue decided by the ITAT in case of assessee for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e same u/s 37(1) of the Act. In the result ground No.15 of the appeal is allowed." 80. In view of the above order of Delhi ITAT in the own case of the assessee, we are of the view to follow the same. Hence the ground of appeal of the assessee is allowed with the direction for fresh adjudication as per the provision of law. Hence the ground of appeal of the assessee is allowed for statistical purposes." Following the decision of the ITAT in the case of the assessee itself as cited above, this ground of appeal of the assessee is allowed with direction to the Assessing Officer to adjudicate this issue de-novo as per the direction laid down in the findings of the ITAT as cited above. Therefore, this ground of appeal of the assessee is allowed for statistical purposes. Ground No. 12 ( Erred in taxing long term gain of Rs. 14,27,71,868/- and income from other sources of Rs. 1,53,43,279/- without appreciating that while considering net business loss of Rs. 302,66,75,122/- aforesaid income were already offered for tax and further adding above incomes resulting into double taxation) 20. In this regard, the ld. counsel has submitted that rectification order has already been....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... issue on identical facts was adjudicated by the Co-ordinate Bench of the ITAT Ahmedabad in the case of Jindal Worldwide Ltd. vide ITA No. 2316/Ahd/2018 and the matter was restored to the A.O. for deciding afresh in view of the judicial pronouncement and the circular of the CBDT as referred above. Therefore after taking into consideration the circular of the CBDT and decisions of the Hon'ble Rajasthan High Court, Hon'ble Bombay High Court as cited above, we restore this issue to the file of the Assessing Officer for deciding afresh after taking into consideration the direction laid down in the aforesaid decisions of the Hon'ble High Court and the Circular of the CBDT. Therefore, this ground of appeal of the assessee is allowed for statistical purposes. ITA No. 729/Ahd/2016 A.Y. 2011-12 filed by revenue Ground No. 1 & 2 (Erred in directing to exclude difference u/s. 14A of the Act for computing the big profit u/s. 115JB of the Act). 26. During the course of assessment, the Assessing Officer has proposed to add back the disallowance made u/s. 14A of the act while computing the income. The assessee has filed objection before the DRP. The DRP has allowed the objection of th....