TaxTMI 
TaxTMI 
2025 (7) TMI 1890
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....ese cross appeals were inter related, both these appeals were heard together and are accordingly being disposed off by this common order. 3. We first take up the assessee's appeal in ITA No.554/Chny/2023. The grounds urged by the assessee are as follows:- "1. The order of the Commissioner of Income-tax (Appeals) ('CIT(A) NFAC') is contrary to law, facts and circumstances of the case. 2. Additions @ 1% u/s 92CA(3) towards notional Corporate Guarantee fees - Rs. 1,22,93,500: 2.1. The CIT(A)-NFAC is not justified in upholding the additions towards corporate guarantee fee @ 1% as proposed by the TPO. 2.2. The CIT(A)-NFAC ought to have appreciated that issuing of guarantees does not fall under the ambit of transfer pricing, since it does not have any bearing on profits, income, losses or assets of the assessee; 2.3. The CIT(A)-NFAC ought to have appreciated that, the corporate guarantees have been provided by the appellant as a stewardship /shareholder activity and not a business transaction that needs to be tested for ALP, since, the appellant is not in the business of issuing guarantee for this activity to qualify as internat....
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....tc. which have been incurred on R&D projects and capitalised in books of the R&D facility as per mandatory requirement of Indian Accounting Standards (IndAS), but for tax purposes, the expenses have been carved out of the total capitalisation and claimed as revenue expenditure in line with DSIR guidelines. 4.3. Without prejudice, expenditure in R&D approved facility, whether Revenue or capitalised are fully allowable u/s 35(1)(i)/35(1)(iv). 5. Weighted Deduction R&D of Capital Expenditure u/s 35(2AB) certified by DSIR but not allowed by NFAC - Rs. 40,21,77,735: 5.1. The CIT(A)-NFAC erred in not granting deduction for Rs. 40,21,77,735 u/s 35(2AB) (being 150% of Capital expenditure of Rs. 26,81,18,490) which has been certified by the DSIR in Form 3CL dated 05.04.2023. 5.2. The Appellant having received Form 3CL dated 05.04.2023 ought to be allowed a total weighted deduction of Rs. 1,72,03,84,500 (being 150% of capital exp. of Rs. 1,14,69,23,000) as certified by DSIR in Form 3CL, but the CIT(A)-NFAC erred in restricting total deduction for capital exp. to Rs. 1,31,82,06,765, thereby disallowing a claim of Rs. 40,21,77,735. 5.3. The CIT(A)-N....
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....pletely overlooked the provisions of S.80IC(5) r.w.s. 801A(8) which requires unit profitability to be based on the market value of the output. Further, the CIT(A) failed to recognize and consider the invoice value of each chassis as the most appropriate method of determining the market value. 6.7. The CIT(A)-NFAC ought to have appreciated that all direct and indirect costs, attributable to manufacture and sale of the product from every manufacturing unit, are identified and allocated based on appropriate accepted allocation keys viz, Turnover ratio, cost of production ratio, Marketing ratio etc, support function activities viz, design, procurement, production, planning, marketing, R & D are centrally located only to facilitate better management and control. The cost of these functions has been fully allocated to the manufacturing units to arrive at their profitability. Hence, reworking of profit is unwarranted. 6.8. The CIT(A)-NFAC in arriving at his prejudiced conclusion about the Pant Nagar Unit erred in completely misunderstanding the business process model of the Appellant by ignoring its detailed factual submissions about the working and benefits of the eligi....
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....inition of international transaction consequent to retrospective amendment made by the Finance Act, 2012 and, accordingly adjustments are required to be made for guarantee commission. The relevant findings taken note of by us is as follows: - "75. The concept of Bank Guarantees and Corporate Guarantees war explained in the decision of the Hyderabad Tribunal in the case of Prolifics Corporation Limited. In the said case, the Revenue contended that the transaction of providing Corporate Guarantee is covered by the definition of international transaction after retrospective amendment made by Finance Act, 2012. The assessee argued that the Corporate Guarantee is an additional guarantee, provided by the Parent company. It does not involve any cost of risk to the shareholders. Further, the retrospective amendment of Section 92B does not enlarge the scope of the term international transaction to include the Corporate Guarantee in the nature provided by the assessee therein. The Tribunal held that in case of default, Guarantor has to fulfill the liability and therefore, there is always an inherent risk in providing guarantees and that may be a reason that Finance provider insist o....
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....The facts as noted are that, during the year, the assessee had not derived any exempt income and accordingly it claimed that, no expenditure was incurred for deriving such exempt income. The AO was not agreeable to the contention of the assessee and sought to invoke Rule 8D. The AO is noted to have computed disallowance u/s 14A of Rs.18,82,33,000/- being 1% of the average value of investments held by the assessee. On appeal the Ld. CIT(A) relying on the CBDT Circular No.5/2014 confirmed the disallowance made by the AO. Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us. 6.2 The Ld. AR submitted that sec.14A of the Act cannot be applied if there is no exempt income earned during the year. According to him, the question of disallowance of expenditure would arise only in a scenario where the assessee has earned exempt income during the year. To support his view, he relied on the following decisions of jurisdictional High Court: − CIT vs. Chettinad Logistics (P) Ltd. [248 Taxman 55](Madras) − Redington India Ltd. vs. Addl. CIT [TCA 520 of 2016](Madras) − Marg Ltd. vs CIT 120 taxmann.com 84 (Madras) − ....
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....rred in relation to income, which does not form part of the total income of the Assessee. 10.4 Rule 8D, in our view, cannot go beyond what is provided in Section 14 A of the Act." (ii) The Hon'ble High Court in Redington India Ltd. v. ACIT (supra) held that:- "4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year. 7. Per contra, Sri. T. Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of....
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.... of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. 11. The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far.." (iii) The above decision was followed with approval by the jurisdictional High Court in the case of CIT v. Celebrity Fashion Ltd (supra) wherein it was held as under:- "17. On the first issue, we find that the Tribunal rightly understood the scope of the transaction done by the assessee. The consistent case of the assessee was that they invested a sum of Rs. 7.25 crores in SBI Magnum Insta Cash Fund, that the amount was invested on 30-3-2011, that they had not incurred any expenditure in making such investment and that at the year end, the assessee did not earn tax free income from such investments. In terms of Section 14A of the Act, the only expenditure, which was proved to be incurred in relation to earning....
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.... earn such dividend income, which is exempt from tax and if at all the Assessing Authority is not satisfied with that declaration of the assessee, after recording such reasonable and cogent satisfaction only, he can resort to the computation method under Rule 8D of the Rules and compute such disallowance with a caveat that under no circumstances, the disallowance can exceed the amount of dividend income earned, received or accrued to the Assessee in the present year, which was taxable but for the exemption as per the provisions of the Act. If no dividend income is declared by the investee company or subsidiary company as the case may be, the disallowance computed under Rule 8D cannot be taxed as a "hypothetical income" of the Assessee, by providing a negative figure beyond the dividend income earned during that year, to be added to the taxable income of the Assessee. That will make the mockery of the concept of "real income" of the Assessee being taxed and it is the bedrock of the Income Tax Act itself. ..... 20. Before parting, we may also note with reference to the Table of disallowance voluntarily made by the Assessee, which is part of the Paper Book before us ....
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....n the circumstances of the case the Learned Income Tax Appellate Tribunal was justified in law by ignoring the CBDT circular no.5/2014 dated 11.02.2014 which has clarified that the disallowance for any assessment year may not be limited to the exempt income for the said assessment year ? ... 9. Substantial questions Nos. D & E pertain to the deletion of the disallowance made under Section 14A of the Act. The learned Tribunal took note of the decision of the High Court of Delhi in Era Infrastructure (India) Ltd. (supra), which had taken note of the decision in the case of Cheminvest Ltd. (supra), wherein it was held that amendment by the Finance Act, 2022 of Section 14A of the Act by inserting a non-obstante clause and explanation we take effect from 01.04.22 and cannot be presumed to have retrospective effect and, therefore, on facts the amendment cannot be applied to the assessment year under consideration. We find no error in such conclusion arrived at by the learned Tribunal. 10. Accordingly, substantial questions of law No. D & E are decided against the revenue." 6.6 Following the above decisions (supra), we thus hold that there cannot be any disal....
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....laimed revenue expenditure of Rs.529,78,40,000/- but while reducing the amount of such claim debited to P&L A/c, the assessee has considered only Rs.304,48,15,892/-. The Ld. CIT(A) thus observed that, the assessee had claimed excess deduction of Rs.225,30,24,000/-. Overall therefore, as against the disallowance of Rs.3,88,02,17,515/- made by the AO, the Ld. CIT(A) restricted the disallowance u/s 35(2AB) to Rs.234,28,47,000/-. Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before us. 7.3 Assailing the action of Ld. CIT(A), the Ld. AR submitted that, the assessee had incurred revenue expenditure of Rs.538,76,62,852/- towards scientific research at their approved R&D facility during the year. He pointed out that, out of the said amount, since revenue expenses to the extent of Rs.234,28,46,960/- were incurred for specific ongoing R&D projects, the assessee had added & capitalized the same to R&D in the books of accounts. The balance sum of Rs.304,48,15,892/- was thus shown to have been debited to P&L A/c. The Ld. AR thus showed us that, while computing the weighted deduction allowable u/s 35(2AB) of the Act, since only sum of Rs.304,48,15,892/- had been debited ....
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....hen does the AO or Ld. CIT(A) has any power to question the same, when the approval granted by DSIR is in terms of the power vested under the provisions of section 35(2AB) of the Act read with Rule 6(7A) of the Income-tax Rules, 1962. In our considered opinion, the provisions of Section 35(2AB) r.w. Rule 6(7A) does not give the lower authorities the power to question the veracity of the expenses quantified and approved by DSIR for weighted deduction. Our view finds support from the decision of the Hon'ble Karnataka High Court in the case of Tejas Networks Ltd. v. Dy. CIT [2015] 60 taxmann.com 309/233 Taxman 426, wherein it has been held that, once a certificate has been issued by the DSIR, the AO is prohibited from looking into the amount of admissibility of deduction. The relevant findings are reproduced hereunder:- "27. A plain reading of Section 35(2AB) would clearly indicate that where a company is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature ....
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....he Act or otherwise. Keeping in mind that such contingency may arise, Parliament has incorporated sub-section (3) to Section 35 of the Act which would be a complete answer to such situations. Thus, if any question arises as to what extent, any activity constitutes or constituted or an asset is or was being used for scientific research, then the Assessing Officer would be required to refer such question to the Board for being referred to the prescribed authority. The decision of the prescribed authority in this regard would be final, inasmuch as, the certification of such expenditure is being examined by an expert body and undisputedly, such exercise has been outsourced by the Revenue under the Act itself, since the prescribed authority being possessed of requisite expertise, it would be in a better position to certify as to whether such expenditure claimed by the assessee under Section 35(2AB) would fall within the said provision or outside. This exercise of examining the correctness of the Certificate issued by the prescribed authority is not available to the Assessing Officer as could be seen from scheme of Section 35 of the Act." 7.7 Following the above decision (supra), in t....
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....g been made by the assessee, as alleged by the Ld. CIT(A) and thus direct the AO to delete the same. 7.9 This may be yet be viewed from another angle as well. According to us, irrespective whether the total revenue expenditure of Rs.538,76,62,852/- was debited to P&L A/c or not, since the amount to the extent of Rs.529,78,40,000/- has been approved by DSIR for weighted deduction u/s 35(2AB), the assessee is legally entitled to corresponding weighted deduction of Rs.794,67,60,000/- [529,78,40,000 X 150%]. The remaining expenditure of Rs.8,98,22,852/- [538,76,62,852 - 529,78,40,000], which was not approved by DSIR, in our considered opinion, is otherwise eligible for normal deduction u/s 35(1) of the Act. We accordingly direct the AO to re-compute and allow the deduction u/s 35(2AB) & 35(1) in respect of revenue expenditure to the assessee, in light of the aforesaid directions. 7.10 We now proceed to examine the issue regarding the allowability of weighted deduction for the remaining capital expenditure of Rs.26,81,18,490/- [Rs.114,69,23,000 - Rs.87,88,04,510], which though approved by DSIR for weighted deduction u/s 35(2AB) but was not claimed by the assessee in return of inco....
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....the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under Section 254 of the Act. 9. Thus, us, the power of the Tribunal cannot be curtailed, based upon the dictum of the Hon'ble Supreme Court in Goetze India Limited Vs. CIT. After noting this legal position, the examination is as to whether the Tribunal has recorded a factual finding that claim made by the assessee, when the case was discussed by the Assessing Officer during the scrutiny assessment by filing a computation, which is not a fresh claim. Further, the Tribunal held that the assessee is only claiming expenditure, which was left out at the time of filing of original income tax return and in any event, the Assessing Officer has power to make upward or downward adjustments in the income returned filed by the assessee and when the assessee had not claimed certain expenditures clearly evident from the records and it comes to the knowledge of the Assessing Officer at the time of assessment proceedings, the Assessing Officer should grant relief to the assessee. 10. The Tribunal took note of the Circular issued by CBDT dated 11.04.1955, wherein the Board....
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....ve claimed deduction of Rs.371,73,37,546/- u/s 80-IC of the Act in the return of income, which was accompanied with the audit report obtained from Chartered Accountant in Form 10CCB. The AO, following the assessment order passed by his predecessor for AY 2018-19, on the identical line of reasoning held that, the profits of 11.51% reported by the eligible unit of the assessee was excessive and restricted the same to 3%. The AO accordingly worked out the excess claim of deduction u/s 80IC at Rs.303,22,16,976/- and disallowed the same. 8.2 Aggrieved by the assessment order, the assessee is noted to have preferred an appeal before the Ld. CIT(A). It is noted that, the Ld. CIT(A) also followed the appellate order passed by his predecessor for AY 2018 19 in which the profits of the eligible unit was estimated at 6.09% instead of 3% adopted by the AO and thus partly allowed the claim raised by the assessee, and restricted the disallowance to Rs.168,14,24,514/-. Aggrieved by this order of the Ld. CIT(A), both the parties are in appeal before us. 8.3 Heard both the parties. It is noted that the findings and reasoning given by the AO for estimating the profits of the eligible unit at 3....
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....ture of Commercial heavy vehicles, inter alia, chassis/products and integrated facility for assembling Axle, Gear-box, vehicle, cab-welding etc. Upon completion of manufacture, the assessee transfers these completed chassis/products from sales-yard to their nodal point located at warehouses termed as regional sales office ('RSO')/Warehouse; and therefrom, the heavy-vehicles/goods/products are sold and sent to the ultimate consumers. It was brought to our notice that, the sales-yard is generally within the same premises as that of the manufacturing units to accommodate storage of the manufactured chassis etc, as they cannot be kept inside the plant for operational efficiency reasons and thereafter transferred to RSO/warehouse, from where the goods are sent to the ultimate customers. However, according to AO, there was no linkage between the goods sold from the RSO with the goods manufactured by the eligible unit and therefore he alleged that, the revenues credited in the stand-alone financials were shown to be higher, to shift profits. In this regard, we find that the Ld. CIT(A) had rightly taken note of the assessee's explanation that, the products manufactured by the e....
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....n the standalone accounts of the eligible unit. 5.13 We find that the Revenue's case is that, the assessee is discharging GST at the manufacturing point (when transferring to RSO/Warehouse) whereas booking sales at the retail point (sale to customers from the RSO) and due to this timing mismatch, the Revenue is disputing the correctness of the sales value credited in the stand alone books of account for income-tax purposes. We find this particular observation to be misplaced. Firstly, as noted above, the revenues have been rightly recognized in accordance with the mandate laid down in section 80-IC(6) read with Section 80-IA(8) of the Act and hence does not warrant interference. Secondly, the Ld. AR has rightly brought to our notice that, under the GST laws, the levy of GST gets triggered upon transfer of goods from one point to another, even if it involves transfer from the manufacturing facility to the sales office of the same assessee. He showed us that, the levy of GST is not dependent upon ultimate sale, but is required to be discharged based on movement of goods from one place to another. It is for this reason that the GST is discharged at the manufacturing point....
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.... intention of the Legislature and the very purpose of bringing in this profit-linked deduction i.e. Section 80-IC of the Act. Also, in our considered view, normally a profit center is that segment of the business organization which has a profit base or is responsible for generating company's profits. Without a doubt, a manufacturing plant is both a source of revenues & profits and is in fact the main engine of the business function and, hence a profit center. It is noted that, Human resources department, R&D center, administration office etc. are regarded as cost centers and they are not a source of any revenue or profits. Accordingly, this particular observation made by the lower authorities ascribing manufacturing unit to be a cost center to limit the profit attributable to the eligible unit, is found to be erroneous and unjustified. 5.16 The lower authorities are noted to have also laid much emphasis on the R&D efforts and sales/marketing efforts undertaken by the assessee outside the eligible unit, which according to them, were the major contributing factors to the revenues of the company. According to the Ld. CIT, DR, the profits reported by the eligible unit was ....
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....urther cost left to be attributed thereto. It is noted that the lower authorities have not pointed out any infirmity or falsity in the above cost allocation parameters adopted by the assessee. It is also not the Revenue's case that, the assessee had not allocated any particular cost/expense, which was otherwise required to be allocated, by which higher profits were reported. Accordingly, when the Revenue had accepted the total cost base, which included the expenditure/costs incurred towards R&D efforts and sales/marketing efforts, to be the costs incurred at the eligible unit, then it was improper for them to turn around and contrarily allege that the revenues attributable to such efforts ought to be excluded. 5.18 In view of our above findings therefore, we find that the revenue of the eligible unit was booked on prudent accounting principles and in accordance with provisions of Section 80-IA(8) of the Act. It is noted that, there is no dispute regarding the direct costs debited in the audited stand-alone accounts of the eligible unit. The assessee has further demonstrated that the common/indirect costs have been allocated on sound and reasonable parameters. According....
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....ith corroborative evidence. Instead, the disallowance is noted to have made on mere suspicion and unfounded, baseless observations, as already discussed above. 5.20 According to us, the fact that high profits were earned by the eligible unit in comparison to other units by itself cannot lead to conclusion that the deduction claimed u/s 80-IC was excessive. It is well known that higher or lower profit of a business in comparison to other units can be as a result of the cumulative effect of several factors. For instance, from the facts of the present case, it is noted that unlike the other non-eligible units, the eligible unit at Pantnagar had received grant of Rs.207.16 crores by way of incentive/subsidy from the government.We further note that the product profile manufactured by the eligible unit was also different. It was brought to our notice that, the eligible unit manufactured higher tonnage vehicles which had a better margin, whereas other units manufactured the lower tonnage vehicles which had comparatively lower margins. Due to difference in nature of products manufactured, the margins varied. It was also brought to our notice that, the employee costs at the Pantnag....
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.... unit. According to us, the AO has failed to show that there existed any arrangement between the assessee and its connected persons or other ineligible units, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee. Since the AO was also unable to show that there was any 'arrangement' in terms of Section 80-IA(10) of the Act, in our view, the AO could not have invoked the deeming provision and then estimated and scaled down the profits of the eligible unit of the assessee. Thus, according to us, even legally, the AO had erred in estimating the profit of the eligible unit without satisfying the condition precedent as prescribed in section 80-IA(6) read with section 80I-A(8) & (10) of the Act. In this regard, we find that, the reliance placed by the Ld. AR on the decision of the Hon'ble Delhi High Court in the case of Pr. CIT v. Harpreet Kaur [2017] 88 taxmann.com 641/397 ITR 125 (Delhi) against which the SLP preferred by the Revenue has been dismissed by the Hon'ble Apex Court, to be relevant. In the decided case, the AO observed that the profit of the eligible unit of the Assessee located at Baddi was abno....
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.... basis that the sales were to related parties thus giving an unfair advantage to the Assessee. 12. The above approach of the AO was rightly found by the CIT(A) to be not justified. Without pointing out the error, if any, in the accounts or disturbing the figures of sales or purchases, to compare the trading results of business of two units and simply reject was clearly not a "reasonable basis", as contemplated by the proviso to Section 80-IA (8) of the Act. The AO's order does not explain the basis for determining the GP ratio of 23% instead of 38.05% for AY 2006-07 and 25% instead of 43.07% for AY 2007 08. In the circumstances, the ITAT's conclusion that the AO's order was passed on conjectures and surmises cannot be said to be erroneous." 5.22 In view of the above, we thus find substance in the argument of the Ld. AR that, the AO's action of estimating the profit of eligible unit was erroneous and therefore we reject this contention of the Ld. CIT, DR. Also, the basis of adopting margin of 3% and 6.09% by the AO and Ld. CIT(A) respectively, is found to be ad hoc, lacking any rational basis and is per se arbitrary and whimsical and so, is rejected....
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....ctured at the Baddi Unit should be the cost of the production plus a reasonable amount of profit which should have been charged, however, the average sale price was escalated by claiming profit derived on sale of products manufactured by Baddi Unit which according to him, the alleged huge profit was not correct for the purpose of claiming the deduction u/s.80-IC of the IT Act. 6.8 He has given an another reasoning and wanted to analyze the issue from yet an another angle. According to him, the assets, such as, brand value and marketing network are the assets owned by the assessee-company as a whole organization. Those assets were not owned by the said Undertaking, i.e. Baddi Unit. Those brands were acquired prior to the setting up of Baddi Unit. The profits of the assessee-company were on account of three reasons; viz. (i) maufacturing assets, (ii) brand assets and (iii) marketing assets. Out of the three, only the manufacturing assets was owned by the said Undertaking, i.e. Baddi Unit. Hence the profit only to the extent of the "manufacturing profit" could be said to be derived from the Baddi Undertaking, which according to AO, was eligible for deduction u/s.80-IC of IT A....
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....ed, is that let us assume that the said manufacturing unit is producing two products; viz. "A" & "B". For production of "A" product, let us say, there is less working hours, but fetching more value for less money. However, in the production of product "B" due to complex process of manufacturing it requires more working hours. For pricing product "B" the situation is that more money expenditure and may fetch less value. Therefore, in the processing department it is not possible to segregate the two components to determine the segregated margins. Keeping this accounting principle in mind, we revert back to the language of section 80-IC which says that a deduction is permissible of such profits of a specified Undertaking engaged in manufacturing of certain article or thing. The business of the said enterprise/concern should be manufacturing of article or thing and the profit therefrom is eligible for deduction u/s.80-IC if that profit is part and parcel of the gross total income. As noted hereinabove, profit is the difference between the purchase price and the cost of production along with the cost of bringing the product to market. This basic principle of accountancy, as appeared, ha....
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....resent 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 manufactured by Baddi Unit the average profit was gone up to 86%. The AO has therefore restricted the deduction only at 6%. He has placed reliance on Rolls Royce Plc (supra). In that case, the assessee was a UK based company carrying on marketing and sales activities in India through a subsidiary. The subsidiary was also rendering support services to the assessee, a UK based company. The assessee was carrying out manufacturing operations. It was held that 35% of its profits could be attributed to the marketing activities carried out in India and, therefore, chargeable to tax in India. The facts of that case were altogether different and there was a finding that undisputedly there was a PE in India and as per In....
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....e profits of the eligible unit as well. Accordingly, when the cost base of the eligible unit was held to be correctly worked out, the Tribunal held it to be improper to segregate and allocate the profits of the eligible unit to the R&D, marketing, brand promotion activities, when all the related costs had already been considered in the stand-alone accounts of the eligible unit, by holding as under:- "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....
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....to be credited and on the other side, the production cost plus overheads including common & indirect costs allocable to turnover is to be debited to compute the profit. We find that, this is what has been done by the assessee and certified by the auditor as well in Form 10CCB. Accordingly, we see no reason to tinker with the eligible profits as computed by the assessee, particularly when, the lower authorities have not pointed out any specific infirmity in the calculation, basis of allocation etc. In support of the foregoing, we further rely on the following findings made by this Tribunal in the case of Cadilla Health Care Ltd. (supra); "10.6 From the side of the Revenue, ld. Special Counsel has argued that in terms of the provisions of section 80-IA(5) the deduction is to be computed as if such eligible business is the only source of income of the assessee. According to him, the manufacturing profit was the only source of income and that alone should be accounted for in the P&L account to claim the deduction u/s.80-IC of the Act. Ld. DR has explained that as per the view of the A.O. up-to 80% of the profit was the result of efficient marketing network plus due to the bran....
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....ppellant an argument was raised that what should be the arm's length price in a situation when a product is ultimately to be sold in the open market. Whether the AO is suggesting that an imaginary line be drawn to determine the profit of the Baddi Unit at a particular stage of transfer of products. Definitely a difficulty will arise to arrive at the sale price as suggested by AO on transfer of product from Baddi to head office. What could be the reasonable profit which is to be charged by the Baddi Unit will then be a subject of dispute and shall be an issue of controversy. On the contrary, if the sale price is recorded at the market price, which is easily ascertainable, that was recorded in the Baddi Unit account, the scope of controversy gets minimal. Rather, the intense contention of the Ld.AR is that the facts of the case have explicitly demonstrated that the goods manufactured at Baddi Unit were transported to various C&F agents across the country for sale purpose. Therefore, the eligible business is the manufacturing of pharmaceutical products and the only source of income was the profit earned on sale of the products. 10.8 An interesting argument was raised by l....
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....n the impugned suggestion of the AO do not have legal sanctity in the eyes of law. 10.9 A very pertinent 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 ar....
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....Standards. Ld. Counsel Mr. Srivastava has argued that the deduction u/s.80-IC is a profit linked incentive. Only the Operational Profit has to be claimed for u/s. 80-IC 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 80-IC 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 judgment is to be correctly interpreted. 10.13...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 me....
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.... completely distinguishable having no relevance in the factum of the present case. It is not in dispute that the assessee had indeed invested and set-up a manufacturing facility in industrially designated backward area in Pantnagar, Uttarakhand, in which it has investment more than Rs.2250 crores. The said unit has been in operation for more than nine years and in none of the prior years the authorities are noted to have doubted its existence. It is also not the Revenue's case that the assessee has not fulfilled the conditions precedent in Section 80-IC to avail deduction in respect of profits derived by this eligible unit. We are in agreement with the Ld. AR of the assessee that the assessee is free and entitled to arrange its affairs within the four corners of law to avail tax benefits, which the law permits it to claim. According to us therefore, the AO grossly erred in alleging tax evasion in the present case. 5.30 For the reasons set out above, we thus hold that the profits reported in the stand-alone audited financials of the eligible unit as certified in Form 10CCB issued by the auditor was based on sound accounting principles which does not warrant any interfer....
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....e CSR donations are not made voluntarily but pursuant to the obligation imposed under Section 135 of the Companies Act, 2013 and therefore, the element of charity was also missing. On appeal, the Ld. CIT(A) is noted to have deleted the impugned disallowance, by holding as under:- "I have gone through the order of the AO as well as the submissions by the appellant. It is not in dispute that CSR expenses are not allowable as deduction u/s 37 of the Income Tax Act, in this regards perusal of explanation to section 37 reads as under: Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession." Plain reading of the explanation only refers to the disallowance with regards to profit and gains of business and profession. However there is no embargo in so far as section 80G is concerned. And therefore I am in agreement with the appellant tha....
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....evant, wherein this Tribunal after considering the provisions of Explanation (2) to Section 37 of the Act and Section 80G of the Act, observed that the Parliament intended restrictions to CSR expenditure spent by way of donations to only two funds/trusts i.e. Swachh Bharat Kosh and Clean Ganga Fund. The Tribunal accordingly held that, the fact that specific prohibition/restriction has been made for CSR contributions only to two eligible charitable organizations, it automatically implies that there is no prohibition/restriction in respect of claim of CSR expenses, in any other cases, which are otherwise eligible under Section 80G of the Act. 10.4 As far as the arguments made by the Ld. DR and the decisions cited by him is concerned, we find that similar arguments where raised before the coordinate bench of this Tribunal at Mumbai in the case of ACIT v. Sikka Ports & Terminals Ltd in ITA Nos. 3047/Mum/2024 & 3755/Mum/2023 dated 30.12.2014 wherein after elaborately discussing the allowability of CSR spend as a deduction under section 80G of the Act, the Tribunal answered the question in favour of the assessee, by holding as under:- "5. We heard the parties and perused the ....
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....ne whether the donations given by the assessee to M/s. Reliance Foundation and M/s Shyam Kothari Foundation without any material return and without any consideration and whether it was a grant for quid pro quo. It is not the case of the revenue that the assessee has made contributions to these institutions with an intention get something in return. The only contention of the revenue is that the contributions are made as part of a mandate and not voluntary. However, the Hon'ble Supreme Court in the above case has laid down the basic principle that a payment made without any material return and without any consideration and not for quid pro quo is a donation. Therefore in our considered view, the payment made whether voluntarily or as part of a mandate does not negate the intention of the contribution made. The reliance placed by the ld DR on the decision of Agilent Technologies (International) Pvt. Ltd (supra) is factually distinguishable. The DRP whose order was upheld in the said case, had placed reliance on the decision of the Hon'ble High Court in the case of DCIT v. Hindustan Darr Oliver Ltd (1994) 45 TTJ Mumbai 552 where the payment made was held as not a donation sinc....
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....an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth turnover profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure. 13.3 The provisions of section 37(1) of the Income-tax Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Income-tax Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in ord....
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....ayment is otherwise allowable under a specific provision of the Act. Further wherever the intention is to restrict the claim of deduction under any other provisions of the Act the same is explicitly provided for to that effect by the legislature. This view is supported by the Explanatory Memorandum Finance Bill 2015 which brought in the specific restriction for claiming deduction under section 80G of the Act towards the CSR spend towards donation to Swachh Bharat Kosh and Clean Ganga Fund. Therefore we are unable to appreciate the contention that the CSR spend being claimed as a deduction under section 80G of the Act is against the intention of the legislature which restricts the same to be claimed as a deduction under section 37 of the Act. 11. The next issue is whether the impugned payments are otherwise eligible for deduction under section 80G of the Act. We have already established that the payments made by the assessee are donations and therefore if the other conditions for the deduction under section 80G is are fulfilled then there should not be any restriction for the assessee to claim the deduction. Before holding so we will address the contention of the revenue th....
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....rmitted corpus contributions to charitable institutions as eligible CSR expenditure. Further, the Ministry of Corporate Affairs vide Circular No.21/2014 dated 18th June 2014 had also clarified that contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure, if such a donee institution or the said corpus has been created exclusively for a purpose related to the activities provided under the CSR framework. However, under the old rules, the mechanism to monitor and ensure that such donation has been actually spent on CSR activity was missing. The donor company would get absolved of its liability of CSR by just donating to the eligible trust/society/company, without ensuring that the amount has been actually spent by the donee on such specific object or purpose (CSR activity) for which it was donated. Therefore, Rule 7 of the CSR Rules, which permitted corpus contributions as eligible CSR expenditure, has been substituted and under the amended CSR Rules of 2021, corpus contributions to any entity shall not be admissible as CSR expenditure. The object and purpose of the aforesaid amendment is to ensure that the expenditure made is actually utili....
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....from computation of business income as provided from sections 28 to 44DB is different from claiming a deduction under chapter VIA of the Act which is allowed from Total Income. As per Explanation 2 to Section 37, CSR expenditure is not allowable as deduction while computing the business income under the provision of Section 28-44DB, whereas deduction u/s.80G is allowed while computing the total income under Chapter VIA. There is no precondition that claim for deduction u/s.80G on a donation should be voluntary. It is independent of computation of business income as it is allowed from Gross Total Income. The assessee had disallowed the CSR expenses while computing business income. Further, there is no dispute that the assessee has filed complete details of donation and also filed the certificate u/s.80G which was enclosed before the AO. Section 80G (1) of the Act provides that in computing total income of the assessee, they shall be deducted in accordance with the provision of Section, such sum paid by the assessee in the previous year as a donation. Deduction under Chapter VIA provides deduction from the gross total income which is computed after making necessary allowances / disal....