Hindustan Unilever Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that the amount of internal transfer between two EOUs of the assessee is to be considered for the purpose of arriving at the profit eligible for exemption under section 10B of the Income Tax Act.
Facts- The assessee is a company engaged in the manufacture, trading and marketing (including export) of fast moving consumer goods (FMC goods). For the year under consideration, the assessee filed a return of income on 31/10/2001 declaring a total income of Rs.830,19,95,740/-. The case was selected for scrutiny and statutory notices were duly served on the assessee.
The Assessing Officer completed the assessment assessing the income at Rs.948,46,19,890/- after making various disallowances / additions. Aggrieved, the assessee filed further appeal before the CIT(A) in which the CIT(A) gave partial relief. Against the order of the CIT(A) both the assessee and the Revenue are in appeal before the Tribunal
Conclusion- Held that the amount of internal transfer between two EOUs of the assesse is to be considered for the purpose of arriving at the profit eligible for exemption under section 10B of the Act. It is also to be noted here that since the impugned amount is an internal transfer which is shown as sales in one EOU and as expenditure in the other EOU, there is merit in the contention that at entity level it is tax neutral. In view of the above discussion, we delete the addition made by the Assessing Officer denying the amount of internal transfer as claimed under 10B of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These cross appeals by the assessee and the Revenue are against the order of the Commissioner of Income-tax (Appeals)-1, Mumbai dated 01/03/2011 for A.Y. 2001-02.
2. The assessee is a company engaged in the manufacture, trading and marketing (including export) of fast moving consumer goods (FMC goods). For the year under consideration, the assessee filed a return of income on 31/10/2001 declaring a total income of Rs.830,19,95,740/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer completed the assessment assessing the income at Rs.948,46,19,890/- after making various disallowances / additions. Aggrieved, the assessee filed further appeal before the CIT(A) in which the CIT(A) gave partial relief. Against the order of the CIT(A) both the assessee and the Revenue are in appeal before the Tribunal raising various grounds contending the following issues:-
Assessee
(1) Disallowance of travelling expenditure relating to foreign travel in respect of spouses who accompanied some of the company employees or official tour.(Ground 1)
(2) Deduction under section 80I / 80IB (Grounds 2 – 2.1 to 2.3)
(3) Allocation of expenditure to individual units in respect of deduction u/s 80IB (Ground 3)
(4) Deduction under section 80IB in respect of tea unit at Dharwad (Ground 4 – 4.1 to 4.2)
(5) Allocating research expenses whilst determining the profits and gains derived from industrial undertaking eligible for deduction u/s 80IB
(Ground 5- 5.1)
(6) Allocating interest expenses whilst determining the profits and gains derived from industrial undertaking eligible for deduction u/ 80IB. (Ground 6- 6.1)
(7) Deduction under section 80HHC – scrap sales / sale of miscellaneous products is required to be included in total turnover for the purpose of computing deduction under sec 80HHC (Ground 7- 7.1)
(8) Excluding 90% certain incomes for the purpose of allowing deduction u/s 80HHC (Ground 8- 8.1 & 8.2)
(9) Unrealised sales proceeds till 30.09.2001 reduced from turnover (Ground 9- 9.1)
(10) Loss on export of traded goods to be reduced from profits for the purpose of computing deduction under section 80HHC (Ground 10 – 10.1 to 10.3)
(11) Provision for retirement pension payable to the employees(Ground 11)
(12) Increasing value of closing stock of raw materials and packing materials unutilized balance of Modvat as on 31.03.2001 (Ground12)
(13) Reduction in exemption u/s 10B in respect of miscellaneous income. (Ground 13 – 13.1)
(14) Disallowance of exemption u/s 10B in respect of internal transfer included in sales (Grounds 14 – 14.1)
(15) Treatment of legal cost incurred in respect of merger of erstwhile Industrial Perfumes Limited as capital expenditure (Grounds 15 – 15.1)
(16) Disallowance of capital expenditure on Scientific research incurred at Hyderabad (Grounds 16 – 16.1)
(17) Claim of cess on green leaf (Ground 17 – 1 to 17.3)
Revenue
(1) Deleting addition of Rs.65,92,482 towards Membership Fees and Entrance to Club (Ground 1)
(2) Deleting disallowance of Rs.38,92,129 towards rural development activities.(Ground 2)
(3) Restoring the 14A disallowance to AO and directing to re-compute the disallowance as per immediate preceding year.(Ground 3)
(4) Allowing the claim of deduction u/s 10B for Pune and Kidderpore Units.(Grounds 4 – 4.1)
I.T.A. No.5431/Mum/2011 – Assessee’s appeal
Disallowance of travelling expenditure – Ground 1
3. This ground pertains to disallowance of travelling expenditure relating to foreign travel in respect of spouses who accompanied some of the company employees or official tour. The assessee debited a sum of Rs.41,35,481/- on account of foreign travel expenses of spouses of employees of the company and claimed it under the head „travelling and motor car expenses’. The assessee submitted before the authorities below that the spouses have to sometime accompany the senior executives who were sent abroad to international educational institutions or to attend seminars or to work in Unilever companies on temporary posts abroad. The assessee, therefore, argued that expenses are incurred for the purposes of business and hence allowable. The Assessing Officer, however, did not agree with the same and relying on earlier year’s order disallowed the claim. On appeal, the Ld CIT(A), upheld the finding of the Assessing Officer, with regard to the disallowance. Further aggrieved, the assessee is in appeal before the Tribunal.
4. Before us, the Ld.AR for the assessee submitted that the issue stands decided in favour of the assessee by the Tribunal in assessee’s own case for A.Y. 2000-01 in ITA Nos.3951/Mum/2008 & 4033/Mum/2008 vide order dated 16/05/2023. The Ld. DR relied on the order of the lower authorities.
5. We heard the rival submissions, we find that the Tribunal in assessee‟s own case for A.Y. 2000-01 (supra) has considered the identical issue and decided the issue in favour of the assessee by holding that :-
“5. During the course of appellate proceedings before us the ld. Counsel contended that such foreign travelling expenses is covered in favour of the assesse vide order of the ITAT, Mumbai in the case of assessee itself for assessment year 1998-99. He also referred the decision of Hon’ble Bombay High Court in the case of CIT Vs. Alfa Laval (I) Ltd. (2015) 149 taxman.com 29 (Bom) dated 15.07.2015. On the other hand, the ld. D.R supported the order of lower authorities.
6. With the assistance of ld. Representative we have perused the decision of ITAT vide ITA No. 2031/Mum/2004 for assessment year 1998-99 wherein the identical issue on similar fact has been adjudicated in favour of the assessee after referring the decision of the coordinate benches of the Tribunal in assesse‟s own case for assessment year 1985-86 to assessment year 1997-98. Consistent with the view taken by the coordinate bench as referred above we allow the ground of appeal of the assessee.”
6. Considering that the coordinate bench has been taking a consistent view as given in the above decision we delete the disallowance made towards travel expenses. This ground of the assessee is allowed.
Deduction under section 80I / 80IB – Ground No.2 and 3
7. During the course of assessment, the AO noticed that the head office expenditure has not been proportionately allocated to the new units for which the deduction under section 80IB has been claimed. On query, the assessee explained that the common unallocated head office expenses are not at all related to the units concerned and these cannot be allocated while calculating profit derived from the new unit. However, according to the Assessing Officer, the expenditure incurred at the head office is for corporate advertising, EDP charges, incentives to promote, aid and benefit all the units concerned and therefore, head office expenses need to be apportioned to ascertain the quantum of profit derived from an industrial undertaking. The Assessing Officer also stated that the issue has been considered in the earlier years and assessee’s contention has not been accepted. On further appeal, the CIT(A) held that expenses of Chairman, Company Secretary, and public relation department, financial controller chief medical officer etc., need not be allocated while determining the profits under section 80IB by relying on the decision of the coordinate bench in assessee’s own case for earlier years. The CIT upheld the allocation of all other expenses of the head office and directed the the Assessing Officer accordingly. In result the CIT(A) partly allowed this issue in favour of the assessee.
8. Before us, both the parties agreed that the issue is squarely covered by the decision of the Tribunal in assessee’s own case for A.Y. 2000-01 (surpa) in which the Hon’ble Tribunal has considered an exactly identical issue and held as under:-
“11. Heard both the sides and perused the material on record. Regarding claim of deduction, the ITAT vide ITA No. 2201/Mum/2004 for assessment year 1998-99 held that this issue has been decided by the coordinate bench of the Tribunal in assesse‟s own case for the preceding assessment year 1985-86 to 1997-98, 2006-07 and AY 2009- 10 wherein the Tribunal has partly allowed the identical issue in favour of the assessee while adjudicating these appeals. Accordingly, the Tribunal has restored the issue back to the AO for de novo adjudication after considering the findings of the Tribunal in accordance with law. Similarly, taking consistent view we restored this issue to the file of the A.O for de novo adjudication as directed vide ITA No. 2201/Mum/2004. Accordingly, ground no. 2 & 3 are allowed for statistical purposes.”
9. Consistent with the above finding of the Tribunal we restore the issue to the file of the Assessing Officer for de novo adjudication with a direction to consider the findings of the Tribunal for preceding assessment years and decide in accordance with law after giving a reasonable opportunity of being heard / make submissions to the assessee. The assessee has raised a without prejudice ground (Ground No.3) to submit that if the common expenses of the head office is to be allocated then the common incomes credited to the P&L account should also be allocated. Since we have restored the issue of allocation of head office expenses to the Assessing Officer for a denovo consideration, this ground has become academic and does not warrant separate adjudication.
Adjustment of brought forward loss/unabsorbed depreciation of tea unit in Dharwad for the purpose of 80IB – Ground 4
10. During the course of assessment the Assessing Officer noticed that brought forward loss pertaining to tea unit in Dharwad has not been adjusted against the profit. In this regard the assessee submitted that the unabsorbed depreciation / loss incurred by the industrial undertaking in earlier years have already been absorbed / set off against the income of the other undertakings / activities and cannot be once again reduced from the profits of the industrial undertaking for the purpose of determining deductions u/s 80IB for the current year. However the Assessing Officer relied on CBDT circular No.281 dated 22.09.1980 and rejected the claim of the assessee.
11. It is brought to our attention by the ld AR that that identical issue on similar facts was decided by the coordinate bench in assessee’s own case (supra) for assessment year 2000-01 against the assessee.
12. We heard the parties and perused the order of the coordinate bench in assessee’s own case for AY 2000-01 (supra) where it is held that –
14. Heard both the sides and perused the decision of ITAT in the case of the assessee itself for assessment year 1999-2000 vide ITA No. 1039/Mum/2005 wherein on the similar issue the appeal of the assessee was dismissed. The relevant part of the decision is reproduced as under:
“12. We have heard the rival contentions. This issue had travelled upto the Tribunal in the preceding assessment years (i.e. Assessment Years 1988-89 to 1991-92, 1996-97 and 1997-98. While deciding identical issues in appeal for the Assessment Year 1990-91 [ITA No. 4628 & 4658/Mum/2003, 08.02.2012] the Tribunal has held as under:
37 Ground No.10 regarding setting off of loss of earlier years for deduction u/s 80I.
The Assessing Officer adjusted the earlier year’s loss of the unit eligible for deduction u/s 80I and consequently the claim of deduction u/s 80I was not allowed in full as claimed by the assessee.
On appeal, the CIT(A) has referred sub.sec. (1) of sub sec (6) of sec. 80I and held that the profit has to be computed,, if the Haldia unit eligible for deduction u/s 80I was only undertaking.
38.We have heard the ld Sr counsel for the assessee as well as ld DR and considered the relevant material on record. At the outset, we note that this issue has been decided against the assessee by the Tribunal for the AY 88- 89 & 89- 90. The Tribunal for the AY 89- 90 has adjudicated the issue in para 27.1 as under;
“27.1 After hearing both the parties, we find that this issue is also covered by the decision of Tribunal in assessment year 1988-89 (supra). In that year, the Revenue had relied on the judgment of Hon’ble Supreme Court in case of Synco Industries Ltd. vs. Assessing Officer (299 ITR 444), to argue that the brought forward losses and unabsorbed depreciation have to be adjusted before allowing claim of deduction u/s 80HH & 80I. The Tribunal distinguished the said case on the ground that brought forward losses/depreciation of the new unit had already been set off against other income of the assessee and nothing was brought forward either as loss or unabsorbed depreciation. Therefore, the Tribunal held that the deduction u/s 80HH has to be allowed without adjusting the brought forward losses/depreciation. However, in relation deduction u/s 80I, the Tribunal noted that in view of the specific provision of sec. 80I(6) as per which deduction u/s 80I has to be allowed on stand allone basis, treating the undertaking as the only source of income. Therefore, the Tribunal directed that brought forward losses and unabsorbed depreciation of the unit of the earlier years starting from the initial year has to be set off before allowing claim u/s 80I. Facts of this year are identical. Therefore, respectfully following the decision of Tribunal in assessment year 1988-89 (supra), we confirm the order of CIT(A) in relation to deduction u/s 80HH and set aside the order in relation to sec.80I on which the order of Assessing Officer is restored.”
Following the order of the Tribunal for the earlier years, we decide this issue against the assessee.
13. In view of the specific provisions contained in Section 80IA(6) of the Act and the judgment of the Hon„ble Supreme Court in the case of Synco Industries Ltd. vs. Assessing Officer: 299 ITR 444, this issue raised in Ground No. 3 to 3.2 were decided against the Appellant by the Tribunal in the above decision. Respectfully following the same, we decide the issue against the Assessee and confirm the order of CIT(A) on this issue. Ground No. 3 to 3.2 raised by the Assessee are dismissed.
Following the decision of ITAT as referred supra this ground of appeal of the assesse stand dismissed.
13. Respectfully following the decision of the coordinate bench we dismiss the ground raised by the assessee with regard to set off of brought forward loss/unabsorbed depreciation of tea unit in Dharwad for the purpose of section 80IB.
Allocation of research & Development expenses and interest expenses and while determining the profits for the purpose of deduction under section 80IB – Ground No.5 & 6
14. The Assessing Officer during the course of assessment held that the outcome of the research expenditure is futuristic in nature in the manufacturing processes and product development of units that are eligible for deduction under section 80IB. Accordingly the Assessing Officer allocated the expenditure incurred on research and development while arriving at the profits eligible for deduction under section 80IB. The Assessing Officer similarly allocated the interest expenses to the unit for arriving at the profits for the purpose of deduction under section 80HHC. The CIT(A) upheld the allocation by stating that the expenditure incurred towards research and development benefits the assessee to the upliftment and progress of the products that are manufactured by the eligible units. The CIT(A) also rejected the submissions of the assessee that borrowed funds were not utilised for the undertaking for the reason that the assessee did not submit any evidence for the claim.
15. The ld AR submitted that the coordinate bench in assessee’s own case for AY 2006-07 (ITA No.7868/Mum/2010 dated 10.12.2012) has considered the similar issue where it is held that –
42. On the argument that the research & development activities carried out by the head office has enduring benefit to the units/industrial undertaking, the Hon’ble High Court also considered this argument and held as under:
“14. The submissions proceeds on an erroneous basis and does not take into consideration the facts of the case at all. As we noted earlier, in the present case, the said R & D activities were in relation to the new drugs. There is nothing to indicate that in the event of the assessee deciding to commercially exploit the benefits of the R & D work, the products would be manufactured by the said units. The fallacy in the submissions proceeds on the hypothetical basis that the said products would be manufactured by each of the units or any one of them.
15. The fallacy also arises on account of an erroneous presumption that the benefit of any R & D activity can only be exploited by an enterprise utilizing the same in its manufacturing activities. That is not so. An enterprise can always assign the benefit thereof to a third party. It can always grant a licence in respect of any patent or design to a third party. In that event, the other units would not derive any benefit in respect thereof. The presumption of a nexus between the R & D activities and the units is not well founded”.
Respectfully following the same, we are of the opinion that the research expenditure cannot be allocated to the units claiming deduction unless it has a nexus. Therefore, AO is directed to exclude the same.
16. The ld AR also submitted that the above decision of the coordinate bench has been upheld by the Jurisdictional High Court in CIT vs Hindustan Unilever Ltd (2016) 72 com 325 (Bombay).
17. We heard the parties and perused the material on record. We notice that the Hon’ble Bombay High Court in assessee’s own case has considered the similar issue and upheld the decision of the coordinate bench (supra). The question of law considered by the Hon’ble High Court and the relevant findings are as extracted below –
2. Whether on facts and in circumstances of the case and in law the Tribunal was right in not allocating the research expenses and interest expenses to various units for calculating allowable deduction under Section 80IB and 80IC of the Act ?
3. Whether on facts and in circumstances of the case and in law the Tribunal was right in not allocating the research expenses and interest expenses for calculating allowable deduction/exemption under Section 10A and 10B of the Act on Pune Tea Export Unit and Khandla Unit ?
4. Regarding question No. 2 and 3 :
(a) We find that the impugned order of the Tribunal allowed the respondent – assessee’s appeal before it by following a decision of this Court in Zandu Pharmaceuticals Works Ltd. v. CIT [2013] 350 ITR 366/213 Taxman 207/31 com 191. The Tribunal while following the principle in this Court’s order in Zandu Pharmaceuticals Works Ltd. (supra) held that so far as research and interest expenses are concerned, it can only be allowed to the extent it has nexus to the unit claiming the deduction. The grievance of the revenue before us is that the aforesaid decision would have no application to the present facts as it is distinguishable. However, besides stating the above nothing has been pointed out in support of its submission that the Zandu Pharmaceuticals Works Ltd. (supra) has no application.
(b) In the above view, as the impugned order of the Tribunal has followed the binding decision of this Court, question nos. 2 and 3 as formulated does not give rise to any substantial question of law. Thus not entertained.
18. For the year under consideration, the revenue did not bring anything on record to show that there is a nexus between the expenditure incurred on research and development and interest expenses and the unit claiming the deduction under section 80IB. Therefore respectfully following the above decision of the jurisdictional High Court we hold that the said expenditure should be excluded while arriving at the profits and the Assessing Officer is directed accordingly.
Deduction under section 80HHC – Grounds 7 to 10
19. Through these grounds, the assessee is contending the action of the Assessing Officer in making certain inclusions and exclusions while allowing the claim of deduction under section 80HHC. The Assessing Officer during the course of assessment, included a sum of Rs.1,78,70,253/- to the total turnover towards sale of scrap/misc sales in order to compute deduction under section 80HHC. The Assessing Officer further considered the following items for the purpose of adopting 90% of the same for determining the profits of the business for deduction u/s 80HHC.
