ITAT MUMBAI BENCH `L’ MUMBAI,
IN THE CASE OF: ACIT Vs. Wockhardt Ltd.,
APPEAL NO: ITA No. 3556/Mum/ 2007,
DECIDED ON July 9, 2010
PER R S PADVEKAR:
In this appeal, the revenue has challenged the impugned order of the ld CIT (A), Central-III, Mumbai for the assessment year 2004-5 dated 7.2.2007.
2 The first issue is in respect of dis allowance of the payment made to clubs of Rs.18.14 lacs.
2.1 The assessee is in the business of manufacturing and trading of pharmaceuticals products. The return of income filed by the assessee was selected for scrutiny and the assessment was completed u/s 143(3) of the Act. During the course of assessment proceedings, it was noticed by the A.O. that as per the audit report, the assessee had claimed expenditure towards payments made to clubs. The assessee claimed that the expenditure on the clubs is merely for the promotion of the business. As per tax audit report, the assessee company paid Rs. 15 lacs towards corporate membership fee to Willington Sports Club. The A.O. made the dis allowance of the entire expenditure of Rs.18,14,762/- as not admissible u/s 37(1) of the Act. On appeal, the ld CIT(A) allowed the claim of the assessee.
3 We have heard the parties and also perused the reasons given by the A.O. a well as the ld CIT(A). The ld counsel of the assessee submitted that the issue is covered in favor of the assessee by the decision of the Hon’ble Delhi High Court in the case of CIT vs Samtel Color Ltd (180 Taxman 82(Del).
3.1 In the present case, there is no dispute about the facts that the assessee company has taken corporate membership in Willington Club, at Mumbai which is one of the prestigious clubs in Mumbai.
3.2 In the case of Samtel Color Ltd (supra), the Hon’ble High Court has held that for qualifying of the deduction u/s 37 is that expenditure incurred should not be on capital account and it should be incurred for the purpose of the business. It is further held that admission fee paid for the purpose of corporate membership of the club, which is an expenditure incurred wholly and exclusively for the purpose of business. In our opinion, the issue is stand covered in favor of the assessee by the decision of the Hon’ble Delhi High Court in the case of Samtal Color Ltd (supra). We, therefore, confirm the order of the ld CIT(A) on this issue and dismiss the relevant ground taken by the revenue.
4 Next issue relates to deletion of addition of Rs. 5,94,000/- made u/s 41(1) of the I T Act.
5 We have heard the parties. It is observed by the A.O. that as per the information furnished by the assessee, sundry creditors to the extent of Rs. 5,93,982/- were outstanding for more than three years. The A.O. was of the opinion that to the extent of sundry creditors, which are outstanding for more than three years, the same are to be added u/s 41(1) of the Act.
5.1 The assessee contended that there was no unilateral writing off of the said liability nor the liability to pay was ceased and hence, no addition can be made u/s 41(1) of the Act. The A.O. rejected the plea of the assessee and made the addition by invoking provisions of sec. 41(1) of the Act. The assessee challenged the said addition before the ld CIT(A) and found favour as the ld CIT(A) by relying on the decision of his predecessor for AY 2001-02, deleted the addition.
6 We have heard the parties. The A.O. made the addition on the presumption that the said `debts’ become time barred under the Limitation Act as no action has be taken for recovery. In our opinion, no such condition is there in sec. 41(1) for considering the cessation of any liability and in respect of any expenditure, even if within the period of limitation of three years, the assessee unilaterally write off the liability within one year then also the provision of sec. 41(1) is applicable. In our opinion, the ld CIT(A) has rightly deleted the addition made by the A.O. u/s 41(1) of the Act; accordingly, we confirm the order of the ld CIT(A) on this issue.
7 Next issue relates to deletion of addition made u/s 80IB.
7.1 During the year under consideration, the assessee had claimed deduction u/s 80IB in respect of Daman-Bhimpore & Daman Kadaiya units without allocating R&D expenditure. The A.O. allocated R&D expenditure to the said units by observing that R&D have nexus with Units in respect of which deduction is claimed under sec. 80IB. The ld CIT(A) deleted the addition by relying on decision of the assesse’s own case for the AY 2001-02. The operative part of the findings given the ld CIT(A) in Paras 8.2 & 8.3 in his order which are as under:
” 8.2 I have gone through the facts brought on record by the A.O. and the contentions of the appellant company, as also the order of the ITAT in the case of the appellant for AY 2001-02. The ITAT, referring to decision of the Madras ITAT in the case of Ponds India Ltd (ITA No.2047/Mad/88 dated 28.5.2002 and the decision of Pune Bench in the case of Vanaz Engineers Ltd, held that no allocation of expenditure on account of R&D expenditure was called for. As in respect of AY 2002-03, during the course of present appeal hearings, the appellant company was required to file the details of product formulations at 80IB qualifying units as well as the details of bulk drugs on which the R&D Centre was working on, to ascertain whether or not the expenditure on R&D had any nexus with the working of the qualifying undertakings. It was fund that the following two items are common.
Name of formulation
Market destination of formulation
Bulk drug used for manufacture
Asiwok 500 1/3 T
Aziwok Kid tab
Zleep 5 mg 10T
Zleep 10 mg 10T
As was the case in AY 2002-03 the bulk drug required for manufacturing the above formulation were being purchased from outside companies such as Alembic, Sunpharma and Zydus. Therefore, on the basis of factual examination, no expenditure on R&D is found relatable to 80IB qualifying unit.
8.3 The other limb of the issue is allocation of interest expenditure to 80IB qualifying units. I was submitted that this issue was covered in favour of the appellant company by the order of the ITAT in AY 2001-02. It was further pointed out that an identical issue in AY 2002-03 and had been decided in favour of the appellant company by me. I have gone through the facts. The ITAT in AY 2001-02 had examined the years in which the borrowing had been made and year of setting up of qualifying units and found that no borrowing had been made after the setting up of the qualifying units and therefore held that no allocation of fresh borrowing was to be made to the 80IB qualifying units. In AY 2002-03, during the appeal proceedings similar statement was called for and examined and found that no borrowing was relatable to 80IB qualifying units. In the current year on examination of similar comparative statement it is seen that interest cost has reduced from Rs.25.97 crores in AY 2001-02 to Rs. 14.95 crores indicating that there were repayments during the year and there were no fresh borrowings. Therefore, there is no question of allocation of portion of interest to 80IB units on the basis of the reasoning followed by the ITAT in the appellant’s own case for AY 2001-02.”
8 We have gone through the reasons given by the ld CIT(A). Moreover, identical issue has been examined by the Tribunal for AY 2001-02 in the assessee’s own case and the Tribunal has given relief to the assessee company. In our opinion, no interference is called for in the order of the ld CIT(A) as this issue is covered in favour of the assessee’s case for AY 2001-02. Accordingly, we confirm the order of the ld CIT(A) on this issue also.
9 Next issue relates to computation of deduction u/s 80HHC without reducing the deduction claimed u/s 80IB.
9.1 It was noticed by the A.O. that the assessee has claimed deduction u/s 80HHC of Rs.14,35,06,609/- and the same was computed without reducing the profit on which he has claimed deduction u/s 80IB.
9.2 The assessee contended that the deduction u/s 80IB was claimed in respect of Daman units and the business of those undertakings is nothing to do with the export as the entire business was in the domestic market. The assessee, therefore, contended that there is no question of claiming double deduction on the same profit. The assessee also relied on the decision of the Jaipur Bench of the ITAT in the case of Toshica Creation vs ITO (96 TTJ 651). The A.O. was not impressed with the explanations of the assessee. The A.O. also noted that the assessee has not filed any evidence to show that in fact the undertakings/units on which the deduction u/s 80IB is claimed have not made any export. He, therefore, reduced the profit of the business for the purpose of deduction u/s 80HHC after reducing the quantum of the deduction claimed by the assessee u/s 80IB. The assessee challenged the action of the A.O. before the ld CIT(A) and the ld CIT(A) by following the decision of the ITAT in the case of ACIT vs Iflunik Pharmaceuticals Ltd (ITA No.4389/Mum/02 dated 24.2.2006) and ITO vs Herts Chemicals Ltd (ITA No.1146/Mum/04 dated 25.5.2006) allowed the claim of the assessee. The findings of the ld CIT(A) is supported by the decision of the jurisdictional High Court in the case of Godrej Agrovet Ltd vs ACIT & others (290 ITR 252(Bom). In our opinion, no interference is called for on this issue and accordingly, we confirm the order of the ld CIT(A). Ground no.4 is therefore dismissed.
10 Next issue is in respect of addition made u/s 92CA of the Act of Rs.23.94 lacs while determining the ALP.
10.1 The A.O. has made a reference to the Transfer Price Officer (TPO) for determining the ALP of some of the international transactions. The A.O. made adjustment of Rs. 23.94 lacs on the basis of the order passed by the TPO u/s 92A(3) of the Act while determining the ALP in respect of providing R&D services to its associated enterprises M/s Wallis Group Ltd. The assessee adopted TNMM method which was accepted by the TPO. The TPO has called for the updated financial statements for the year ended March 2003 and on the basis of such updated financial statements, the assessee claimed that profit margin work out at 21%.
10.2 The assessee had earned 16.78% profit on the above research activity. The assessee filed comparables and on the perusal of the list of comparables, the TPO found that one loss making entity i.e. M/s Kitco Ltd was also included by the assessee . The assessee contended that M/s Kitco Ltd had been taken as comparable because it was performing transactions which were functionally the same. The assessee’s contention was rejected by the TPO on the reasons that there could be some abnormal circumstances which lead loss to the company. The TPO, therefore excluded the financial loss of M/s Kitco Ltd and determined the net margin.
10.3 As per the TPO, the margin was worked out to 26.33% as against 16.78% determined by the assessee. The ld counsel argued that merely because any comparable is loss making like M/s Kitco Ltd, the same should not be discarded and in this case the TPO has only considered the companies with the favorable margin to the revenue. The ld counsel further argued that the TPO did not grant benefit of 5% difference as contemplated in proviso to sec. 92C(2) of the Act.
11 The ld CIT(A) has observed that comparable considered by the TPO in the case of Gilcon and M/s TCE Consulting Engineer Ltd are cases of profit and even if the comparable of Kitco is not considered, which is due to loss, the ALP worked out to 22.88%, which after 5% deduction is 16.74% as against the margin returned by the assessee company at 16.78% . It is well settled principle in law that if proviso has made certain exception which give relief to the assessee from adverse application of law; on fulfilling of certain conditions then the same should be strictly interpreted. The Proviso to ses.92(C)(2) provides that where more than one price is determined by application of MAM, the ALP shall be taken to be the arithmetic means (AM) of such price or, at the option of the tax payer, with the price which derives from AM by an amount not exceeding 5% of such AM may be to be the ALP.
12 We have heard the rival contentions of the parties. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold as follows.
12.1 The following definitions are extracted for ready reference:
Section 92F(ii) arm’s length price:
” arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.”
(vi) – transaction.
“transaction includes an arrangement, understanding or action in concert,-
(C) whether or not such arrangement, understanding or action is formal or in writing; or
(D) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. ”
Rule 10B sub clause (e) – transaction at margin method:
(e) transactional net margin method, by which,—
(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.
12.2. A plain reading of the above shows that TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of international transactions and not comparisons of operating margins of enterprises. For arriving at this conclusion, we drew strength from the decision of Mumbai `L’ Bench of the Tribunal in the case of UCB India P. Ltd. vs. ACIT 121 ITD 131 (Mum.) where it is held that section 92C read with Rule 10B(1)(e) deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole.
12.3 Respectfully following the same, we set aside the issue to the file of the A.O for the reasons that the AO has not followed properly and correctly any of the method prescribed for the purpose of determining the ALP under the Act. Even the transaction at net margin method has not been properly and correctly applied in this case. We, therefore, set aside the issue to the file of the A.O to decide the issue afresh.
13 Next issue relates to provisions of doubtful debts of Rs. 1.49 crores which the A.O. did not allow to reduce while computing book profit u/s 115JB of the Act.
13.1 The A.O. computed the book profit u/s 115JB and added back the profit for doubtful debts of Rs. 1,49,80,000/-. The ld CIT(A) by relying on the decision of the ITAT in assessee’s own case for AY 2001-02 directed the A.O. to compute the book profit u/s 115JB without making any adjustment in respect of provisions for doubtful debts.
14 The contention of the assessee is that the assessee makes provisions for doubtful debts after review of the unpaid debts at various locations of its agents and the same cannot be termed as unascertained liability. The assessee placed heavy reliance on the decision of the Hon’ble Bombay High Court in the case of Echjay Forgings P Ltd (251 ITR 15) and the said decision was in the context of sec 115J as it was applicable at that time. In that case the department has not disputed the contention of the assessee that the said liability was an ascertain liability. But in the present case, the A.O. never accepted that this is an ascertained liability, hence, the reliance placed by the ld counsel in the case of Echjay Forgings P Ltd (supra) is not helpful.
14.1 The ld counsel further argued that newly inserted clause (i) to Explanation I to sec. 115JB by Finance Act, 2009 with retrospective effect from 1.4.2001 will not affect the `provisions for bad and doubtful debts’ as the only provision made for diminution of the value of the investment is covered by the aforesaid clause (i). We are unable to accept the interpretation of the ld counsel in respect of the newly inserted cl.(i).
15 Admittedly, the provision for bad debts is not the liability; but it is diminution in the value of the assets as the recoverable debts partake the character of the asset. So far as the decision of the Tribunal in assessee’s own case for AY 2001-02 is concerned, (3391/Mum/2005 dated 24.2.2006), clause (i) to Explanation-I was not on the statute book when the said decision was rendered. Hence, the assessee cannot be taken shelter of the decision of the Tribunal for AY 2001-02. In our opinion, there is no justification to support the findings of the ld CIT(A) on this issue. Accordingly, we reverse the order of the ld CIT (A) and restore the order of the A.O. on this issue. Accordingly, the ground no.6 taken by the revenue is allowed.
16 Next issue relates to whether for the purpose of sec. 115JB, export profit should be as per the book profit or not.
17 Now, this issue is stand covered against the assessee by the decision of the jurisdictional High Court in the case of CIT vs Ajantha Pharmaceuticals Ltd (318 ITR 252). In the said decision, the Hon’ble High Court has revered the decision of the Special Bench of the Tribunal in the case of Dy CIT vs Silicon Formulations India Ltd (106 ITD 193) (Mum)(SB). We, therefore, reverse the order of the ld CIT(A) and restore the order of the A.O. on this issue. Accordingly, ground no. 7 of the revenue is also allowed.
18 Next issue relates to direction given to the A.O. to ignore the phasing out provision for deduction u/s 80HHC for the purpose of computing book profit u/s 115JB of the Act.
19 The ld counsel for the assessee fairly submitted that this issue stands covered against the assessee by the decision of the Tribunal (supra). Accordingly, the order of the ld CIT(A) is reversed and that of the A.O. is restored on this issue. Accordingly, ground no.8 is allowed.
20 Ground no.9 is in respect of adjustment on account of debenture redemption reserve for the purpose of computing book profit u/s 115JB of the Act.
21 We have heard the parties. Identical issue has been considered by the Tribunal in assessee’s own case for AY 2001-02 and has held as under:
“37. In case of IOL Ltd vs DCIT 81 TTJ 525 the Tribunal has held that sum appropriated by the assessee in the P&L account towards debenture redemption reserve cannot be held to a reserve within the meaning of cl (b) or amount set apart to met unascertained liabilities within the meaning of cl (c) of the Explanation to . 115J(1) and as such, the said amount was not to be added to that net profit as commuted by the assessee to arrive at the book profit for the purpose of sec. 115J.
38 Therefore, following the decision of the various Benches of the Tribunal and in view of the above discussions, we are of the view that both the sums claimed in P&L A./c by the assesee are ascertained liability, therefore, they are out of purview of clause (c) of sec. 115JB of the Act. Therefore, n adjustment can be made while computing the income for the purpose of sec. 115JB. Accordingly, we allow this ground and direct the A.O. to re-compute the profit u/s 115JB accordingly.”
Therefore, following the order of the Tribunal in assessee’s own case for AY 2001-02, we dismiss the ground taken by the revenue on this issue.
22 In the result, the appeal filed by the department is partly allowed. For statistical purpose.
Order pronounced on the 9th day of July 2010.