Case Law Details

Case Name : Sun Pharmaceutical Vs ACIT (ITAT Ahmedabad)
Appeal Number : ITA No. 702/Ahd/2016
Date of Judgement/Order : 08/04/2021
Related Assessment Year : 2011-12

Sun Pharmaceutical Industries Ltd. Vs ACIT (ITAT Ahmedabad)

Conclusion: Disallowance made under section 14A was not to be added for computing the book profit, therefore, AO had not erred in directing to exclude difference under section 14A for computing the big profit under section 115JB.

Held: Assessee-company was engaged in the business of manufacturing and sale of pharmaceutical products. It had 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 assessee, draft assessment order u/s. 143(3) r.w.s.144C was passed and computed the total income at Rs. 9,16,04,08,572/-. Against the draft assessment order, assessee had filed objections before DRP. Thereafter, taking into consideration the direction issued by DRP, AO had passed assessment order u/s. 143(3) r.w.s. 92CA r.w.s. 144C(3) and total income was determined at Rs. 9,38,19,42,897/- against the order passed by AO. Revenue raised the issue that AO had erred in directing to exclude difference under section 14A for computing the big profit under section 115JB without appreciating that as per provision of clause (f) of Explanation (1) to section 115JB, the book profit was to be increased by the amount of amount of expenditure relatable to any income to which section 10 applies, which found support from the decision in the case of Dy. C.LT. Central Circle, Mumbai Vs. Viraj Profiles Ltd. reported in [2015] 64 Taxmann.com. 52 ()Mumbai Tribunal). It was held that following the decision of Co-ordinate Bench in the case of the Vinit Investment 165 ITD 27 (Del-SB), disallowance made u/s. 14A was not to be added for computing the income u/s. 115JB.

FULL TEXT OF THE ITAT JUDGEMENT

These two appeals filed by assessee and revenue for A.Y. 2011-12, arise from order of the Dispute Resolution Panel-2, New Delhi dated 23-112015, in proceedings under section 144C of the Income Tax Act, 1961; in short “the Act”.

2. The return of income was filed on 30thNov, 2011 declaring taxable income under normal computation at nil and carry forward on loss of Rs. 3,02,66,75,211/-. The profit u/s. 115JB of the Act was declared at Rs. 7,18,44,50,980/-. The case was selected for scrutiny 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/-against the order passed by the Assessing Officer. The assessee has filed appeal on the various issues as per grounds of appeal listed below against the order passed by the Assessing Officer on the direction of the DRP.

“1. Re: Order passed by the Assessing Officer on directions of Ld. DRP is bad in law :

1.1 The Directions given by DRP based on which the Assessing Officer passed the final order is bad in law being against the principal of natural justice, since additions / disallowances the have been upheld by DRP without providing any reason and by passing a non-speaking order. The Ld. DRP erred in passing the several grounds, solely on the observations made in the earlier year, without appreciating that grounds raised by Appellant were different for year under consideration as compared to earlier years.

1 .2 The Ld. DRP erred on the facts and in law in confirming the additions / disallowances proposed in the draft assessment order passed by the assessing officer, without judiciously considering the factual and legal objections filed against the said order.

1.3 The DRP erred on facts and in law in not directing the assessing officer to delete various additions / disallowance, which were squarely covered in favour of the Appellant by the order(s) of the appellate-authorities in Appellant own case for earlier years.

1.4 The DRP erred on facts and in law in not independently considering/ directing the assessing officer to consider certain claims for deduction / relief made by way of notes forming integral pan of the computation of income on the ground that the said claims were not. made in the return and no variation was proposed on the said claims in the draft assessment order.

Re: Contribution to Ranbaxy Community Healthcate Society (RCHS)- Rs30,992,839/:

2.1 The Ld. DRP erred both on facts and in law in nol directing the Assessing Officer TO allow the contribution made to Ranbaxy Community Healthcare Society (RCHS), under the provisions of section 37(1) of the Act without appreciating that the contribution was made in furtherance of business objective of the Appellant Company and the same has been decided in earlier years by the Delhi Income Tax Appellate Tribunal (ITA No 743/2009) for A Y 1997-98 in favour of the Appellant Company and the departments’ appeal before the Honourable High Court 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 Pricing Rs 1,808,200,000/-:

3.1 The Ld. DRP erred both on facts and in law by not accepting the overseas Associated Enterprises (‘AEs1) as the tested party, being the least complex of the transacting entities and instead considering the Appellant as the tested patty, thus violating the basic principles of Transfer Pricing.

3.2 The Ld. DRP ought to have appreciated that Appellant had already entered into an Advance Pricing Agreement (APA) for AY 2014-15 with Central Board of Direct Taxes (CBDT) on the principal issue of selection of Foreign AF, as a tested party and hence the same principle being a legal principle ought to have been followed in the year under question as there were no changes in Functions, Assets and Risks (“FAR”) of the transacting parties.

3.3 The Ld. DRP grossly erred in upholding the actions of TPO / AO in disregarding I he ALP benchmarking process carried out by the Appellant in respect of Transfer Pricing documentation maintained by it in terms of Section 92D of the Act read with Rule 50D of the Income-tax Rules, 1962 (“Rules”):

By rejecting (he approach adopted by the Appellant of undertaking a regional benchmarking in the TP report which is in line with the globally accepted TP principles and also accepted by CBDT in the APA entered into with Appellant for AY 2014 15;

b. By holding that relevant and sufficient financial data is not available for the comparable companies selected by the Appellant and questioning the authenticity of the financial data of foreign comparables without appreciating that the database used by the Appellant was a globally accepted one; and

c. By disregarding the segmented financial statements of AKs as furnished by the Appellant, thereby holding that there is nothing on record to demonstrate that the margins earned by the AEs is due to the international transaction that needs to be benchmarked.

3.4 Without, prejudice to the above, the Ld. DRP grossly erred in upholding the actions of TPO / AO, while determining the ALP considering the Appellant as the tested party on the following counts.

a. In disregarding / modifying the filters applied by Appellant while determining the final list of comparables and denying commercial and economic adjustments applied by the Appellant while computing ALP, citing frivolous allegations;

b. In considering 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. 83/2015 dated 19 October, 2015, allowing the Appellant to use multiple year data while carrying out comparability analysts.

4. Re: Disallowance u/s 14A – Rs 4,60,85,478/:

4.1 The Assessing Officer grossly erred in carrying out disallowance u/s 14 A, disregarding the specific directions of Ld. DRP, to compute the disallowance in accordance with the decision of the Hon’ble Delhi Court in case of Cheminvest Limited as per which the disallowance u/s. 14A could not be made in case there was no exempt income.

4.2 The Assessing Officer grossly erred in by passing the directions of the DRP which were binding on the Assessing Officer as per S. 144C(10) and holding that in view of the long term capital gains claimed as exempt u/s. 10(38), disallowance u/s. 14A could be made. The Assessing Officer failed to appreciate that ii was not open to the AC) to take a different stand to disregard the specific directions of the DUP on the matter.

4.3 Without prejudice to the above, the Assessing Officer erred in proceeding to disallow additional amount of Rs. 46,085,478 under section 14A of the Act, by applying the provisions of Rule 8D of Income Tax Rules, 1962, without appreciating that the Appellant had suo-moto disallowed a sum of Ks. 8,772,339 in its computation of income. Further, the AO grossly erred in applying Rule 8D automatically without arriving at the satisfaction with regard to the correctness of the expenses disallowed by the Appellant.

4.4 Without prejudice to the above, the Assessing Officer failed 10 appreciate that since Appellant had sufficient own funds to make the investments, presumption ought to be made that investments were made from interest free funds and not borrowed funds.

1.5 Without prejudice to the above, the AO grossly erred in considering strategic investments for the purpose of disallowance u/s. 14A by not appreciating that investments were strategic investment for furtherance of business objectives and not for the purpose of earning exempt income.

4.6 Without prejudice to the above, the AO grossly erred in computing the amount of disallowance u/s 14A r.w.r 8D.

5. Disallowance of deduction u/s 80IB / 80IC – Rs 819,857,681/-

5.1 The ld. DRP erred on facts and in law in not independently adjudicating the issue of eligibility to claim deduction under section 80TB 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 eligibility for allowance of deduction u/s 80-IB & 80-10 of the Act is relevant only in the first year and not in subsequent years of claim.

5.4 The ld. DRP grossly erred in law in not rejecting the actions of AO to deny the deduction and inter alia arriving at various conclusions which arc completely contrary to the facts and the law in as much as:

a. Appellant did not maintain separate books of accounts and did not submit the profit and loss and balance sheet of the new industrial undertakings, without appreciating that revised 10CCH submitted by the Appellant already contained the requisite information.

b. Selling and distribution activity constituted a separate profit centre and that for the purpose of working out the profits and gains of the new industrial undertakings the Appellant should have computed only the profits from the manufacturing activity;

c. Modifying the allocation of expenditures on an arbitrary basis without appreciating that detailed assumptions and justifications were submitted alongwith the Form 10CCB for allocating expenses to the new industrial undertakings;

d. In completely misinterpreting the provisions of S. 8WA(8) in holding that the- only profits from the manufacturing activity are eligible for deduction and alleging that the profits so computed would result in loss

5.5 The Ld. DRP grossly erred in law in not rejecting the actions of AO to deny the deduction on the alleged ground that the Appellant has used tax arbitrage by diverting expenses relating to deductible profits of the undertaking to taxable profits of the company and by diverting income not relating to deductible profit of the undertaking from taxable income of the Company to claim a higher deductible profits u/s 80IB & 80IC without appreciating the fact that during the year under consideration the Appellant had incurred loss under the head profits and gains from business and thus there was no tax arbitrage.

6. Re: Consideration of Marked to Market (MTM) Gain as taxable income – Rs. 1706.33 millions:

6.1 The Ld. DRP erred both on facts and in law in upholding the Mark to Market (‘MTM’) gain of Rs,1706.33 million as taxable ‘income’ of the Appellant under normal provisions without appreciating that the same was not consistent with the stand taken by the department in earlier years while: disallowing 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 allowable as revenue expenditure and accordingly the action of the At) in treating the premium on the redemption of FCCB as akin to dividend on equity shares is completely contrary to the facts and the law.

8.3 The Ld, DRP grossly erred in upholding the additions by AO without appreciating that judicial pronouncements relied by AO were not applicable in facts of the present ease and the instant case was for FCCB which were “optionally convertible” and not “mandatorily convertible” and hence reliance on Circular No. 74 of Reserve Bank of India by AO was grossly erroneous and uncalled for.

9. Re: Disallowance of deduction u/s 35(2AB) – Rs 4,13,47,54,496/ :

9.1 The Ld. DRP erred both on facts and in law in disallowing the weighted deduction u/s 35(2AD) Rs. 4,13,-17,54,496/- merely on account of failure to produce Form 3C1. without appreciating that there was no onus or requirement under the relevant sections read with the rules on the Appellant to submit the said Form, The Ld, DRP ought to have appreciated that issue of certificate in Form 3CL was never the responsibility of the Appellant but of the prescribed authority and non-issue of the same by the prescribed authority cannot be attributed as non compliance by the Appellant.

9.2 The L.d. DRP failed to appreciate that the Appellant’s facilities were consistently recognised and approved by Department of Scientific and Industrial Research (DSIR) and that the Appellant had complied with all the conditions of Sec. 35(2AB) and Rule 6.

9.3 Without prejudice to the above, the Ld, DRP grossly erred in not directing the AO to allowing 100% deduction u/s 35(1) (iv) in respect of capital expenditure during the year.

9.4 Without prejudice to the above, the Ld. DRP grossly erred in not directing the AO to allow depreciation u/s 32(1) on capital R&D assets.

10. Re: Non-adjudication of claim of weighted deduction u/s 35(2AB) on cost of assets given to employees Rs. 1,64,23,930 /:

10.1 The Ld. DRP erred both on facts and in law in not adjudicating the claim of weighted deduction under section 35(2AB) of the Act, on the cost of assets provided to the employees working in approved Research & Development (R&D) facilities and engaged in execution of R&D activities, without giving any cogent reason for same.

10.2 The Ld. DRP failed to appreciate the fact 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.

12. Re: Double taxation of Income from Capital gains and other sources.:

12.1 The Assessing Officer grossly erred in taxing the long term capital gains of Rs, 14,27,71,965/- and income from other sources of Rs. 1,53,43,279/- without appreciating that the while considering the net business loss 3,02,66,75,122/-, the aforesaid incomes were already offered for tax and thereafter further adding the above incomes in computing the taxable income .

13. Re: Short grant of TDS Credit of Rs. 15,654/-

13.1 The Assessing Of fleer grossly erred in not all owing credit of TDS to the extent of Rs. 15,651/-.

14. Re: Interest u/s 234B and 234C :

14.1 The Assessing Officer grossly erred in computing interest u/s 2MB and 234C of the Act.

15. Re: Non grant of deduction u/s 80G of Rs 6,00,000/-

15.1 The Assessing Officer grossly erred in not granting deduction u/s 80G to the Appellant without appreciating that Appellant was eligible for the same.”

The Revenue has also filed appeal on the following grounds of appeal vide ITA 729/Ahd/2016 against the direction of the DRP to the Assessing Officer.

“1. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in law in directing the A.O. to exclude disallowance u/s. 14A of the Act for computing book profit u/s. 115JB of the Act without appreciating that as per provision of clause (f) of Explanation (1) to section 115JB of the Act, the book profit is to be increased by the amount of amount of expenditure relatble to any income to which section 10 applies, which finds support from the decision of Hon’ble I.T.A.T. Mumbai Bench “F”, Mumbai, in the case of Dy. C.LT. Central Circle, Mumbai Vs. Viraj Profiles Ltd. reported in [2015] 64 Taxmann.com. 52 ()Mumbai Tribunal)

2 On the facts and circumstances of the case and in law, the Hon’ble DRP erred in law in directing the A.O. to exclude disallowance u/s. 14A of the Act for computing book profit u/s. 115JB of the Act without appreciating that the A.O. had correctly computed book profit u/s. 115JB of the Act, since section 14A relates to disallowance of expenditure in respect of earning of exempt income referred to in section 10 of the Act.”

3. During the course of appellate proceedings before us, at the outset, the ld. counsel has submitted that all the issues in the 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/- to Ranbaxy Community Healthcare Society (RCHS). The assessee submitted before the Assessing Officer that this expenditure has been incurred for promoting its business, therefore, the same may be allowed as business expenditure u/s. 37 of the Act. The assessee has also submitted that ITAT Delhi has examined this issue of assessee’s appeal for the assessment year 1997-98, 2001-02, 2002-03, 2004-05 and 2005-06 in its own case and held that the contribution made to RCHS was an expenditure for the purpose of promoting its business and same was allowable as business expenditure u/s. 37 of the Income Tax Act. It was also submitted that Hon’ble High Court of Delhi had also rejected the revenue’s appeal against the aforesaid decision of the ITAT Delhi, for assessment year 1997-98, in ITA No. 743/2009 on 17th March, 2011. The Assessing Officer has not accepted the submission of the assessee stating that this issue has been contested in the past assessment year and the department has not accepted the decision of ITAT and filed appeal before the Hon’ble High Court of Delhi. The Assessing Officer stated that assessee was only entitled for deduction u/s. 80G on the amount computed and such contribution cannot be allowed as deduction u/s. 37 of the Act. The Assessing Officer has stated that assessee has also not deducted any TDS on the said amount and the same would automatically disallowed u/s. 40(a)(ia) of the act. The Assessing Officer also stated that assessee entitled for deduction u/s. 80G and the donation is a voluntary contribution without any benefit and cannot form a business expenditure u/s. 37(1) of the Act. Therefore, the Assessing Officer has treated the aforesaid contribution of Rs. 3,09,92,839/- as donation and only eligible for deduction u/s. 80G and not for deduction as business expenditure. The assessee has filed objection before the ld. DRP and the ld. DRP vide letter dated 23.11.2015 dismissed the objection of the assessee retreating the facts reported by the Assessing Officer. Consequently to the direction of the DRP, the Assessing Officer disallowed the said expenditure of Rs. 3,09,92,839/- as business expenditure u/s. 37 of the Act. During the course of appellate proceedings before us, the ld. counsel brought to our notice that identical issue on similar fact has been adjudicated in the case of the assessee itself in its favour by the Co-ordinate 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’s case had held that contribution made to RCF & RCHS are expenditure for the purpose of promoting the business of the company and is allowable as business expenditure u/s 37 of the Act.

24.2. However, the AO rejected the contention of the assessee by observing that the earlier year case is pending before the Hon’ble High Court of Delhi. Accordingly, the AO rejected the submission of the assessee and held that the assessee entitled for deduction u/s 80G of the Act. The AO further observed that the recipients did not show the amount as taxable receipts but accounted as donations.

24.3. The AO also noticed that the assessee has also not deducted TDS on such expenditure, therefore the same cannot be allowed as deduction u/s 40(a)(ia) of the Act. Hence, the AO disallowed the said expenditure as business expenditure u/s 37 of the Act.

25. The aggrieved assessee preferred an appeal before the Ld.DRP who has confirmed the order of the AO.

26. Being aggrieved by the order of the DRP, the assessee is in appeal before us:

27. The Ld. AR before us submitted that in the identical facts and circumstances in the own case of the assessee for the A.Y. 2008-09, ITAT Delhi Tribunal in ITA No. 196/Del/2013 dated 25.04.2016 has decided the impugned issue in its favor.

28. On the other hand, the Ld. DR before us vehemently supported the order of the authorities below.

29. We have heard the rival contentions of both the parties and perused the materials available on records. At the outset, we find that in the identical facts & circumstances in the own case of the assessee, the ITAT in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 com322, held as under:

“6. We have carefully considered the rival contentions. In view of the decision of Hon’ble Delhi high court in case of assessee for AY 1997-98 order dated 17.03.2012 in ITA no.743/2008 and 20.11.2012 for AY 2002-03 to 2005-06, We reverse the decision of the AO and direct to delete the disallowance of Rs.47 lacs and Rs.1250000/- of contribution made by appellant to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation. Furthermore regarding failure to deduct tax on this sum, Ld. DR. could not point out particular section, which warrants deduction of tax at sources on this payment. Therefore, 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 international transaction entered into with its overseas AE’s were more than prescribed limit. Therefore, according to the provisions of section 92CA(1), the case of the assessee was referred to the additional director of income tax (transfer pricing officer) to determine the arms length price u/s. 92CA(3) of the Act. The TPO has passed order on 30th Jan, 2015 after considering the assessee as tested party. As per the detailed discussions made in the order passed u/s. 92CA(3) of the Income Tax Act, 1961 dated 30th Jan, 2015, the TPO has made upward adjustment of Rs. 1,80,82,00,000/- on the arms length price of international transaction. The assessee filed objection against this issue of the draft assessment order before the ld. DRP and the ld. DRP vide order dated 23.11.2015 dismissed the objection of the assessee. Consequently, following the direction of the DRP, the Assessing Officer made addition of Rs. 1,80,82,00,000/- to the total income of the assessee. During the course of appellate proceedings before us, the ld. counsel has submitted that identical issue on similar facts has been adjudicated by the Co-ordinate Bench of the ITAT in the case of the assessee itself for assessment year 2009-10 vide ITA no. 1782/Del/2014 in favour of the assessee. The ld. Departmental Representative is fair enough not to controvert these undisputed facts that issue in this ground of appeal is covered in favour of the assessee by the decision of the ITAT Ahmedabad in the case of the assessee itself as cited above. With the assistance of representatives, we have gone through order of ITAT Ahmedabad vide ITA No. 1782/Del/2014 for assessment year 2009-10. The relevant part of the decision on this issue is reproduced as under:-

“10. We have heard the rival contentions and perused the materials available on records. At the outset we find that in the identical facts & circumstances in the own case of the assessee, the ITAT Delhi Bench in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 taxmann.com 322, held that AE’s are accepted as tested party being the least complex for comparability analysis of international transaction of the assessee. The relevant extract of the order is reproduced as under:

“18. We have carefully considered the rival contentions. We have also perused the relevant paragraphs of the several documents relied upon 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 where the principles of transfer pricing have been in use for a long time and act as a guiding force for all the developing economies. The transfer pricing guidelines issued by the US Internal revenue services under section 482 provide and discuss the concept of transfer pricing. Section 1.482-5 of the US Transfer Pricing Regulations state that ‘the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. Thus, in a sense, the tested party would have lesser risk as compared to the other transacting party or the real entrepreneur.

22. As per the OECD Transfer Pricing Guidelines 2010, when applying a cost plus, resale price or transactional net margin method, 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 rule, 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 least complex functional analysis.

23. As per UNTPM 2013,

“5.3.3. Selection of the Tested Party

5.3.3.1.When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method 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 controlled transaction. Attributes of controlled transaction(s) will influence the selection of the tested party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for 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 manufactures two types of products, P1 and P2 that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical specification set by B. Assume that in this P1 transaction, A only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested part for the P2 transaction would most often be B.”

25. From the above guidance certain principles emerges in selection of tested party

(a) The choice available of tested party for comparability only in CUP method, TNMM and ‘Other method’, in other methods such as RPM and CPM choice of selecting a tested party is not available. In any case, it is not required in Profit split method.

(b) The tested party normally should be the least complex party to the controlled transactions.

(c) Availability of Most reliable data of tested party and requirement of minimum adjustments is also one of the most important aspects in selection of tested party.

(d) There is no bar against the selection of Tested party either Local party or Foreign party. Neither Income Tax Act and nor any guidelines on Transfer pricing provides so. Therefore selection of tested party is to further the object of comparability analysis by making it less complex and requiring fewer adjustments.

(e) There may be many circumstances where the data related to one party to the controlled transaction may be available easily, readily and in abundance. However the first step is to look at the FAR study of that party and if found to be complex than other party, then such party should be rejected as tested party and preference may be given to another entity which is least complex and is having reasonably reliable data for comparability. Therefore, the driving force in selection of tested party should be the least complex FAR of 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 that foreign AEs are the tested parties. It is also important to notice that how this agreement has been reached between the parties. Page No 500 where in it is held that applicant i.e. appellant is an entrepreneur manufacturer where in the functions performed by it are

(a) R & D for both the products and processes

(b) Production and supply of formulations and APIs

(c) Provision of technical support and quality control process for the AEs

(d) Application for regulatory approvals from foreign governments

(e) Management support

In the risk assumed by appellant is discussed at page no 502 to 505 of the paper book. After that page no 505 to 523 the functions performed by each of the AEs and risk assumed is discussed. It shows that the functions performed by AEs are very limited and naturally, consequent risks assumed are less. After that at page no 525 and 526 of the paper book where in it is agreed that manner in which segmentation of the AEs would be computed being December/March year end which would be certified by the independent cost accountants. It is further provided that in case of AES are secondary manufacturers as well as low risk distributors margins would be computed separately. Therefore, APA has been agreed on the whole mechanism of computation of Alp of International transactions of the assessee.

27. It is also important

28. The issue that arises is though APA is signed for AY 2014-15 can it have any impact on the transactions for the year under appeal. According to The APA it shall apply in respect to previous year 2013-14 relevant to AY 2014-15, however principals laid down for comparability analysis in that does have a greater persuasive value. It is not the case of the assessee that APA should be applied for this year but it is the prayer that principles laid down by the highest revenue authority should be accepted by revenue at least for the purpose of starting the first step of comparability analysis for this year as the nature of international transactions, FAR of appellant and AEs respectively are similar. The availability of data is also on the similar lines as agreed in APA. Though the critical assumptions referred to a set of taxpayer related facts, it mentions that this APA would not have any effect on other years. May that be the case, but the concept and the 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 the assessee there is no “roll back provisions” for the year under appeal, however we analyses the circumstances, which provides for applying that rule. Rule 10MA of the Income tax Rules 1962 provides for the roll back provisions as under :—

’10MA. (1) Subject to the provisions of this rule, the agreement may provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person during the rollback year (hereinafter referred to as “rollback provision”).

(2) The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely:—

(i) the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies;

(ii) the return of income for the relevant rollback year has been or is furnished by the applicant before the due date specified in Explanation 2 to sub-section (1) of section 139;

(iii) the report in respect of the international transaction had been furnished in accordance with section 92E;

(iv) the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and

(v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule (5);

(3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of an international transaction for a rollback year, if,—

(i) the determination of arm’s length price of the said international transaction for the said year has been subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement; or

(ii) the application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year.’

On reading above rule, it is clear that if the International transactions are same in the year of APA and the year for which roll back is applied, roll back is 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 party should be taken as Foreign AE for the current year too.

31. On looking at the TP Study report of the assessee placed at page Nos. 409 to 478 of Paper Book Volume-II as well as the order of TPO it is apparent that assessee has also adopted region based analysis and also country by country analysis of comparable where they are available. Therefore, in the TP study report as far as the tested party is concerned we do not agree with the observation of the TPO that no comparables are available. It runs contrary to the finding of the CBDT in APA.

32. Coming back to the order of coordinate bench in case of assessee for AY 2004-05 it is apparent that tribunal has accepted that least complex party to the transaction should be taken as tested party. In that year due to the weakness of the TP documentation of the assessee where assessee compared the operating margin of all the overseas AEs with reference to a single set of comparables selected from around the world without any regard to the functional and geographical dissimilarities. In that set of facts, coordinate bench has held that such comparability analysis is not appropriate and therefore in absence of comparable data there was no option but to uphold the appellant as a tested party. Therefore, coordinate bench has upheld the principle that tested party should be least complex but on the facts of the case for that year on non-availability of comparable data, it is so held. In the current year, the appellant has adduced reasonably comparative data based on region and country for comparing the foreign AEs. Therefore the facts in the present year are quite distinct than the year decided by ITAT i.e. A.Y. 2004-05. In view of this, we reject the reasons assigned by ld. TPO for rejecting the selection of overseas AE as the tested party.

33. AR has cited many decisions, which are on the principle of selection of tested party, which is least complex. We are of the view that there is no dispute on this principle as it is well recognized and well accepted in all those decisions. This too has been held by coordinate bench in the case of the assessee for A.Y. 2004-05. We have perused those decisions and applied the same in reasoning and our findings. For the sake of brevity we refer the decision of coordinate bench in General motors India (P.) Ltd. (supra) where 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 taking result of comparable transactions and those transactions must be in comparable circumstances. It is therefore required to have a proper study of specific characteristics of controlled transaction. It is also required that there should be proper study of functions performed to match the identical situations under which functions have been performed. Then risk profile is also required to be compared. We may like to add that there are so many perspectives which were required to be compared and in this connection the Hon’ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables etc. Hence, in the present case, it is necessary to consider an analysis that whether the comparables selected by the TPO had analogous functional profile to that of functional profile of the assessee. It is true that functional profile and assets and risk analysis was made available but that is to be correctly understood in the light of the nature of International transaction carried out by the assessee with the said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel India Pvt. Ltd. v. DCIT (2011-TII-07-ITAT-DEL-TP) where the assessee stated to be engaged in the business of providing electronic data support service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the purpose of selection of comparables and the answer given was that functional profile must be first examined and after that proceeds to select the comparables. Interestingly, in the present case now before us, comparables chosen by the assessee were discussed by the TPO and those were discarded. The basic reason for rejection of those comparables was that the companies those were 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 simple engaged in marking activity. In this context, 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 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 for its convenience. Futher, being an entrepreneur company, it is difficult to determine the profits of ATKC with respect to work downloaded to India (as the revenue received for work off-shored to India cannot be separately identified). Further, the revenue generated from the services provided by the assessee would form only a small part of the entire operations. The value of engineering drawing and design services rendered by the assessee to TKC for AY 2002-04 was Rs. 1,58,43,923/- and for AY 2004-05 it was Rs. 1,45,77,704/-. The value of service forms approximately 6% to 7% of the Cost of Sales to TKC. HENCE, THIS Shri Rahul Mitra argued, shows that testing the margins of TKC would not serve the purpose of determining the arm’s length nature of the transactions undertaken by the assessee with TKC. Hence, the recourse available to test the arm’s length price of the services rendered by the assessee to TKC is to test the margins from the Indian side. In view of the discussion on tested part earlier, the assessee was selected as the tested party being least complex of the two entities. Hence, the transfer pricing analysis in this case was done from the Indian side, wherein, the margins of the assessee with respect to services provided to TKC were compared internally with services provided to other third parties in foreign market. Taking into account the divergent submissions, the Hon’ble Tribunal had recorded its findings that –

“33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm’s length price of the international transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm’s length for both the assessment years.”

(iii) In the case of Ranbaxy Laboratories Ltd. v. Addl. CIT110 ITD 428, the Hon’ble Delhi Tribunal had recorded its findings that –

“58. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to 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 of many authors which included India, Norway, Nigeria, Italy, USA, Netherlands, Brazil, China, OECD, Japan etc. For ready reference, the relevant portion of it observation is extracted as under:

“5.3.3. Selection of the Tested Party:

5.3.3.1. When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method (see further Chapter 6) 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 controlled transaction. Attributes of controlled transaction(s) will influence the selection of the test party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for 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.”

With regard to the challenges emerging in transfer pricing in India, it has been observed as under:—

“10.4. Emerging Transfer Pricing Challenges in India
10.4.1. Transfer pricing Regulations in India

10.4.1.3 The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprise is the less or least complex entity and requisite information is available about the tested party and comparables.

11.2.1 It was also vouched during the course of hearing by the learned Sr. Counsel that the financial details including operating margin of comparable companies along with the back-up computations were furnished before the TPO in the transfer pricing documentation [Source: Pages 113 to 210 of the Transfer Pricing Study]. This contradicts the assertion of the learned DR that the assessee had not furnished any financial information of the comparable companies.

11.2.2 The United Nation’s Practical Manual 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 allocation keys. To substantiate its claim, the assessee has also furnished a report on factual findings certified by the statutory auditors – Deloitte Anjin LLC.

11.2.5 Moreover, we find that the DRP had not considered in great detail the plea of the assessee as to why GMDAT should not be selected as the tested party for analyzing the inter-company transactions. Instead, the DRP had, in a cryptic manner, concluded that the results of assessee have to be compared with the stand alone results of Mahindra & Mahindra in the automotive segment.

11.2.6 In this connection, we tend to recall the ruling of the Hon’ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP & 1. After due consideration of rival submissions, the Hon’ble Court had ruled thus –

“16. . . . . .If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it should have considered the objections filed by the petition on merits. As a consequence of the impugned order, firstly the objections raised by the petitioner have not been decided, secondly, in view of the directions issued by the Dispute Resolution Panel, the petitioner would not be in a position to avail of the remedy of appeal before commissioner (Appeals) against the draft assessment order; and thirdly, in the light of the observation made by the dispute Resolution Panel that the petitioner has chosen to withdraw the objections, preferring any appeal against the impugned order before any forum would be an exercise in futility, as no appeal would be entertained against an order passed on a concession. Thus, the dispute Resolution Panel has virtually closed all doors for the petitioner. In the circumstances, impugned order of the Dispute Resolution Panel suffers from the vide of being contrary to the record as well as non-application of mind, in as much as the petitioner had never sought withdrawal of the objections filed by it. The impugned order also causes immense prejudice to the petitioner as recorded hereinabove. In the circumstances, the impugned order of the Dispute Resolution Panel, therefore, cannot be sustained. . . . . . .

11.3 We shall now peruse the case laws on which the learned DR had placed reliance 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 up the issue with the Tribunal. The Hon’ble Tribunal, after due consideration of the issue in depth and for the reasons recorded therein, directed the AO/TPO to determine the arm’s length interest at Libor plus 2% on the monthly closing balance of advances during the FY. We have, with due regards, perused the issue and the findings of the Hon’ble Bench in detail. Ironically, the main issue before the Bench was the percentage of the interest to be calculated on the loan advanced by the assessee to its foreign AEs. We are, therefore, of the view that this case is not directly applicable to the issue under dispute.

(ii) In the case of M/s. Onward Technologies Ltd. (supra) as relied on by the Revenue, it is observed that the assessee, a parent company had international transaction with its AEs. With regard to IT enabled services provide to its AEs, the assessee had chosen six comparables with its foreign AEs as a tested party. The TPO had ignored the working of the assessee whereby selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon’ble Bench had, after having considered rival submissions, recorded its findings, among others, as under:

So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its foreign AE. It can neither call for also roping in and taxing in India the margin from the activities undertaken by the foreign AE nor can it curtail the profit arising out of transaction between the Indian and foreign AE at arm’s length. The contention of the ld. AR in considering the profit of the foreign AE as ‘profit A’ for the purposes of comparison with profit or comparables, being ‘profit B’, to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of ‘internal transaction’ 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 distinguished from potential uncontrolled comparables”.

The Hon’ble Calcutta Tribunal in the case of Development Consultants (P.) Ltd. (supra) had recorded its findings that

“33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm’s length price of the international transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm’s length for both the assessment years.”

Thirdly, the Hon’ble Delhi Tribunal in the case of Ranbaxy Laboratories Limited (supra) took a stand that—

‘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.’

Then, the United Nation’s Practical Manual on Transfer Pricing for Developing Countries had observed that—

“5.3.3.1. . . . . . The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for 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. . . . . .

11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the ‘tested party’ either from local or foreign party and the United Nation’s Practical Manual on transfer pricing for developing countries had observed that ‘It may be the local or the foreign party’, we tend to agree with the same.’

34. Above decision reproduced by us covers many divergent views of the coordinate benches and after considering them coordinate bench has reiterated all the principles noted by us for selection of tested party. Hence, we also draw staunch support from that decision.

35. Therefore, for the reasons stated above, ground no 2.2 of the appeal is allowed with a direction that overseas associated enterprises are 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 from the judgment of Hon’ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977]110 ITR 453(Mad.) wherein it was held as under:

“No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion totally contradictory to the conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the Courts or the Tribunals and not reached objectively on the basis of the facts placed before the authorities.

If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single Judge takes a view different from the one taken by another Judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal wants to take an opinion different from the one taken by an earlier Bench, it should place the matter before the President of the Tribunal, so that he could have the case referred to a Full Bench 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 ofArt. 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 argument that Art. 31A itself is void as violative of the basic structure of the Constitution has been negatived by my learned brother, Bhagwati, J. in a kindred group of cases of Andhra Pradesh. The amulet of Art. 31A is, therefore, potent, so far as it goes, but beyond its ambit it is still possible, as counsel have endeavoured, to spin out some sound argument to nullify one section or the other. Surely, the legislature cannot run amok in the blind belief that Art. 31A is omnipotent. We will examine the alleged infirmities in due course. It is significant that even apart from the many decisions upholding Art. 31A, Golak Nath’s case decided by a Bench of 11 Judges, while holding that the Constitution (First Amendment) Act exceeded the constituent power still categorically declared that the said amendment and a few other like amendments would be held good based on the doctrine of prospective over-ruling. The result, for our purpose, is that even Golak Nath’s case has held Art. 31A valid. The note struck by later cases reversing Golaknath does not militate against the vires of Art. 31A. Suffice it to say that in the Kesavananda Bharati’s case. Article 31A was challenged as beyond the amendatory power of Parliament and, therefore, invalid. But, after listening to the marathon erudition from eminent counsel, a 13 Judges Bench of this Court upheld the vires of Article 31A in unequivocal terms. That decision binds, on the simple score of stare decisis and the constitutional ground of Art. 141. Every now discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. In this view, other submissions sparkling with creative ingenuity and presented with high-pressure advocacy, cannot persuade us to re-open, what was laid down for the guidance of the nation as a solemn pre-posion by the epic Fundamental Rights case. From Kameshwar Singh and Golak Nath (supra) through Kesavananda (supra) and Kanan Devan to Gwalior Rayons and after Art. 31A has stood judicial scrutiny although, as stated earlier, we do not base the conclusion on Art. 31A. Even so, it is fundamental that the nation’s Constitution is not kept in constant uncertainty by judicial review every season because it paralyses, by perennial suspense, all legislative and administrative action on vital issues deterred by the brooding threat of forensic blowup. This, 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 Special Bench as argued by the ld. AR for the assessee.

10.5 In view of the identical issue raised before us in the ground of appeal no. 2 which has already been considered by the ITAT Delhi, we are taking the same view and accordingly the ground of appeal of the assessee is allowed for statistical purposes.

10.6 As we have restored the issue to the file of the TPO for fresh adjudication considering the AE’s as tested party, other grounds nos. 3 and 4 do not require to be adjudicated separately. Therefore, we dismiss the same.”

On considering the finding of the ITAT Ahmedabad and after taking the same view, we restore this issue to the file of the TPO for fresh adjudication considering A.E’s. as tested party. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.

Ground No. 4 (Erred in confirming disallowance u/s. 14A of the Act of Rs. 4,60,85,478/-)

7. During the course of assessment the Assessing Officer noticed that assessee company has made investment of Rs. 601.22 crores in the shares of Indian companies and Rs. 3242.2 crores in its overseas subsidiaries as on 31st March, 2011. The Assessing Officer also stated that assessee has offered an income of Rs. 1,53,43,279/- as taxable income on these investments. The Assessing Officer was of the view that domestic investment yield exempt income to the assessee for which the income on transfer would be offered under the head capital gain. The Assessing Officer further stated that during the year, the assessee company has incurred administrative and financial cost to maintain and made new investment, therefore, the assessee was asked to explain why not disallowance of expenditure incurred towards earning exempt income be computed according to section 14A of the Act r.w.s rule 8D of the I.T. Rule 1962. In response, the assessee explained that it had not received any dividend income claimed as exempt u/s. 10(34) of the I.T. Act, 1961. However, in spite of these facts as abandoned caution the assessee has suo-moto disallowed Rs. 87,72,339/- u/s. 14A of the Act. The Assessing Officer has not accepted the submission of the assessee stating that assessee has failed to prove a nexus of surplus funds with investment and work out the disallowance of expenditure u/s. 14A r.w.s. 8D of the I.T. Rule, 1962 to the amount of Rs. 4,60,85,478/-. The assessee has filed 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 Gujarat as contended by the ld. counsel. Respectfully following the decision of the Hon’ble High Court of Gujarat in the case of Corrtech Energy Ltd. 372 ITR 97 (Guj) wherein held that in case no dividend income is claimed as exempt no disallowance is to be made u/s. 14A of the Act. Therefore, following the decision of Hon’ble Gujarat High Court as cited above, this ground of appeal of the assessee is allowed.

Ground No. 5 (disallowance of deduction claimed u/s. 80IBand 80ICof the Act of Rs. 819,857,681)

9. During the course of assessment, the Assessing Officer noticed that assessee has claimed deduction u/s. 80IB/80IC of the act of Rs. 81,98,57,681/-. The assessee claimed these deductions in respect of undertakings located in backward area for deduction u/s. 80IB (Goa Unit) and for deduction u/s. 80IC (Paontashahib, Himachal Pradesh). On query, assessee explained that certificate of the chartered accountant in form 10CCB has already been filed vide letter dated 21stSep, 2012 as per the requirements of section 80IB and 80IC of the Act along with profit and loss account for the respective eligible new industrial undertakings (NIU). The assessee has also enclosed copy of these certificates as per annexure 1. The assessee has also filed revised certificate in form no. 10CCB along with profit and loss account and the balance sheet of the respective new industrial undertaking and submitted that there was no change in the profit or loss of the respective new industrial undertaking. The assessee has also submitted that it had maintained separate books of account in computerized environment which has been the basis for computing deduction u/s. 80IB and 80IC of the Act. The profit and gain are determined on the prices realized from the customer as adjusted with the direct or indirect cost. The assessee has filed a detailed submission in response to the query raised by the Assessing Officer produced at page no. 22 to 48 of the assessment order of the Assessing Officer. The same is reproduced as under:-

“On the query that units earlier setup by the assessee company (with deduction at lower percentage) is incurring losses as against the latest units set up by the company (entitled for deduction @ 100%), following merits your consideration:

    • Certificates in Form 10CCB has a schedule of notes which forms an integral part of the computation of profit 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.N O. New
Industrial Undertaking(s)
Year of Establish me nt Year or
claim
Prof it/ [loss] for the year Deduction claimed
Per cen tag e Amount
1 GOA Plant (New Clock) Y.E 31.03.2002 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 6th (766,213,342) 30 % NIL
4 New SCG Plant Y.E 31.03.2007 5th 702,849,827 100 % 702,849,827
5 New Tablet Plant-Ill Y.E

31.03.2008

4th 2,005,186 100 % 2,005,186
6 Formulation Plant- Baddi Y.E 31.03.2010 2nd [71,394,3881 100 % NIL

.

    • Above table clearly evidences that assessee has incurred losses in its NIUs which are eligible for deduction @100% (viz. Baddi) and also claimed deduction on NIU which are eligible for deduction @30% (i.e. Goa).

The Auditor while computing the above deduction in Form No. lOCCB has made the following assumptions which are of relevance and brought out as under. The comments on the assumption made by the Auditor have been discussed in brackets on every point.

1. SALES:

The sales have been recorded at the selling price of the company.

Comments on the Assumption:

(It is pertinent to note that the sales have been recorded at the global sale price effected by the company i.e. the price paid by consumer and not. by following the provisions of 80IA r.w.s.801C(7). The assessee records the sale effected after the services provided by the selling and distribution arm of the company and other facilities of the company whose cost has not been incorporated. Therefore, the sales have not been recorded as per ALP from the manufacturing unit to the company],

HEAD OFFICE EXPENSES:

75% of the allocable head office expenses for the year excluding legal and secretarial, corporate affairs and communications, M&A, separation, investor relation, business development, as allocated by the management arc apportioned in the ratio of sales,

Comments on the Assumption:

(It is seen that the certificate of the Auditor only mentions the opinion of the management and is devoid of any evidence or justification to arrive at this magic figure of 75% and no Justification as to why 100% is riot taken is also given and also why the other expenses have been excluded, where the excluded services also play a key role in conducting the sales of the undertaking of the assessee).

R&.D EXPENSES:

30% of the R&D expenses have been apportioned to individual undertakings in the ratio of sales. Comments on the Assumption:

(It is seen that again this figure of 30% is without any basis and bonafide evidence. The

assessee has merely claimed the figure

at 30% without attaching any Justification or basis for the same).

10.2.1 RULE 186BBB(2) AND FORM MO,1OCCB:

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. The gross turnover of the assessee is Rs.5380.48 Crs. The income under the head “Other” in the Schedule 15 of the P&L Account indicates a sum of Ks.788.02 Crs. Even if we reduce there from the export incentives of Rs.64.56 Crs which can be related 1.0 manufacturing activity, a sum of Rs.723.46 Crs is residual which is not relatable la manufacturing activity. It is pertinent to mention here that in the assessment finalized for preceding years AY 2008-09& 2009-10 also the claim of deduction u/s 80 IB/IC was disallowed.

10.2.3.2 Considering the above facts and circumstances of the case, the assesses was asked
during assessment proceedings various queries relating to its claim u/s 801B/IC of the 1. T. Act, 1961.

10.3.0 The assessee was asked to justify the following during the course of assessment proceedings:

i. Justification of claim u/s. 80IB/IC

ii. Details of products manufactured u/s. 80IB/1C

iii. Why expenses which are indirect should not be allocated in the ratio of turnover for determining deduction u/s. 801B/IC of the l.T. Act, 1961 for the units.

iv. Details of R&-D expenses and its allocation to various units,

v. To state whether separate books of accounts and trial balance have been maintained for 801B/IC units,

vi. To give Trial Balance of these units.

vi. To give the costing of products manufactured in these units.

viii. To state whether these products have been earlier manufactured by the assessee either by himself or loan license basis/job work basis or has been purchased from outside parties in the earlier year or during this yr.

ix. List of been purchased from outside parties in the earlier year or during this year, manufacturing facilities and their turnover

x. Sale prices from 80IB/IC units to the company.

xi. Why not after excluding other income like royalty, technological r-license income, export incentives, misc. Income, and sundries etc. which are not eligible for 80IB/IC deduction, the determination of eligible profits is done,

xii. The company does trading activity also. Why the trading profit should not be excluded for determining eligible income.

xiii. It was observed that the sales from 801B/1C units were not recorded within the meaning of provision of Sec. 801 A(5), applicable to compute deductions

xiv. 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 Act amounting to Rs. 79,74, 52.S43/- for the year under consideration, which is reproduced as under:-

“(a) Deduction u/s SO-IB of the Act of Rs. 78,631,353/-

The asscssee company has claimed deduction u/s 80-IBf4) of the Act in respect of its Goa Plant for Rs. 78,631,353/-. In this matter, we would like to draw your kind attention to the relevant extracts of section SO-IB of the Income Tax Act, 1961 (“the Act”) reproduced as under:

Quote

(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to 131(11], (I1A) and (11B)14] (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assesses, a deduction from such profits and gains of an amount equal to such percentage and far such number of assessment years as specified in this section.

(2) This section applies to any industrial undertaking which fulfils ail the following conditions, namely:—

(I) It is not formed 03′ splitting up, or the reconstruction, of a business already in existence:

(II) It is no! formed by the transfer to a new business of machinery or plant previously used for any purpose;

(III) It manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India:

(IV) In a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or .more workers in a manufacturing process carried on with the old of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

3. The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking:

Provided that the total period of deduction does not 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 eligible new industrial undertaking based upon the certificate issued by the statutory auditors of the company. As per the requirement of Section 80IB of the Act, we had also submitted audit report in Form No. lOCCB along with documents before your good self in response to notice issued u/s 143(2) of the Income-tax Act 1961. In the certificate, the auditors have also attached a .schedule of notes which forms an integral part of the computation of profit of New Industrial Undertaking as per which the assessee company has claimed deduction u/s 80-JB of the Act. The schedule provides assumptions and basis for computation of the profit of the undertaking. The certificate provides all the relevant data / information and basis relating to the deduction claimed u/s 80-JB 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-IB of the Act.

(C) Deduction u/s 80-IC of the Act for Rs. 718,821,490

The assessee company has also claimed deduction u/s 80~IC(3) of the Act for Rs.718,821,490/- In respect of its various industrial undertakings at Paonta Sahib, Himachal Pradesh and the same is tabulated below:

Industrial
Undertaking
.
Date of Commercial Production Year of Claim Profit for the year
New SGC Plant 10lh April 2006 4th 612,560,927
New Tablet 15th July 2007 3rd 306,260,563
Plant III
Deduction claimed (100%) 718,821,190

In this matter, we would like to draw your kind attention to the relevant extracts of the section 80- 1C of the income Tax Act, 1961 [“the Act”) reproduced as under:

Quote

(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or on enterprise from any business ‘referred to in sub-sections (2), there shall, in accordance with and subject to the provisions of this section, be allowed. In computing the total income of the assessee, a deduction from such profits and gains as specified in subsection (3).

(2) This section applies 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 clause (b), of sub-section (2), one hundred percent of such profits and gains for ten assessment years commencing with the initial assessment year;

(ii) In the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub- clause (ii] of clause1 (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per centn (or thirty per cent where the assesses is a company) of the profits and gains

(4) This section applies to any undertaking or enterprise which fulfills all the following conditions, namely:—

(i) It is not formed by splitting up, or the reconstruction, of a business already in existence:

(ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose;

Unquote

We would like to submit that the eligible units of assessee company are entitled to claim deduction under section 80IC of the Act, since the eligible units satisfy the conditions provided by section 801C of the Act namely:

The eligible units of the assessec firm manufacture Pharma products, not being any article or thing specified in the Thirteenth Schedule to the Act;

    • The eligible units of the assessee firm has been set up in areas notified by the Central Board of Direct Taxes (‘CBDT’) in exercise of powers conferred under section 8OlC(2)(a)(ii)of the Act by the Central Government.
    • The eligible units have commenced production (as tabled above) within the period required under the said section.

Further, we would like to submit that the assessee has claimed deduction u/s 801C on the eligible New Industrial Undertaking based upon the certificates issued by the statutory auditors of the company. As per the requirement of Section 801C of the Act, we had also submitted audit report in Form No’. 1OCCB along with documents before your good self in response to notice issued u/s 143(2) of the Income-tax Act 1961. In these certificates, the auditors have also attached a schedule of notes which forms an integral part of the computation of profit of Undertaking as per which the assessee company has claimed deduction u/s 80-IC of the Act. These schedules provide assumptions and basis for computation of the profit of these undertakings. These 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 these certificates, the auditors have also attached a schedule of notes which forms an integral part of the computation of profit of New Industrial Undertaking as per which the assessec company has claimed deduction u/s 80-IB / 1C. These schedules provide assumptions and basis for computation of the profit of these undertakings and also the basis of allocation of various expenses. After verifying these schedules, your good self would find that there is a rationale and justification in the basis of allocation of each expense. In the said schedule, there are some indirect expenses viz. Common Expenses, HO expenses allocated by the assessee company in the ratio of sales / turnover made by respective unit to total sales / turnover of the company for the year under consideration. In view of above, we humbly submit before your good self that the expenses have been allocated in the ratio of sates wherever it is justified.

Query

(iv) Details of R&D Expenses and its allocation to various units

Details of R&D expenditure incurred by the company during AV 2010-11 along with the copies of approval of the R&D facilities by the prescribed authority [being Department of Scientific & Industrial Research, Ministry of Science and Technology (‘DS1R’)] have already been filed before your good self vide our letter dated 8th September 2011.

The assessee Company is a leading pharmaceutical company in India. Being a pharmaceutical company, it has scientific research and development centers, which are duly recognized by DSIR for carrying on basic research for discovery and development of new drug molecules, pharmaceutical dosage forms including novel drug delivery systems, API, etc. These research .and development centers are of international standard and carrying on research of new medicines/ formulations.

The basic object of the research and development centers of the assessee is to innovate new molecules/drugs. As per the American Chemical Society Report, the International average time for the discovery, development and launch of a new drug is around 10 to 15 yenrs and the cost related to these activities, i.e., discovery and development is more than USD 250 Million. Therefore, the expenditure incurred during the previous year by the R&D centers of the assessee for innovation of new molecules/drugs, has no relationship with the production 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 apportionment of 30 percent of R&D expenses to these industrial undertakings have not only been made during the previous year relevant to the AY 2010-1], but the same has been consistently followed for the last several years, keeping in view the limited role which R&D plays in the manufacture of existing products. The institute of Cost and Works Accountants of India have also issued Cost Accounting Standard 4 (CAS – 4 copy attached as Annexure – 2) being standard on cost of production. As per the said standard, while computing the cost, the Research and, Development cost incurred for development and improvement of the process or the existing product has to be included in the cost of production and not the entire R&D expenditure.

Query

(v) & (vi) To state whether separate books of accounts and trial balance have been maintained for 80IB/IC units and to give Trial Balance of these units.

Response

The Company maintains its records on a “business area” basis on SAP ERP system. Business area is an organizational unit within financial accounting system which corresponds to a defined business segment or area of responsibility, Pharma manufacturing is considered as a separate business area by the Company. Similarly, API manufacturing (bulk drugs) is considered separate business area.

A business area may be further subdivided, for e.g. the manufacturing business area further comprises of various plants. Each Plant is given a separate Plant Code within business area. In this regard, your goodself may note that a plant location may have different production units (referred to as ‘Blocks’), manufacturing different kinds of medicines. The units which are eligible to claim deduction under section 80-IB/ 1C of the Act are referred to as “New Industrial Undertaking (‘N1U’) by the Company.

It may be noted that the transactions/ entries relating to each business area or its plants are distinctly identified by way of a separate code.

At each of the plants, the company manufactures different kind of medicines and in different package forms, Each medicine in its packaged form is referred to as Stock Keeping Unit (‘SKU’). Your goodself may note that each batch of SKU’s manufactured by the Company is allotted a unique batch number and related details of sales arid material cost are 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, namely expenses of head office, international division, etc. are allocated to the relevant Block on the basis of the sales. The above approach has been traditionally followed by the Company to compute the total cost of the NIU.

In this regard, attention of your good self is also invited to the assumptions and basis of computation of profits of the undertaking forming part of the audit report under sections 80-JB/ 1C of the Act. in form 10CCB.

In view of this, it is submitted that the Company has an established system to compute the profit earned by each NIU. The computation of profit for the purpose of deduction under sections SO-IB/ 1C of the Act, duly certified by the auditors of the Company has been provided ^as-part of the audit report under sections 80-1B/ 1C of the Act in form 10CCB. It may be noted that above approach has been followed for past several years. Further, there has been no change in the factual position.

Query (viii) & (ix)

To state whether these products have been earlier manufactured by the assessee either by himself or loan license basis/Job work basis or has been purchased from outside parties in the earlier year or during this yr.

Response

Please find attached in Annexure – 3 the list of common products manufactured by the Company in other plants/ procured on loan license basis during the year by the Company. Please note that the Company is not claiming any deduction u/s 80IB/1C in respect of profit from sale of these products procured from other plants.

Query (XII

Why not after excluding other income like royalty, technological license income, export incentives, misc. Income, and sundries etc. which are not eligible for 80IB/IC deduction, the determination of eligible profits be done.

Response

Please find attached herewith details of miscellaneous income as Annexure – 4 which is included in the profit of New Industrial Units on which the assessce company has claimed deduction u/s 80-IB / 1C. As per the details, your good self may kindly observe that ii mainly includes sale of scrap, unclaimed balances 8t, excess provision written back, etc. related to respective units.

In this connection, we would like to submit that the assessee company is engaged into the business of manufacturing Pharmaceuticals products at its units located at places 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 and has shown the same separately. Given that such expenses have been incurred in the course of manufacturing Pharmaceuticals products, their subsequent write back, etc. shall also be considered in the course of manufacturing of Pharmaceudeals products and accordingly eligible for deduction under section 80IB/IC of the Act.

In view of the above, your goodself would appreciate that since the aforesaid scrap, unclaimed balances written back, excess provision written back and rebate in relation to Power are incidental to the activities carried on by the NIU’s, the same have a direct nexus with the manufacturing activity carried on by these units. Hence, the assessee has claimed deduction u/s 80-IB / 1C on the same and it may kindly be allowed. Reliance in this regard is placed upon the following:

Fenner (India) Ltd. vs. CIT (2002) 241 1TR 803 (Mad.)

Arvind Fashions Ltd. vs. ACIT (2010) 37 SOT 369 (Ahm.)

Amar Raja Batteries Lid. Vs. AC1 T (2004) 91ITD 280 (Hyd.)

Wipro Ltd. vs DCIT (2006) 5 SOT 805 (Ban.)

Further, company would like to submit before your good-self that other income like royalty, technological license income, export incentives and sundries etc. have not been included for the purpose of the determination of eligible profits

We would also like to submit that similar deduction u/s 80-1B / 1C on aforesaid items has also been claimed by the assesses company in earlier years and the same has always been allowed in the Income tax assessments. It is further submitted that there is no change in the facts during the year under consideration as compared to earlier years and therefore, we humbly request your goodseif to kindly allow deduction u/s 80-IB / 1C on the aforesaid miscellaneous incomes.

Query (xii)

The company does trading activity also. Why the trading profit should not be excluded for determining eligible Income.

Response

As also mentioned in the point above, we would like to reiterate that the company has not considered ‘Other income (Like Royalty, technological license income, export incentive etc] (mentioned in the order sheet)’ and “Income from trading activities’ as eligible profits, while computing eligible profits of the NIUs for the purpose of claiming deduction under section 801B/1C of the Act.

As rightly pointed out above 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 and toevery subsequent assessment year up to and including the assessment year for which the determination is to be made”

From the above, it is amply clear that the intent of legislation was to provide tax incentives on the profits from an eligible business for computing deduction under section 80IB/IC of the Act. The scheme was to consider the manufacturing unit as an independent business unit and calculate the profits, as if such eligible business is the only source of income for the assessee.

In this regard, your goodself would appreciate that, with due regard to the above provisions under the Act, the company has computed profit of each NIU separately for the purpose of deduction which has been certified by the auditors also. The statement of computation of profits annexed to the audit report in Form 10CCB submitted to your goodself vide our letter dated September OS, 20 H, evidences the computation mechanism opted by the company and substantiates that each unit has been considered a separate unit for the purpose of computing eligible amount of deduction. Please note that separate Form lOCCB’s for each of the five units eligible for deduction under section 80IB/IC of the Act, have been submitted by the company for the year under consideration – which provide for an independent computation of eligible profits of each of the undertaking respectively.

We reiterate that the company has considered each eligible unit as an independent business/ source of income for the purpose of computing deduction and the provisions of section 801A(5) of the Act are duly compiled with.

Query (xlv)

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 he excluded.

Response

In this regard, company would like to submit that the Selling and Distribution network (herein after referred to as S&D function) is an integral part of the assessee company and works cohesively. Any manufacturing activity ultimately is meant for sales and hence such function cannot be considered as a separate profit centre. Hence the S&D function is note separate business segment/undertaking to be taxed separately, since it is only facilitating the 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 whether it has got a plant or an organization is considered as one whole unit and the entire business of the going concern is embraced within the term…
      • It is an activity of a man engaged in, with a view to earn profit
      • The expression undertaking has the same meaning as the expression ‘business’
      • The word ‘undertaking’ is used in the sense of an enterprise which can be owned and transferred…
      • The word ‘undertaking’ must be defined as ‘any business or any work or project which one engages in or attempts as an analogous to business or trade
      • The expression ‘undertaking’ means a separate and distinct business or industrial activity and does not comprehend an infinitesimally small part of manufacturing process. Painting section of a factory is not an ‘undertaking’.
      • Undertaking means an enterprise engaged in production, sale or control of goods etc.”

> S&D function is just to facilitate the selling process of the manufacturing units. The company
is engaged in the business of manufacturing and trading in formulations. Active Pharmaceuticals Ingredients (‘API’) and intermediate, Generics, Drug discovery and Consumer Health Care products, (as also prescribed in the main objects of the company). The primary object of the company is to carry out necessary activities in connection with manufacturing of the medicines/ drugs and sell them to the ultimate stockiest-

Like any other cost center of the company viz Human Resource Department, Administration Department, etc S&D function performs the marketing function which facilitates the primary functions of manufacturing in the company. The S&D function of the company facilitates the function of marketing; selling and delivery of the goods to the stockiest, hence, the cost incurred by this function has been considered as common cost and is accordingly allocated to the manufacturing units of the company by considering it to be a separate cost center like any other department (as has been mentioned above). We further submit that these cost centers exists in every organization for marketing the products and onward selling to the customers, however booking the revenues in this department and taxing it separately as profit center would be contrary to the facts, standard business principles and accordingly 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 company and no separate income is earned by it from performance of service to any third party.

Query (xv) & (xvii)

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/s 801B

Response

As regards allocation of head office expenses, the assessee company wishes to submit that it has two prime business areas-Manufacturing of Dosage and Manufacturing of APIs. Basis the nature of activities carried out in both the manufacturing segments vis-a-vis the nature of expenses clubbed under Head Office expenses, your goodsclf would appreciate that the assessee company has appropriately allocated 75% of the Head Office expense across all the manufacturing units of the assessee (i.e. amongst eligible as well as ineligible manufacturing units) during the year under consideration. The assessee further submits the Justification of allocating 75% of HO expenses here under:

The assessee’s head office (Corporate Office – HO) is located at Gurgaon while its manufacturing undertakings are located at several location including Mohall, Paonta Sahib and Goa, These manufacturing undertakings are distinct and separate from the HO and operate independently. These undertakings have their independent staff for production, management, accounts, personnel, administration, legal, etc.

The assessee is maintaining HO for the purposes of looking after inter alia, the business of trading in API & medical equipments, supervise the operations of its manufacturing undertakings, etc. The HO is also looking after certain other important functions of the assessee company, viz. Strategic Planning, Investor Relations, Corporate Communications, dealing with various Departments/ Ministries of the Government of India, Corporate Affairs, Shareholders Servicing, raising equity and other funds and compliance of applicable legal provisions. Therefore out of NCO expenses, the portion attributable to the industrial undertakings, i.e. 75% has been allocated. The remaining 25% NCO expenses are attributable to the other business activities. In this connection, attention is also invited to Section 44C of the Act, ‘which restricts Head Office Expenses to 5% of adjusted total 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 NIUs. Further, the M&A expenses relates to expenditure incurred by the Company on exploring new avenues for expanding its business activities through acquisitions, etc. The said expenditure has no connection with the activities of the NIUs.”

The Assessing Officer has not accepted the submission of the assessee. The Assessing Officer stated that no separate books of account have been maintained in respect of the eligible undertaking and concluded that as held in the earlier assessment year the assessee was not eligible for deduction u/s. 80IB/80IC of the Act. The DRP in his direction dismissed the objection filed by the assessee holding that the DRP has also decided this issue against the assessee in previous assessment years.

10. During the course of appellate proceedings before us, as stated above, the ld. counsel has submitted that identical issue on similar fact has been adjudicated by ITAT Ahmedabad vide ITA No. 1782/Del/2014 for assessment year 2009-10 in favour of the assessee. The ld. Departmental Representative is fair enough not to controvert the contention of the assessee that the issue has been decided in favour of the assessee by the Co-ordinate Bench of the ITAT, Ahmedabad. With the assistance of ld. representatives, we have gone through the decision of Co-ordinate bench of the ITAT in the case of the assessee itself wherein vide ITA No. 1782/Del/2014 assessment year 2009-10, the Co-ordinate Bench of the ITAT held as under:-

“57. We have heard the rival contention and perused the materials available on record. In view of the brief facts and circumstances discussed in the previous paragraph, we find that the impugned issue is covered by the order of Delhi ITAT in the case of assessee in which the exactly the same issue was adjudicated for the assessment year 2008-09 in ITA No. 196/Del/2013 dated 25.04.2016 in its favour. The relevant extract of the order is reproduced as under:

“68. We have carefully considered the rival contentions. During the year assessee has claimed deduction u/s 80IB and 80IC as under:—

Nam e of
unit
Section under which claimed Year of establish ment Year of claim Initial year of the claim Amount claimed remarks
Goa Plant 80IB 31.03.20 02 7th 2002-03 90204832 Profit for year is Rs. 300682774/-
and deduction is claim @ 30% of the eligible profit.
New Tabl et Plant – I 80IC 31.03.20 05 4th 2005-06 Rs.220579510 It is eligible for deduction @100% of profit for the year
New Tabl et Plant – II 80IC 31.03.20 06 3rd 2006-07 Rs.156142930 It is eligible for deduction @100% of profit for the year
New
SGC
plant
80IC 31.03.20 07 2nd 2007-08 Rs.376385228 It is eligible for deduction @100% of profit for the year
New table t plant – III 80IC 31.03.20 08 1st 2008-09 RS.52350900 6 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 eligible for deduction for these undertakings. During the course of assessment proceedings assessee was specifically asked to explain the reasons and basis for apportionment of 30% R&D expenditure and 75% of the head office expenses to this new undertaking. Assessee explained vide letter 02.12.2008 and after going through the submission made the assessee and based on allocation explained by the assessee, profits of the undertaking u/s 80IB/80IC were accepted by the AO. Therefore, in the initial year the claim of deduction for the unit New Tablet Plant-I was claimed, examined and allowed.

71. In case of New Tablet Plant-II which was set up in AY 2006-07, the assessee did not claim any deduction in view of provision of section 80A(2).

72. Similarly, in case of new SGC Plant which was set in AY 2007-08 the assessee did not claim any deduction for that year in view of the provision of section 80A(2) of the Act as the gross total income of the assessee was negative.

73. In case of New Tablet Plant-III, this is the first year of deduction and assessee has claimed the same in return of income and it is under dispute in this appeal.

74. It is argument of the ld. AR that it is the well settled proposition of law that where the act provides for the deduction for a certain term period the revenue is required to examine the claim of deduction and its eligibility to examine whether all statutory conditions are satisfied in the first year in which the appellant claims the deduction. If revenue does not disturb the claim of the assessee in that year, it is not open to revenue to disallow the deduction in the subsequent years. The various authorities cited by the ld. AR are specifically on the point in favour of the assessee. The contention of the revenue that this is the first year in which the methodology of claim of deduction of the assessee is being verified is not accordance with the previous assessment orders passed by the AO with respect to deduction u/s 80IB with respect to Goa plant and deduction u/s 80IC of the Act for New Tablet Plant-I. On perusal of those orders, it is apparent that these deductions claimed by the assessee in the initial year of this industrial undertaking have been examined in detail and then allowed by the revenue after making enquiry. In view of this, the argument of the revenue cannot be accepted 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 case of CIT v. Delhi Press PatraParakashan (P) Ltd. [2013] 355 ITR 14/217 Taxman 288/34 taxmann.com 3 (Delhi) where in it is held that:—

“69. The next controversy that needs to be addressed is whether it was open for the Assessing Officer to deny the benefit of section 80-I of the Act to the assessee having allowed benefit to the assessee in the preceding three years. It is contended on behalf of the assessee that it was necessary for the Assessing Officer to be consistent with the assessment for the earlier years. The question as to the qualification of Unit Nos. 2 & 3 as industrial undertakings arose in the earlier years and the Assessing Officer had accepted that Unit Nos. 2 & 3 qualified for deduction under section 80-I of the Act in the earlier years. By virtue of section 80-I(5) of the Act deduction under section 80-I of the Act was available to an assessee in the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things (such assessment year being the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year. This necessarily implied once the issue as to eligibility under section 80-I of the Act was examined and allowed in the initial assessment, the same was allowable in the subsequent years also unless there was any material change in the succeeding years.

70. It is well settled law that the principles of res judicata do not apply to income tax proceedings and assessment for each year is an independent proceeding. It is now equally well established that issues that have been settled and accepted over a period of time should not be revisited in subsequent assessment years in absence of any material change which would justify the change in view.

71. The Supreme Court in the case of RadhasoamiSatsang (supra) has held that unless there is a material change in justifying the revenue to take a different view the earlier view which has been settled and accepted of a several years should not be disturbed. The relevant extract from the said judgment is quoted below:—

“We are aware of the fact that strictly speaking 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 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, 1922 had not been granted for the assessment year 1939-40. The assessee had challenged the assessment order which was accepted by the Appellate Assistant Commissioner who upheld the assessee’s claim for exemption. This view was consistently followed by the successive Assessing Officers till 1963-64. In these circumstances, the Supreme Court held that the view that had been settled and accepted over a period of years should not be allowed to be disturbed.

73. This court in the case of Lagan Kala Upvan (supra), following the decision of the Supreme Court in the case of RadhasoamiSatsang (supra) has also held that where a particular view has been accepted by the Assessing Officer to several years the same cannot be permitted to be departed from unless there is some material facts that justified such a change. Similar view has been expressed by this court in the case of Modi Industries Ltd. (supra). In this case, while considering a claim of deduction made by an assessee under section 80J of the Act, this High Court held as under:—

“The second question relates to the claim of the assessee for deduction under Section 80J of the Income Tax Act in respect of its new unit namely 10 ton Furnance Division and Steel Unit ‘B’. This case pertains to the assessment year 1976-77. A perusal of the order of the Assessing Officer would reveal that for the first time, claim under section 80J of the Act was made by the assessee in the assessment year 1973-74. The assessee was denied that claim by the Assessing Officer. For this reason, the Assessing Officer denied the claim in this assessment year as well, taking note of the fact that the matter pertaining to 1973-74 was pending before the Income Tax Tribunal.

It is a matter of record that the appeal filed by the assessee for the assessment year 1973-74 was allowed by the Income Tax Appellate Tribunal. The effect thereof was that the assessee was granted the requisite deduction under Section 80J of the Act for the assessment year 1973-74. The Department has sought reference under Section 256(1) of the Act which reference application was also rejected by the Tribunal. Likewise, for the assessment years 1974-75 and 1975-76, the claims of the assessee were allowed. The assessee, once given the deduction under Section 80J of the Act is entitled to such a deduction for a period of 5 years. If the 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 ITR 1 had held as under:

” that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity….”

75. In the facts of the present case, where although the Assessing officer has allowed the assessee deduction under section 80-I of the Act in the preceding years, one may still have certain reservations as to whether the issue of eligibility of Unit nos. 2 and 3 fulfilling the conditions has been finally settled, since the question has not been a subject matter of any appellate proceedings in the years preceding the assessment year 1991-92. However, there is yet another aspect which needs to be considered. By virtue of section 80-I(5) of the Act, deduction under section 80-I of the Act is available to an assessee in respect of the assessment year (referred to as the initial assessment year) relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning or the company commences work by way of repairs to ocean-going vessels or other powered craft. Such deduction is also available for the seven assessment years immediately succeeding the initial assessment year. Surely in cases where an assessee is held to be eligible for deduction in the initial assessment year, the same cannot be denied in the subsequent assessment years on the ground of ineligibility since the set of facts which enable an assessee to claim to be eligible for deduction under section 80-I of the Act occur in the previous year relevant to the initial assessment year and have to be examined in the initial assessment year. In such cases, where the facts on the basis of which the deductions are claimed are subject matter of an earlier assessment year and do not arise in the current assessment year, it would not be possible for an Assessing Officer to take a different view in the current assessment year without altering or reopening the assessment proceedings in which the eligibility to claim the deduction has been established.

76. 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 also disturbed.

77. The Assessing Officers over a period of three years being assessment years 1988-89, 1989-1990 and 1990-1991 have consistently accepted the claim of the assessee for deduction under 80-I of the Act and it would not be open for the Assessing Officer to deny the deduction under Section 80-I of the Act on the ground of non fulfilment of the conditions under 80-I(2) of the Act without disturbing the assessment for the assessment years relevant to the previous year in which the Unit Nos. 2 & 3 were established.

78. This view has also been accepted by a Division Bench of Gujarat High Court in the case of Saurashtra Cement & Chemical Industries (supra). In that case, the Gujarat High Court held that where relief of a tax holiday had been granted to an assessee in an initial assessment year in which the conditions for grant of tax holiday had to be examined, denial of relief in the subsequent years would not be permissible without disturbing the assessment in the initial assessment year. The relevant extract from the decision of the Gujarat High Court in Saurashtra Cement & Chemical Industries (supra) is quoted below:—

“The next question to which the Tribunal addressed itself, and no our opinion rightly, was whether the Tribunal was justified in refusing to continue the relief of tax holiday granted to the assessee-company for the assessment year 1968-69, in the assessment year under reference, that is, 1969-70, without disturbing the relief granted for the initial year. It should be stated that there is no provision in the scheme of s. 80J similar to the one which we find in the case of development rebate which could be withdrawn in subsequent years for breach of certain conditions. No doubt, the relief of tax holiday under s. 80J can be withheld or discontinued provided the relief granted in the initial year of assessment is disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the ITO cannot examine the question again and decide to withhold or withdraw the relief which has been already once granted.”

79. The Division Bench of the Bombay High Court in the case of Paul Brothers (supra) has also adopted the view expressed by the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries (supra).’

For the sake of brevity, we do not reproduce 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 respect to impugned year. We have carefully considered the argument of the ld. AR and we do not see any dispute on the principle of consistency as it has already been propounded by Hon’ble Supreme Court and various other Hon’ble High Courts. The latest in point of time is Excel Industries Ltd. (supra) where Hon’ble Supreme court has held that:—

’28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue.

29. In RadhasoamiSatsangSaomiBagh v. CIT[1992] 193 ITR 321/60 Taxman 248 (SC)this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same “fundamental aspect” permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoysteadv.Commissioner of Taxation 1926 AC 155 (PC) wherein it was said:

“Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”

30. Reference was also made to Parashuram Pottery Works Ltd. v. ITO[1977] 106 ITR 1 (SC) and then it was held: “We are aware of the fact that strictly speaking 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 so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.’

77. Therefore, following this principal also we are of the view that deduction for the year claimed by the assessee with respect to its Goa Unit and New Tablet Plant-I cannot be disturbed on the principle of consistency also. Further, this argument cannot be taken shelter regarding the claim of the assessee for New Tablet Plant-II, SGC Plant and New Tablet Plant-III.

78. The third argument advanced by the assessee is that the accounts of the assessee are being maintained on SAP ERP System, which provides separate books of accounts resulting into independent balance sheet and profit and loss account of the eligible unit. For this ld., AR explained in detail how the ERP system works and how it generates individual profit and loss account and balance sheet of the Industrial units. In the present business environment and looking to the nature of the business and the size of the operation of the company, it is apparent that it is multi product, multi-location company. The assessee has made a claim of various units, which is submitted before us from Page Nos.974 to 1038 of Paper Book Volume No.IV. The details of this is tabulated as under:—

Name of the unit Date of Audit report as per Rule 18BBB Supported by the balance sheet and profit and loss account of the unit Page No. of PB Volume IV
Goa Unit 31.01.2012 Yes 974-986
New Tablet Plant-I 31.01.2012 Yes 987-999
New Tablet Plant-II 31.01.2012 Yes 1000-1012
New SCG

Plant

31.01.2012 Yes 1013-1025
New Tablet Plant-III 31.01.2012 Yes 1026-1038

79. On examination of the above stated balance sheet and profit and loss account of the above industrial undertaking where the claim of the deduction of the assessee is worked out and certified by the Independent accountant is prepared based on similar accounting policies and practices. It is also apparent that the profit and loss and the balance sheet have been prepared on rational basis after allocation of proper expenditure, which has been followed by the assessee consistently and based on the accounting practices followed in earlier years. The main reason for asking of separate books of accounts 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 financial and operational records on SAP ERP systems the Assessee can at any moment of time on any day after every transaction can produce the product wise, units wise, geography wise, independent profit and loss account and balance-sheets. Therefore, in our opinion the contention of the ld. AO that common books of account are maintained and not separate books of account is devoid of any merit. As such, Assessee has contended that provision of section 80IB and 80IC does not provide that Assessee should maintain separate books of accounts with respect to eligible undertaking. It only provides as per provision 80IA(7) that the ‘accounts’ of the undertaking for the previous year for which deduction is claim should have been audited by an ‘accountant’. The provision of the section does not talk about maintenance of ‘separate books of accounts’. Provisions of section 80IA(7) are as under :—

“(7) 38[The deduction] under sub-section (1) from profits and gains derived from an 39[undertaking] shall not be admissible unless the accounts of the 39[undertaking] for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form40 duly signed and verified by such accountant.”

80. Rule 18BBB of the Income tax rules governing the certificate by an accountant provides as under :—

98“[Form of audit report for claiming deduction under section 80-I or 80-IA or 99[80-IB or section 80-IC].

18BBB . (1) The report of the audit of the accounts of an assessee, which is required to be furnished under sub-section (7) of section 80-IA or sub-section (7) of section 80-I, except in the cases of multiplex theatres as defined in sub-section (7A) of section 80-IB or convention centres as defined in sub-section (7B) of section 80-IB 1[or hospitals in rural areas as defined in sub-section (11B) of section 80-IB], shall be in Form No. 10CCB.

(2) A separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction under section 80-I or 80-IA or 80-IB1[or 80-IC] and shall be accompanied by the Profit and Loss Account and Balance Sheet of the undertaking or enterprise 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’ble Supreme court in case of Arisudana Spinning Mills Ltd. v CIT[2012] 26 taxmann.com39/210 Taxman 233/348 ITR 385, which provides guidance on the issue of maintenance of separate account for the purpose of claiming deduction u/s 80IA of the Act. Facts before the Hon’ble Supreme Court were that the Assessing Officer found that the assessee-Company was engaged in the business of manufacturing of yarn. The assessee derived, during the relevant assessment year, a gross total income of Rs. 51,82,666/- from what it called ‘manufacturing activity’. It denied that it had undertaken any trading activity during the year in question. On the said sum of Rs. 51,82,666/-, the assessee claimed deduction at the rate of thirty per cent under section 80IA of the Act amounting to Rs. 15,54,800/-. The Assessing Officer found that the assessee had not maintained a separate trading and profit and loss account for the goods manufactured. In the assessment year in question, it appears that the assessee had sold raw wool, wool waste, textile, and knitting cloths. When a query was raised, the assessee contended that, business exigencies in the assessment year in question, it had sold the above items. However, according to the assessee, the sale of raw wool, wool waste, etc., would not disentitle it from claiming the benefit under section 80IA of the Act on the total sum of Rs. 51,82,666/- at the rate of 30%. Department found that the assessee has not maintained the accounts for manufacture of yarn actually produced as a part of industrial undertaking. Consequently, the Assessing Officer worked out, on his own, the manufacturing account, as indicated in his Order, giving a bifurcation in terms of quantity of raw wool produced. On Appeal before hon’ble court it was held as under :—

“4. In our view, the findings given by ITAT and the High Court are findings of fact. In this case, we are not concerned with the interpretation of Section 80IA of the Act. On facts, we find that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year. If the assessee had maintained a separate account, then, in that event, a clear picture would have emerged which would have indicated the income accrued from the manufacturing activity and the income accrued on the sale of raw material. We do not know 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. In view of this, the argument of the revenue that separate books of accounts are required to be maintained with respect to each unit does not have any support of the Income Tax Act or Rules framed thereunder.

82. Nonetheless, assessee has maintained books of accounts of the whole undertaking on SAP ERP systems from which on any day the independent profit and loss account and balance sheet as well as the respective ledgers, cashbook and bankbook and journal of any independent industrial undertaking is available. According to section 2(12A) of the income tax Act books of accounts have been defined as under :—

‘(12A)42a “books or books of account” includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as printouts of data stored in a floppy, disc, tape or any other form of electromagnetic data storage device;]’

On reading of the above, it is apparent assessee has maintained separate books of accounts, which are on the SAP ERP system, which provides transaction-by-transaction ledgers, daybooks, cashbooks, and other books such as quantitative details and stock registers. The Ld. AO was of the view that as the books of accounts are maintained for the entity as a whole, it has not maintained separate books of accounts for the eligible industrial undertaking. It will further be appreciated that the primary purpose of maintaining separate books of account in any provision of the Act is only to enable the assessing officer to verify that deduction under any particular provision has been correctly computed. If from any system/ software, identified and separate accounts relatable to any particular unit/ undertaking are discernible and are capable of being generated, the same, in our view, is sufficient compliance with the requirement of maintenance of separate books of account, if any. However, it is to be noted in present era of technological evolution that old age notions of the maintenance of accounts and business records do not survive and business entity today survives on real time information on each aspect of its business process. In this era when an entity maintains its accounting and business records on Enterprise Resource Planning system, which is a standard procedure or program to optimize all business processes including Sales, Logistics, Production, Quality, Finance 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 undertaking to be audited and a certificate to be filed. The essence of this requirement is that, at any given time the financial position of the undertaking, should be ascertainable. The intent is that the profits of the undertaking eligible for the deduction can be properly identified. This requires maintenance of accounts in such a fashion that the sales of the eligible business are known, the expenses – both direct and indirect are identifiable and the common expenses are apportioned. The details filed before CIT(A) clearly demonstrate that in the case of the assessee, the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act.”

83. Addressing the next arguments of the revenue that there are certain items of other income, which are reduced from the computation of total income then the manufacturing activity results in loss. For this, proposition LD. DR drew our attention to page no 51 of the assessment order where ld. AO has stated that assessee has earned Royalty Income of Rs 18.91 Crs, (ii) export Incentives of Rs 78.93 crores, (iii) sundries and miscellaneous income Rs 33.74 Cr and Income from trading activity of Rs 94.25 Crores totalling to Rs 225.83 Crs. It was stated that the gross total income of the assessee is Rs. 178.64 Crores and if the above stated income are excluded i.e. of Rs 225.83 Crores the total income of the assessee will result in to loss and therefore there is no profit in manufacturing activity of the assessee and hence no deduction is allowable to the assessee. On this aspect we have carefully perused the computation of total income filed by the assessee which is at page no 1145 to 1155 of the paper book where the gross total income of the assessee is Rs. 3347340467 and claim of the deduction u/s 80 IB/IC of the act of Rs 1366821506/-. Therefore, it is apparent that assessee’s deduction is not exceeding the gross total income of the assessee. We have perused the provision 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 allocation of common expense , the R & D expenses primarily represents cost related to the development of ‘new’ medicinal products. It is only after innovation of the new product that the same is produced. In these circumstances, the appellant, in line with the traditional allocation methodology adopted in the earlier years apportioned 30% of such R&D expenses to the individual undertakings in the ratio of sales. Further, there is no evidence laid down by revenue that that in the event of the appellant deciding to commercially exploit the benefits of the R & D works, the products would be manufactured by the said units. Further on allocation of head office expenses we fully agree that it relates to costs that have been incurred on an entity level and pertains to the company as a whole. Appellant has apportioned 75% of such head office expenses to the individual undertakings based on sales. This method of allocation has been consistently followed by the assessee since commencement, which is duly certified by the auditors and accepted in the assessments completed in the past. We do not find any irrationality in the al above allocation keys adopted by the assessee firstly and for the reason that it has been accepted by the revenue in past it cannot be disputed now in subsequent years without there being any change in the facts and / or law. Honourable Delhi high court in the case of EHPT India (P.) Ltd.(supra) where in allocation of expenses based on head counts and turnover is upheld to stress that there is no bar in law for common expenses to be allocated on a scientific/ rational basis to the eligible unit has held as under :—

’10. The provisions of sub-section (4) of section 10A, relied upon by the Assessing Officer, apply for the purpose of segregating the profits of the business into export profits and domestic profits. It is a statutory formula for ascertaining what are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. We are not in the present case concerned with sub-section (4). That sub-section will apply when the combined profits – profits of the exempt unit and those of the non-exempt unit – have been 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 cannot in the very nature of things be great precision and exactness in the matter” (at page 552). In the recent judgment of the Supreme Court in CIT v. Bilahari Investment (P.) Ltd.[2008] 299 ITR 1/168 Taxman 95,the facts were these. The assessee was subscribing to chits and was maintaining the accounts on mercantile basis. The discount on the chits, which was actually the profit arising to the assessee, was declared at the end of the chit period, which at times exceed a period of 12 months. This method adopted by the assessee was being accepted by the department for a number of years. However, for the assessment years 1991-92 to 1997-98 the Assessing Officer took the view that the discount on the chits should be assessed every year, taking into account the number of instalments paid and remaining to be paid. The contention of the assessee was that the method adopted by him has been consistently accepted in the past and there was no justification for any departure. Accepting the submission, the Supreme Court held as under:

“As stated above, we are concerned with the assessment years 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court.”

In the light of the observations of the Supreme Court in Hukam Chand Mills Ltd. (supra), in a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to 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) of the Act is required which provides for inter unit transfer of goods and services should be at the market value of the goods and services which means the price that such goods or services would ordinary fetch in the open market. Firstly ld. AR of the assessee has submitted that there is no inter unit transfer of any goods and services and therefore provisions of section 80(IA)(8) does not apply. This fact has remained uncontroverted. None of the transaction has been pointed before us, which shows that there is inter unit transfer of goods or services. Therefore in absence of any instances of such transfer of goods or services pointed out before us by revenue we are of the view that provision of section 80IA(8) are not attracted.

86. Further, it is submitted by the assessee that various units are manufacturing different products and final products are sold in the open market. Sales of each of the unit are accounted in the profit and loss account by the appellant of that unit. It is not pointed out before us that what is the material or services that has not been accounted for by the assseess as sales and it is not at the market rate and what is the market rate of such product or services sold by those units. It is emphatically stated that there is no inter unit transfer of the goods or services. In view of the above, we do not have any option but to reject the objection of the revenue of invoking section 80 IA (8) of the Act on this issue.

87. It is one of the contention of revenue that selling and distribution activity is itself a separate profit center and therefore whatever services have been provided by the selling and distribution arm of the company to the eligible undertaking should have been charged and reduced from the profit of the industrial undertaking after valuing service of selling and distribution arm of the company at market rate. At present assessee has allocated it at cost. Therefore, ld. AO has invoked provisions of section 80 IA (8) of the act. It is not dispute that that products manufactured by these industrial units are sold by selling and distribution arm of the assessee and the cost incurred is allocated to these respective units on the basis of appropriate allocation key of ‘sales’. Ld. AR of the appellant relying on the decision of coordinate bench of Cadila Healthcare Ltd. (supra) has submitted 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 with the provisions of the sections. Even then for argument sake if the expenses relatable to current year are to be apportioned; it was found that the assessee had not apportioned even a penny of the expenses in development and research of new products of Baddi Unit.

9.5 Next, Revenue’s Counsel has drawn our attention on the profit & loss account of the eligible Unit, i.e. Baddi Unit, (refer Page No.87 of the paper-book). Ld. DR has said that sales to the tune of Rs. 1,19,13,22,749/- were recorded for the accounting period ended on 31.3.2006. He has pleaded that if the said Unit was to sale its products on stand alone basis, then the said Unit which was only two years old could not fetch such high sale price. The said Unit has shown high profit at Rs. 1,16,82,91,400/-. The goods manufactured by the said Unit were transferred to the marketing division of the assessee-company and the sale price was noted by the Baddi Unit as per the final sale price of the product. But the fact is that the marketing divisions and the C&F are involved, therefore the sales are realized by the main marketing division. He has thus pleaded that the profit derived from “marketing function” cannot be dragged to the manufacturing unit for the purpose of claiming deduction u/s.80IC. The Special Provision is confined to certain Undertakings, as defined in the Statute, and such eligible undertakings are entitled for the deduction of the profit of such undertakings only. He has again drawn our attention that the only source of income should be the eligible source of income and not other sources of income, such as, profits of marketing division or profits on account of established brand. For the allocation of profit of manufacturing unit the mandate is very clear because Income Tax Rule, 1962 contains Rule 18BBB wherein as per sub-rule(2) a separate report is to be furnished by each undertaking and that report shall be accompanied by a profit & loss account and balance-sheet of that Undertaking as if the Undertaking is a distinct entity. He has therefore argued that the allocation of the profit of a manufacturing unit should be made on stand alone basis. He has questioned that how the sale price of the products of the Baddi Unit were determined and recorded. Because of the brand value the sale price must have been determined by the management as if the profit is earned by the assessee-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 claiming a deduction under the Statute. The adjustments as suggested by the AO while working out the manufacturing profit of an eligible Unit has a far reaching consequences on all such taxpayers; therefore we have to deal this issue carefully and little elaborately, so that we can reach to a logical conclusion.

10.1 To begin with, it is better to elucidate that the I.T. Act has only defined ‘income’ (Sec. 2(24)) as well as ‘business’ (Sec. 2(13)) but not the term “profit and gains”. However, the section we have to deal with i.e. Sec. 80 IC revolves around the term ‘profits and gains’. As per section 2(13) ‘business’ includes trade, commerce or manufacture. In auxiliary, as per section 2(24) ‘income’ includes (i) profits and gains. An ‘income’ has to have a component of ‘profits & gains’ but all type of ‘profits & gains’ may not be an ‘income’ for tax purpose under the Act. The section in controversy i.e. Sec. 80 IC of the Act is embedded with both these terminology, reproduced verbatim :—

“80IC (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section(3)”.

10.2 The ‘business’ is prescribed in sub-section (2) in the following manner : (2) This section applies to any undertaking or enterprise

(a) which has begun or begins to manufacture or produce any Article or thing

Therefore, ‘manufacturing’ is the first criteria for the eligibility of the ‘business’ to qualify for the deduction. Hence the ‘profits’ are required to be derived from a manufacturing undertaking which is producing the specified article. That ‘profit’ is inclusive in the ‘gross total income’. As already noted, the terminology “profit” has not been defined in this Act therefore we have taken the help of other resources. The basic question is that what is the “profit” of a manufacturing unit?

Firstly, the term “Profit” implies a comparison between the stage of a business at two specific dates separated by 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 manufacturing capacity. So the objective of such concern ought to be to maximize the profit. Now the problem, as posed, 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 80IC 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.80IC 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, have been adopted by Baddi Unit because as per Profit & Loss account, cost of material, personal cost and general expenses, corporate expenses were reduced from the sale price to arrive at the “profit before tax” i.e. Rs. 116,82,91,400/-.

10.3 It is not in dispute that for Baddi Unit the assessee has maintained separate books of accounts and therefore drawn a separate profit and loss account. In such a situation, whether the AO is empowered to disturb the computation of profit, is always a subject matter of controversy. From the side of the assessee, reliance was placed on Addl. CIT v. Delhi Press PatraPrakashan [2006] 10 SOT 74 (Delhi) (URO). In this case, the assessee was claiming deduction u/s.80IA in respect of a Unit No.4. The said Unit was showing profit @ 62%. As against that, AO has noticed that a margin of profit shown by the assessee as a whole was only to the extent of 10%. The AO has therefore recomputed the profit of the said Unit by applying sub-section (10) of section 80IA and restricted the profit of the said Unit to 10% only. While dealing this issue, 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 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 Indo-UK DTAA the income has to be taxed in India. An another fact was that there was no separate account of the assessee’s India operation and the AO had found that on the basis of global accounts the profits were determined on sales. In that case, marketing was said to be the primary activity for earning profit. The profit was directly due to operation in India. In that context the word “attributable” was considered and then it was held that such part of the income as it was reasonably attributable to the operations carried out in India is taxable. The expression “business connection” was also considered and then it was found that it will include a person acting on behalf of a non-resident and carried on certain activities is having business connection. A business connection has to be real and intimate and through which income must accrue or arise whether directly or indirectly to the non-resident. On those facts, since it was found that R&D activities were carried out by the assessee, therefore, 15% of the profit was allocated to the R&D activities and balance of the profit was attributable to the marketing activities in India. The said decision was entirely based upon the connectivity of the marketing operations with the profits. The CBDT Circular No.23 of 1969 dated 23/07/1969 was also taken into account wherein it was opined that where a non-resident’s sales to Indian customers are secured through the services of an agent in India then that profit is attributable to the agent’s services. Meaning thereby because of the close connection of the agent’s marketing activity the proportionate profit was attributed to the said activity. 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 assessee has in fact debited certain expenses which have included head office expenses, such as, marketing expenses and corporate expenses. Meaning thereby the net profit of the Baddi Unit was not merely production cost minus sale price, but the difference of sale price minus all general expenses which were attributable to the sales. Therefore, it is not reasonable to say that unreasonably the profit was escalated. The difference between the two percentages of profit, i.e. about 28% ( G.P. – N.P.) thus represented the expenditure which could be said to be in respect of marketing network and brand of the product related expenses. The AO has not complained about the allocation of expenditure as made by the assessee while computing the profit of the Baddi Unit. Once the assessee has itself taken into account the related expenses to arrive at the net profit, then it was not reasonable on the part of the Revenue Department to further reallocate those expenses by curtailing the percentage of eligible profit.

10.6 From the side of the Revenue, ld. Special Counsel has argued that in terms of the provisions of section 80IA(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.80IC 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 net work plus due to the brand name of the company. Only 6% was the manufacturing profit, per A.O. It is true that section 80IC does recognized the provisions of section 80IA. Refer, Subsection (7) of section 80IC which prescribes as follows:—

“Section 80IC(7) : The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section.”

Due to this reason, our attention was drawn on the provisions of section 80IA(5) of IT Act; reads as under:—

“Section 80IA(5) : 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 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 the only source of income was the sales of the qualified products. In the said P&L A/c there was no component of any other sources of income except the sale price and otherwise also the assessee has confined the claim only in respect of the eligible profit which was derived from the sales of the pharmaceutical products. This section do not suggest that the eligible profit should be computed first by transferring the product at an imaginary sale price to the head office and then the head office should sale the product in the open market. There is no such concept of segregation of profit. Rather, we have seen that the profit of an undertaking is always computed as a whole by taking into account the sale price of the product in the market.

10.7 The Ld. AO has suggested that the assessee should have passed entries in its books of account by recording internal transfer of the product from Baddhi Unit to the head office marketing unit and that too at arm’s length price. From the side of the appellant 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 ld. Special Counsel that the provisions of section 80IA(8) prescribes the segregation of profit in case of transfer of goods from one Unit to another Unit. But section 80IA(8) reads 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 goods or services, means the price that such goods or services would ordinarily fetch in the open market.

Where any goods held for the purpose of the eligible business are transferred to any other business carried on by the assessee, then if the consideration for such transfer as recorded in the accounts of the eligible business do not correspond to the market value of such goods, then for the purposes of the deduction the profits and gains of such eligible business shall be computed as if the transfer has been made at the market value of such goods as on that date. Though the section has its own importance but the area under which this section operates is that where one eligible business is transferred to any other business. We again want to emphasis that the word used in this section is “business” and not the word “profit”. We can hence draw an inference by describing these two words and thus have precisely noted that ‘eligible business’ has a different connotation which is not at par or identical with the “eligible profit”. The matter we are dealing is not the case where business as a whole is transferred. This is a case where manufacturing products were sold through C&F in the market. Even this is not the case that first sales were made by the Baddi Unit in favour of the head office or the marketing unit and thereupon the sales were executed by the head office to the open market. Once it was not so, then the fixation of market value of such good is out of the ambits of this section. If there is no inter-corporate transfer, then the AO has no right to determine the fair market value of such goods or to compute the arm’s length price of such goods. The AO has suggested two things; first that there must be inter-corporate transfer, and second that the transfer should be as per the market price determined by the AO. Both these suggestions are not practicable. If these two suggestions are to be implemented, then a Pandora box shall be opened in respect of the determination of arm’s length price vis a vis a fair market and then to arrive at reasonable profit. Rather a very complex situation shall emerge. Specially when the Statute do not subscribe such deemed intercorporate transfer but subscribe actual earning of profit, then 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 are certain expenditure which are self-generated to create the brand value of a product. Naturally, the allocation of notional expenditure particularly in respect of self- generated brand is a matter of hypothesis and not a matter of realty. Logically it is not realistic to set apart a value of a self generated brand which had grown in number of years.

10.10 The segment reporting of profit is although in practice but the purpose of such reporting is altogether different. Such segment information is particularly useful for financial analysis, so that the management may keep a close watch on the performance of the diversified business lines. The areas of demarcation are business segment, geographical segment, etc. But as far as the Revenue of an enterprise is concerned while segmentation is required, then Revenue from sales to external customers are reported in the segmented statement of profit and loss. In an accounting system, an intra-company sale between divisions or units is not regarded as Revenue for the purpose of such financial reporting. As per the Accounting Standards an Enterprise Revenue ignores in house-sales that represent Revenue to one segment and Expense to another. In this connection, the AO has discussed the Hon’ble Supreme Court decision pronounced in the case of Liberty India (supra). The AO wanted to justify his attempt of segmentation on the basis of the theory that only the profits derived due to manufacturing activity can be said to be derived from eligible undertaking. It was contested by AR before us that the “segment reporting” is about the segregation of business and not about the segregation of any specific activity. In the case of Liberty India (supra) it was observed that the IT Act broadly provides two types of tax incentives, namely, investment linked incentives and profit linked incentives. The Court was discussing Chapter VIA which provides incentive in the form of tax deductions to the category of “profit linked incentives”. The incentive is linked with generation of ‘operational profit’. Therefore, the respected Parliament has confined the grant of deductions only derived from eligible business. Each eligible business constitutes a stand alone item in the matter of computation of profit. The Court has said that because of this reason the concept of “segment reporting” was introduced in Indian Accounting Standards. Ld. Counsel Mr. Srivastava has argued that the deduction u/s.80IC is a profit linked incentive. 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 manufactured at Raichur but sold in Bombay. The controversy was that the assessee had contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur which are an essential part of their business and that such profit must be excluded from the assessment under EPT Act. It was narrated that in other words, the Act brings within its ambit all income in the case of a person resident in British India which accrues or arises or which is deemed to accrue or arise to him in British India during the accounting year. If Sec. 5 of the Act stopped short at that stage, it was undoubted that in the case of the respondent who is a resident in British India all his income, no matter where it arose, within British India or without British India, would be chargeable to excess profits tax just in the same way as it chargeable to income-tax under the Indian IT Act. The whole of his income arising in Raichur has legitimately been taxed under that Act. In that decision also, the word “business” was defined, i.e. business includes any trade, commerce or manufacture. It has also been said that all businesses, to which the said law applied, carried on by the same person shall be treated as one business for the purpose of the said Act. The question was about the manufacturing activity and it was contended that if a man is a manufacturer as well as a seller of goods, then in his case the term “part of a business” means carrying on all the two activities together and therefore constitute the part of the business. One of the Hon’ble Judges has said that the activities which the assessee carried on at Raichur was certainly a business of the assessee. On one hand, it was argued that the accrual of profit must necessarily be at the place where the sale proceeds are received or realized. But on the other hand, it was argued that the profits received relate (i) firstly to his business as a manufacture, (ii) secondly to his trading operations and (iii) thirdly to his business of export. On that basis, it was opined that the profit or loss has to be apportioned between these businesses in a business like manner and also according to well established principle of accountancy. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines 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 that place because there was nothing done from which the profits could accrue. There was an interesting contradiction because of the divergent views and it was also expressed that it was a fallacy to regard the profits as arising solely at the place of sale. It was said that the revenue of the company are derived from a series of operation, including the purchase of raw-materials or partly manufactured articles, completely manufacturing its products and transporting and selling them, and receiving the proceeds of such sales. The essence of its profit-making business is a series of operations as a whole.

10.12 We have carefully perused this decision of the Hon’ble Supreme Court as cited by the Special Counsel Mr. Srivastava. At the outset, we want to place on record that the entire issue before the Hon’ble Supreme Court was in respect of third proviso to section 5 of EPT Act. The said proviso was duly a reproduced in para-40 of the order and for ready reference typed below:—

“Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State, and where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business.”

The point for consideration was that whether on those facts the third proviso to section 5 could be invoked. The manufacturing activity of making ground-nut oil was carried out at Raichur (Hyderabad) which was treated as a separate business within the meaning of the said proviso and thereupon it was claimed as exempt being carried out within the territorial jurisdiction of Indian State. So the Court has observed that to succeed in their claim, it is incumbent upon the assessee to show that there was in fact a part of a business and that the profit had actually accrued or arose in that part of an Indian State. The Court has clearly stated in para-41 that both the elements should found exist and then only the business could be treated as a separate business. However, the said proviso has propounded only deeming provisions, as is apparent from the language of the section itself. 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 that the business should be capable of earning profits separately. Rather, in the subsequent paras it was further made clear that the manufacturing profit could be sub-divided only if there was no insuperable/challenging difficulty in making such apportionment. A possibility was therefore discussed that there could be apportionment of the net profit that accrue to the business of the assessee and one portion of it could be allotted to that part of the business which relates to the manufacture of the said commodity which was ultimately sold in the market.

The Raichur factory certainly has business connection in British India for a part of the oil manufactured by it is sold through the Bombay establishment of the assessee. That all the operations of the Raichur business are not carried on in Bombay. Therefore, the profits that would be deemed under this section to accrue or arise in Bombay will only be the profits which may reasonably be attributed to that part of the operations carried on in Bombay, that is to say, to sale of part of its oil in Bombay. In this context, an observation was made that a trade is completed at a place where a business transaction is closed. Profits of a business are undoubtedly not “received” till the commodity are sold and they are ascertained only when the sale take place. This aspect has not been doubted or challenged even in the said order. But in the said order the question was that if a part of a business consisted of manufacturing activity and that activity can be segregated so as to compute the yield profit, then whether such profit accrue only at the place where the manufacture are sold. To answer this question, the Hon’ble Court has commented in para-49 that there was no express direction as to apportionment in the third proviso to section-5 of EPT Act. The opinion expressed was very specific that a profit can accrue in respect to that part of a business only when apportionment is possible. The Hon’ble Court has said that only on the said assumption that apportionment was possible the said proviso was based upon that presumption only. If no apportionment can be made in respect of the process of a particular business, then that will not be considered to be a part of the business at all and held that the proviso will not apply. It was concluded that the principle of apportionment was implied therein. After 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 manufacturing unit has prepared a profit & loss account of its manufacturing-cum-sale business activity. If the Statute wanted to draw such line of segregation between the manufacturing activity and the sale activity, then the Statute should have made a specific provision of such demarcation. But at present the legal status is that the Statute has only chosen to give the benefit to “any business of drug manufacturing activity” which is incurring expenditure on research activity is eligible for this prescribed weighted deduction. The segregation as suggested by the AO has first to be brought into the Statute and then to be implemented. Without such law, in our considered opinion, it was not fair as also not justifiable on the part of the AO to disturb the method of accounting of the assessee regularly followed in the normal course of business. It is true that otherwise no fallacy or mistake was detected in the books of accounts of Baddi Unit prepared on stand alone basis through which the only source of income/profit was the manufacturing of the specified products. We therefore hold that the AO’s action of segregation was merely based upon a hypothesis, hence hereby rejected. These two grounds Nos.6 & 7 are allowed.”

We have carefully perused this decision and note that the controversy in this ground of appeal with respect to applicability of section 80 IA (8) of the act, on marketing and other selling distribution as well as research and development services provided by the undertaking as a whole to the eligible industrial undertaking at the cost or market rate for working out the eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to the decision cited by the Ld. AR. Therefore, we respectfully following the above decision of coordinate bench hold that provisions of section 80IA(8) of the act does not apply to the assessee on transfer of services of marketing division of the company to the eligible industrial undertaking whose profits are claimed as deductible.

88. Further ld. AO has also given one of reason that the claim of the assessee is not admissible because of the reason that along with Form NO.10CCB assessee was required to file the balance sheet and profit and loss account of the eligible undertaking. It is admitted fact that assessee did not file balance sheet along with Form 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 remark is made either by the ld. AO or by ld. DRP on the balance sheet of the eligible undertakings though it were available before them for proper verification and examination. Ld. AR of the appellant has submitted a plethora of judicial precedents covering this issue on this issue we refer to the decision of Honourable Delhi high court on this issue rendered in case of Axis Computer India (P.) Ltd. (supra) where in it is held that

“2. This Court has already interpreted the latter provisions and has held the same to be directory and not mandatory. The contention of the revenue was that unless and until the audit report is filed along with the return, the benefit of section 10A could not be available to the assessee. Recently, we have considered the identical provisions of section 80-IA(7) in the case of CIT v. Contimeters Electricals (P.) Ltd. [IT Appeal No. 1366 of 2008, decided on 2-12-2008] and held that as long as the audit report is filed before the framing of the assessment, the provisions of section 80-IA(7) would be complied with inasmuch as the same are directory and not mandatory. A similar view would have to be taken in the present case also inasmuch as the provisions are the same. Consequently, we do not find any fault with the conclusions arrived at by the Tribunal. No substantial question of law arises for our consideration. The appeal is dismissed.” [Underline supplied by us]

In this case, appellant has already filed the audit report and the profit and loss account of the units however; the profit and loss account was filed before ld. DRP but in any way available with ld. DRP and Ld. AO at the time of finalization of the assessment order. In the decision cited before us HonourableDelhi high court has held that even if the audit report is not filed then also the deduction cannot be denied if same is filed before finalization of assessment. Therefore case of the assessee stands on the better footing. No other contrary decision was put before us by revenue. Hence, we do not wish to agree to the contention of the revenue that as the balance sheets were not filed by the assessee of those eligible industrial undertaking whole of the deduction is not allowable to the assessee.

89. Coming to the computation of the eligible income of the assessee for all the eligible units, Ld. AO could not point out any error except dealt with by 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 should be set aside back to the file of ld. AO for fresh verification and for this ld. DR. relied on the decision of coordinate bench Amarnath Reddy (supra). Against this Ld. AR raised the objection that this issue should not be set aside as only law points are involved in this issue and no further facts are required to be examined. We have carefully considered the rival contentions on this issue. We have noted the above cited decision in Asstt. CIT v. Amarnath Reddy where in it is held as under :—

‘6. Now, let us examine whether the plea sought to be raised by the ld. D.R. can be admitted by the Tribunal or not. Though several authorities have been cited in the course of hearing, the basic judgment is that in the case of Hukumchand Mills Ltd. (supra). In that case, in order to arrive at the correct written down value of the assets, the Tribunal permitted the department to raise a plea to find out whether the assessee was allowed any depreciation under an enactment which was in force earlier, i.e., before the Indian Income-tax Act was made applicable to the assessee. The Court held that the subject-matter of the appeal before the Tribunal was the question as to what should be the proper written down value of the assets for calculating the depreciation allowance under the Indian Income-tax Act. It was certainly open to the department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the written down value on any of the grounds decided against it. In the case before the Supreme Court, earlier enactment was to be referred to, whereas in the present case only a different provision of the same enactment has to be considered. Therefore, I see no reason as to why the plea of the ld. D.R. cannot be accepted. In the present case, of course, the department is the appellant unlike in the case of Hukumchand Mills Ltd. (supra). But, in my view, it makes no difference. The department is aggrieved by the deletion of disallowance of expenditure which disallowance was made under one particular provision. The subject-matter of the appeal was whether the expenditure claimed by the assessee was allowable or not. If it was not disallowable under one particular provision but is disallowable under any other provision, the subject-matter, viz., the allowability of expenditure remains the same. There are a number of 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 fetter on the Tribunal’s jurisdiction to admit a new plea. For, the power to listen to a new contention and decide the appeal on that basis has been spelled out by the Supreme Court from the terms of the statute. The exercise of that power does not depend on the presence of any other factor, excepting that the new plea comes from a party to the appeal. Even in a case where fresh facts are called for to decide the new plea, the Tribunal would have jurisdiction to entertain that plea. How the Tribunal wishes to get at the relevant facts in order to decide the new point may be quite a different thing. The Tribunal may either remand the matter for the purpose, or proceed to investigate the facts themselves. In this part of the decision-making alone, there is scope for the play of the Tribunal’s discretion. As to the very power to entertain a new plea, that is not to be ruled out, merely because a consideration thereof would call for further facts to be gone into. In Hukumchand Mills’ decision [1967] 63 ITR 232, the Supreme Court laid down no fetter on the Tribunal’s powers. That case, indeed, was a case where the new plea raised by the department before the Tribunal could not be considered without a further investigation into facts. Nevertheless, the Tribunal entertained the plea, and remitted the case to the ITO for the ascertainment of the relevant facts. The Supreme Court, in their decision upheld not only the Department’s new plea, but also the Tribunal’s order of remand based on the new plea.”

In the light of the above discussion, I agree with the view taken by the ld. J.M. to hold that the plea raised by the ld. D.R. is to be accepted and the matter is to be remanded to the Assessing Officer for considering the claim of the assessee for claiming deduction of unaccounted expenditure under section 37(1) of the Act.’

In the above case the issue as set aside to the file of the ld. AO to decide and examine the facts in the course of hearing before the Tribunal, the revenue raised a fresh plea that the Assessing Officer should have invoked the provisions of section 37(1) and requested the Bench to remit back the matter to the file of the Assessing Officer to consider the allowability or otherwise of the expenditure under section 37(1). We do not find that any such fresh plea is raised by the revenue 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 allowing one of the parties before the Tribunal to have another inning, particularly when such party had full opportunity to establish its case. Unnecessary remands, when relevant evidence is on record, belies litigant’s legitimate expectations and is to be deprecated. Having regard to aforesaid principle, it is necessary to look into records to see whether there is sufficient material on record to dispose of the issue on merit and there is no need to remand the issue to provide a fresh inning to the revenue.”

Therefore, in view of the above decision and in absence of any fresh plea by any of the parties we donot intend to agree with the request of revenue to set aside this issue to the file of ld. AO.

91. In view of above ground no. 12 of the appeal of the assessee with respect to claim of deduction u/s 80IC and 80IB of the Act amounting to Rs1,36,68,21,506/- is allowed.”

58. In view of the above, we note that the issue as discussed above is covered by the order of Delhi

Tribunal. Moreover, we also note that the ld. DRP has also relied on the order of its predecessor which has been reversed by the ITAT as discussed above. In view of the above discussion and following the order of the ITAT Delhi in which the deduction claimed by the assessee under section 80IB/80IC was completely allowed based on reasoning discussed above. Hence the ground of appeal of the assessee was allowed.”

Vide the above decision of the ITAT in the case of the assessee, the claim of deduction u/s. 80IB/80IC were allowed following the decision of the ITAT in the case of the assessee for the A.Y. 2009-10. On similar facts as supra, we allow this ground of appeal of the assessee after taking the same view for the reasons elaborated in the findings of the Co-ordinate Bench as above. Accordingly, this ground of appeal is allowed.

Ground No. 6 (Market to market gain of Rs. 1706.33 million as taxable income totally inconsistent/contradictory to disallowance of market to market loss made while completing assessment year 2009-10)

11. During the course of assessment, the Assessing Officer noticed that the assessee has executed forward contracts, hedging contracts, on various accounts such as protecting export realization against purchase of plant and machinery and other capital investment etc. The Assessing Officer has asked the assessee to clarify why the 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 to the profit and loss account, without actual realization thereof. Further the said amount of exchange gain was also offered to tax in the return of income filed for the said assessment year.

During the Assessment Year 2011-12, the Company had, consistent with the aforesaid, recognized MTM gains of Rs.1,706.33 Mn (Rs. 1,534.16 Mn plus Rs.172.17 Mn) as per details attached herewith for your goodself kind perusal as Annexure – 1. These MTM gain were recognized in the books of accounts by the Company as per Accounting Standard – 30 issued by the Institute of Chartered Accountants of India |ICAI]

The company had, consistent with its stand for the Assessment Year 2009-10 & 2010-11, that MTM gains or losses are crystallized gains/ losses taxable as income / deductible as expense, offered the aforesaid gain of Rs. 1,706.33 Mn for taxation in the Assessment Year 201.1-12 (the year under consideration) under the normal provisions and Rs 1,534.16 Mnu/s 115JB of the Income Tax Act, 1961 (‘the Act).

The aforesaid issue is, it is submitted, squarely covered by the decision of Supreme Court in the case of C1T vs. Woodward Governor India (P.) Ltd. 312 1TR 254. The relevant observations of the Court are reproduced hereunder for the sake of ready facility:

“10. There was no dispute that in the previous years, whenever the dollar rate stood reduced, the department had taxed the gains which accrued to the assessee on the basis of accrual and it was only in the year in question when the dollar rate stood increased resulting in a loss, that the department had disallowed the deduction/debit. Thai fact was important. It indicated the double standard adopted by the department.

13. The word “expenditure” is not defined ‘in the 1961 Act. The word “expenditure” is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head “profits and gains of business “. In Sections 30 to 36, the expressions “expenses incurred” as well as “allowances and depreciation” has also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament 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. Under Section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P and L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading Section 37(1) with Section 145.

xxxxx

15. For the reasons given hereinabove, we hold that. In the present case, the “loss” suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under section 37(1) of the 1961 Act.

18. AS-11 deal with giving of accounting treatment for the effects of changes in foreign exchange rates. In case of the revenue items falling under section 37(1), para 9 of AS-11, which deals with recognition of exchange differences, needs to be considered . Under this para, exchange differences arising on Jordan currency transactions have to be recognised as income or as expense in the period of which they arise. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vas monetary items denominated in a foreign currency to be taken into account for givgn accounting treatment on the balance sheet date. Therefore, an enterprise has to report, the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognised in the profit and loss account for the reporting period.” (emphasis supplied)

Kind attention in this regard is further invited to the decision of the Supreme Court in the case of Sutlej Cotton Mills Limited, v. CIT: 116 ITR 1, wherein the apex Court propounded the following test to determine the character of loss/gain arising due to exchange fluctuations:

“The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of 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 keeping in view the nature of contract, can it be said that a liability accrued on 31st March in respect of unmatured forward foreign exchange, contract on account of fluctuation in rote of foreign currency or not. Therefore, it is necessary to first examined the nature of contract entered into by the assessee. Forward Foreign exchange contract means agreement to exchange different currencies at a forward rate. Forward rate is a specified rate for exchange of currency at a specified date. The assessee enters into forward contract with clients to buy or sell foreign exchange at an agreed price at a future date in order to hedge against the possible future financial loss on account of wide, fluctuation in the rate of foreign currency. Thus, firstly, forward foreign exchange contract creates a continuing binding obligation on the date of contract, against the assessee to fulfill the same on the date of maturity and secondly, it is in the nature, of hedging contract because it is a contract entered into against possible financial losses, xxxxxxxx

xxxxxxxx

43.1 We have to bear in mind that the issues relating to accual of income cannot be decided on the same footing and considerations on issues relating to loss/expense is to be decided. In case of loss/expense, it is the concept of reasonable certainty to meet an existing obligation which comes into play which in legal terminology is sold to be ‘crystalisation of liability. When outflow of economic resources in settlement of present obligation can be anticipated with reasonable accuracy then it is to be recognized as crystalised liability. This is in consonance with the principle of prudence as considered by the Hon’ble Supreme Court in the case of Woodward Governor of India Pvt. Ltd. (supra). The revenue’s main contention is that liability can arise only when the contract matures. This pica, in our humble opinion, is completely divorce of the principles of commercial accounting and, therefore, cannot be accepted. Both legal obligation and commercial principles have to be taken into consideration for deciding such issues.

44. Prom the above discussion, it is evident that the anticipated losses on account of nature of expenditure/accrued liability, have to be taken into account while preparing financial statements.

xxxxxxx

58. In view of the above discussion, 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 assessec’s claim is allowable.

viii) in the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit.

59. We, accordingly, hold that where a forward contract is entered into by the assessee lo sell the foreign currency at on agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last dale of the accounting period i.e. before the date of maturity of the forward contract.”

Kind attention is further invited to the recent decision of the Delhi Bench of the Tribunal in the case of Bochtel India P. Ltd. v. Addl. C1T: 146 1TD 733, wherein the Tribunal held as under:

“8. Coming to the corporate additions i.e. disallowance of loss, it clearly emerges from the record that the assessee in respect of foreign exchange realization follows mercantile system of accounting and not cash system of accounting. The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest. The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon’ble Supreme, Court judgment in the case of Woodward Governor India IP,] Ltd, (supra). Our view is farther fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in A.Y. 2008-09. Therefore, the allowability of the loss on actual payment in A. Y. 2009-10 has been made subject to the alienability of the Loss for AY. 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assesses on mercantile system which method is consistently followed by the assesses. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assesses in this year. This ground of the assessee is allowed.” (emphasis supplied)

In a surfeit of Judicial pronouncements, the Tribunals have consistently held that the loss/gain-arising 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 should, therefore, be excluded from the taxable income of the Company.”

However, the Assessing Officer has not accepted the detailed submission of the assessee. The Assessing Officer was of the view that market to market gain during the year was subject to taxation while computing taxable income under normal provisions as well as u/s. 115JB of the act. Against the draft assessment order, the assessee has filed objection before the DRP. The DRP has upheld the action of the Assessing Officer.

12. During the course of appellate proceedings ld. counsel has contended that identical issue has been adjudicated in favour of the assessee by the ITAT Ahmedabad vide ITA No. 781/Ahd/2015 for assessment year 2010-

11. On the other hand, the ld. Departmental Representative is fair enough not to controvert the submission of the ld. counsel that the issue is covered in favour of the assessee by the above cited decision of the ITAT in the case of the assessee itself.

13. Heard both the sides and perused the material on record. Following similar method of accounting of A.Y. 2009-10 and 2010-11 the assessee company during assessment year 2011-12 has recognized the fluctuating gain on account of foreign expenses to the amount of Rs. 1706.33 Mn. under the normal provision and Rs. 1534.16 Mn u/s. 115JB of the Income Tax Act, 1961. The assessee company has claimed the market to market loss in the assessment year 2009-10 and also consistent with its method of accounting offered market to market gains in the assessment year 2010-11 and assessment year 2011-12. The assessee has submitted before the DRP that the market to market losses claimed by the assessee in the earlier years have been disallowed and accordingly market to market gain credited to the P & L A/c would not be taxable as income. However, without giving specific reasoning the ld. DRP has upheld the action of the Assessing Officer.

During the course of appellate proceedings, the ld. counsel has submitted that this issue in the instant appeal was decided in favour of the assessee vide ITA No. 781/Del/2015 for assessment year 2010-11 on 05-09-2019 by ITAT Ahmedabad in the case of the assessee itself. The relevant part of the decision is reproduced as under:-

“96. The issue raised by the assessee in the ground no. 10 and the additional ground is that the Ld.DRP erred in confirming the action of the AO by 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 has suffered to tax in the immediate preceding AY 2009-10.

98.1. At this juncture, we find to refer the relevant finding of the AO as reproduced under: “The assessee pointed out that the AO vide order dated 30/01/2014 for AY 2009-10, did not allow the MTM loss considering the same to be contingent loss, resulting in consequent reduction in carried forward loss to AY 2010-11 by Rs.6094.43 Mn. It was therefore submitted by the assessee that :

“It is respectfully submitted that the Company continues to bonafidely believe that MTM gains/losses on forward contracts represents crystallized 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.”

After verying the submissions of the assessee, it is observed that during the year under consideration, assessee has earned gain on MTM and has requested not to consider the same as taxable and to be excluded from income pending adjudication of appeal filed before ITAT. However, the contentions of the assessee are not acceptable. It is noted that the assessee has not accepted that MTM loss as not deductible being contingent in nature and has filed an appeal before ITAT against the assessment order for the preceding year i.e. AY 2009-10.

Therefore, the matter is not finally concluded and I hold that MTM gain during the year on similar transactions is subject to taxation while computing taxable income under normal provisions as well as under section 115JB. Since in last assessment order entire MTM loss was disallowed, treating the same as contingent liability, carried forward business loss and unabsorbed depreciation was reduced and available b/f loss for set off u/s.72 was restricted during AY 10-11 at Rs.9,20,46,46,935/-.

Base on the above remarks the taxable income of the assessee is computed under the normal provisions as well as for calculating the books profits u.s.155JB for AY 10-11 where by the MTM gain which is taxable during the year as well as the MTM loss of the earlier year is treated as contingent liabilkty.”

99. From the above, we note that the amount written back by the assessee has already suffered the tax in the immediate preceding 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.”

Following the decision of ITAT on the identical issue and facts as supra we hold that the amount written back by the assessee cannot be subject to tax either under normal computation of income tax act or under section 1115JB of the Act in the year under consideration. Therefore, following the decision of the ITAT as supra reversal of amount of Rs. 1706.33 Mn is not taxable under the normal provision and Rs. 1534.16 Mn under section 115JB of the Act as the same was already suffered to tax in the preceding assessment year 2009-10. Therefore, following the decision of the ITAT as supra, this ground of appeal of the assessee is partly allowed.

Ground No. 7 (Disallowance of Rs. 10 lacs being non-compete fees)

13. This ground of appeal of the assessee was not pressed by the ld. counsel similar to assessment year 2009-10 and 2010-11, therefore, this ground of appeal of the assessee is dismissed.

Ground No. 8 (Disallowance on premium paid on FCCB of Rs. 5,945,459,801/-)

14. During the course of assessment, the Assessing Officer noticed that assessee has debited an amount of Rs. 59.4 crores to the profit and loss account on account of premium paid on redemption of FCCB. The

Assessing Officer has asked the assessee why the premium paid on redemption of FCCB should not be disallowed as the same is capital expenditure item. In response, the assessee has explained as under:-

“The assessee company had raised funds amounting to USS 440 million through issuance of Zero Coupon Convertible Bonds (FCCB or Bonds] on 17th March 2006. The terms and conditions of the FCCBs at the time of issue, as detailed in Offering Circular attached as Annexure-2 are as under:

Terms of Issuance, of bonds as per offering Circular

A. 1 .issue of Bonds

      • The issue was of US$ 440 mn in aggregate principal amount of Zero Coupon Convertible Bondson 17l!‘March 2006. These Bonds are constituted by a Trust Deed dated 17rhMareh 2006 made between the assessee company and the Bank of New York [BONY]as trustee for the holders of the Bonds.
      • The assessee company entered into Agency Agreement with BONY whereby it was appointed as “Principle Paying, Conversion and Transfer Agent” and “Registrar” for the issue.
      • The bonds were issued in registered form in denomination of USS 100,000 and integral multiples of US$ 1,000 thereof.

A. 2 Status of Bonds

      • 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:
        • Free distribution, bonus shores, division, consolidation and re-classification of shares;
        • Dividend in shores;
        • Capital Distribution;
        • Issue of rights or warrants for equity related securities to Shareholders
        • Issue of convertible or exchangeable securities other thon to Shareholders or on exercise of warrants;
        • Issue of equity related securities

The term 5.3.19 also referred that the conversion price shall not be reduced below par value of the shores (Rs. 5 at the date of issue of bonds) as a result of any adjustment made unless under applicable law then in effect.

Shares issued on conversion of bonds will be fully paid up and nonassessable and will rankpari-passu with the shares.

Condition 5.6 of the terms of issue also contained provision on conversion of Bonds upon change of control in the assessee company and computation of conversion price accordingly-

The bond holders can seek redemption of the bonds on maturity date i.e. 18th March 2QHunless there are previously redeemed, converted or purchased and cancelled as provided in the Conditions of offering circular. In case of redemption at maturity, a premium was agreed to be paid to the bond holders @ 26.765% of the principal value of US$ 44 mn

The Company had an option, as per Condition 7.2 of the offering circular, to redeem the Bondsin whole and not in part, on or any time after IS”1 March 2009 and on and prior to 6th February 2011, subject to certain conditions, in case of such early redemption, the assessee company was required to pay “Early Redemption Amount” to be computed as Condition 7.7 of the Offering Circular, which provided the computation methodology, as under:

Early Redemption Amount = Previous Redemption Amount x (1 + r/2)d/P; where

Previous Redemption Amount = Early Redemption Amount on the Semi – Annual Date immediately preceding the date fixed for redemption as set out below, per USS 1000.

Semi Annual Date Amount Early Redemption (US$)
17′h September 2006 1,024.00
17th March 2007 1,048.58
17th September 2007 1,073.74
17th March 2008  1,099.51
17th September 2008 1,125.90
17th March 2009  1,152.92
17th September2009  1,180.59
17th March 2010  1,208.93
17th September 2010  1,237,94

r= 4.80 percent

d= number of days from and including the immediately preceding Semi-,Annual Dote to but excluding the date fixed for redemption.) calculated 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 made free from any restrictions or conditions and be made without deduction or withholding in respect of Indian taxation save to the extent required by law. Where so required, the assessee company will gross up the net taxable amount and will be required to account separately to the Indian Tax authorities for any withholding taxes applicable on such amounts. In view of the above, the assessee company has paid withholding tax of Rs.627,691,919 on the redemption premium.

Treatment in books of accounts

In the books of accounts, the company is directly charging the redemption premium on a pra-rata basis to the “Share Premium Account” over the years.

The detail of such premium charged to Share Premium Account in various years is as under:

31stMarch 2006 43.18
31st March 2007 1,022.75
31st March 2008 1,111.63
31st March 2009 1,911.96
31st March 2010 733.43
31st March 2011 1,122.51
Total 5,945.46

3. Treatment in tag computation

The FCCB had been issued by the assessee company in March 2006 for a period of five years and on the date of maturity, i.e. March 2011; the holders of bonds had an option to redeem the FCCBs at a premium of 26.725% above the issue price or to convert the FCCBs into equity shares of the Company.

As per the Paying, Conversion and Transfer Agency Agreement, BONY will act as a Principal Paying and Conversion Agent. In order to provide for the payment of the principal and redemption premium in respect of the bonds as the same shall become due, the company shall unconditionally pay to the Principal Agent. Subsequently, the Principal Agent will pay to the clearing systems for the benefit of bond holders.

On the date of maturity none of bond holders, exercised the option to convert the FCCBs into equity shares and hence the bonds were redeemed by the assessee company at the stated premium. The assesses company has claimed the premium on redemption of FCCB in the year of redemption only and no such claim for any proportionate amount of premium was made in any of the preceding assessment years as (here was uncertainty as to various events viz. (i)

conversion of bonds into shares at time during the conversion period at stated prices (ii) adjustment, to conversion price in case of conversion of bonds into shores as prescribed in Condition 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 debenture is an unsecured corporate obligation while o bond is secured by a Hen or mortgage on corporate property. However, in common parlance, the expression “bond” is often used indiscriminately to cover both bonds and debentures. As a matter of fact, the Companies Act, 1956 in section 2(12) defines debentures to include stack bonds and any security of the company whether or not they constitute charge on the assets of the Company, A bone! is a formal document constituting the acknowledgment of a debt, by an enterprise and normally contains a provision regarding payment of principle and interest. There is clear distinction between bonds and share capital because a bond does not represent ownership of equity capital. Bonds are in essence interest bearing instruments which represents a Joan. Further in the case of RD Goyal vs Reliance Industries Limited, the Supreme Court noted that a debenture is simply an instrument of acknowledgement of debt by a company whereby it undertakes to pay the amount covered by it and till then, it undertakes to pay interest to the debenture holders. The expression “share” has been defined in section 2(46) of the Companies Act, 1956 to mean share in the share capital of a company. On the other hand, debenture is an instrument of debt executed by the Company acknowledging its liability to repay the amount represented therein at a specified rate of interest. Jn other words, a debenture is a certificate of loan or a bond evidencing the fact that the Company is liable to pay an amount specified with interest. Though the amount raised by a Company through debentures becomes a part of its capital structure, it does not becomes part of its share capital.”

Given the above, FCCB issued by the Company are debt instruments issued by the assessees acknowledging its liability to repay the debt amount. These bonds are distinguishable from shares since bonds forms part of the loan and does not represents ownership in share capital. Further, it meets are the characteristics of a debenture as outlined by Rajas than High Court in Shree Rajasthan Syntax (269 ITR 461] and Tribunal in the case of Enjay & Sons vs 1TO [32 TTJ 340 – Hyderabad):

Debenture denotes one of the modes for borrowing money by any company in exercise of its borrowing powers.

      • Debenture is an acknowledgement of its indebtness.
      • Debenture is an 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 moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”

B. Summary

Given the above, the premium paid on redemption of FCCB is interest, eligible for deduction under the Act for the following reasons:

      • The liability to pay premium is contingent upon the right of redemption being exercised by the assessee company. Further, the liability to pay premium is further contingent upon the right of conversion of FCCBs to equity shares not being exercised by the holders of the FCCBs.
      • The holders exercised their right for redemption in year under assessment by choosing not to convert the FCCBs into the equity shores of the assessee company in the year under assessment.
      • The liability to pay premium on redemption crystallized during the year under assessment upon exercise of the right of redemption by the holders of the bond.

The bonds are in the nature of debentures and premium on redemption on redemption is in the nature of interest allowable as deduction under provision of the Act.”

The Assessing Officer has not accepted the reply submitted by the assessee. The Assessing Officer was of the view that the interest on convertible debenture was akin to dividend as the intent for issuance on satisfactory convertible debenture was to always issue equity share which in turn was part of share capital which confers a right either to the whole or part of the any residue of any profit or to the whole or part of any residue of any or remaining for distribution after satisfying the claim of any other organization whose rights to participate therein was limited. Against the draft assessment order, the assessee has filed objection before the DRP. The DRP has sustained the action of the Assessing Officer. Consequently, as per the direction of DRP an addition of Rs. 5,945,459,801/- was made to the total income of the assessee.

15. During the course of appellate proceedings as reported above, the ld. counsel has referred the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd. 372 ITR 605 (SC) and submitted that identical issue on similar facts has been decided by the Hon’ble High Court of Bombay in the case 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 term which is fixed for the Non Convertible Debentures and upon which the debentures are to be redeemed is the flip side of a situation where the assessee issues debentures at a discount. In the case of a discount, the assessee has the benefit of the funds which are realised from the issue of the debentures, over the term of the debentures. In the case of a premium which the assessee pays, the premium paid on the date fixed for redemption is in consideration of the use of the funds by the assessee until such date as the debentures fall due for redemption. The principle which has been laid down by the Supreme Court in Madras Industrial Investment Corpn. Lid. (supra) to hold that the liability equivalent to a discount represents revenue expenditure must, by analogy of reasoning, apply to the Premium which is paid by the assessee at the time of redemption of the debentures. In that view of the matter the qestion which has been framed by the Revenue would have to be answered in the affirmative, in favour of the assessee. The actual premium paid upon the redemption of the debentures would have to be classified as revenue expenditure, in terms of the decision of the Supreme Court in Madras Industrial Investment Corpn. Ltd. (supra)

We have also perused the judicial pronouncement in the case of Taparia Tolls Ltd vs. Joint CIT (2015) 55 taxmann.com 361 (SC) wherein the assessee has paid interest on debenture issued for a period of five year and the Hon’ble Supreme Court held that assessee would be entitled to deduction on entire expenditure in the year in which the amount was actually paid. It is clear from the aforesaid facts and finding that bond holders were having the option of conversion the bond into equity share or seek redemption of the bonds on maturity rate. In the case of the assessee on the maturity of bonds none of the bond holders exercised the option of conversion into equity share, therefore, premium was paid to the bond holder on redemption of the bonds. It is observed that ld. DRP has dismissed the objection filed by the assessee after referring the provision of section 78 of the Companies Act, 1956 which pertained to the application of the premium received on issue of shares. However, the ld DRP has not considered the specific fact in the case of the assessee and the submission of the assessee that its case is pertained to redemption of FCCB or bonds 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. The liability to pay premium is contingent upon the right of redemption being exercised by the assessee company. The liability to pay premium is further contingent upon the right of conversion of FCCB to equity share not being exercised by the holders of the FCCB. Therefore, payment of interest in the form of premium which is incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. Therefore, in the light of the above facts, findings and decisions of Hon’ble Supreme Court and decision of Hon’ble High Court of Bombay, we consider that premium on redemption of debenture is in the nature of interest allowable as deduction under the provision of the act, therefore, this ground of appeal of the assessee is allowed.

Ground No. 9 (Disallowing weighted deduction u/s. 35(2AB) of Rs.  413,47,54,496/ merely on account of failure to produce form 3CL)

16. During the course of assessment, the Assessing Officer noticed that assessee has claimed deduction u/s. 35(2AB) on eligible revenue expenditure @ 100% amounting to Rs. 373,68,70,946/- and on eligible capital expenditure @ 200% on such expense amounting to Rs. 397,883,550/-. In this regard, the Assessing Officer noticed that assessee has not filed form No. 3CL. The Assessing Officer was of the view that according to the provision of rule 6(7A) approval of expenditure incurred on in house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the submission of report in relation to the approval of in house research and development facility in form no. 3CL to the Director General of the Income Tax Act exemption within sixty days of its approval. The Assessing Officer stated that assessee has not filed form 3CL therefore it was not eligible u/s. 35(2AB) of the Act. Consequently, the claim of deduction u/s. 35(2AB) of 413,47,54,496/- was disallowed and added to the total income of the assessee. The assessee has filed objection before the DRP. The DRP has dismissed the objection of the assessee on the ground that it has not filed form no. 3CL for claiming deduction u/s. 35(2AB).

17. During the course of appellate proceedings before us, the ld. counsel submitted that similar issue on identical facts in the case of the assessee itself has been adjudicated in favour of the assessee by ITAT Ahmedabad vide ITA No. 1390/Ahd/2016 dated 22ndDecember, 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 various in house research & development facilities. Ld. PCIT’s case as made out in his above extracted findings is that the assessee has failed to produce Form 3CL with respect to approval of its impugned revenue and capital expenses. His view is that the Assessing Officer ought not to have accepted assessee’s weighted deduction in absence of the above approval Form 3CL.

7. We have given our thoughtful consideration to rival contentions as well as ld. PCIT’s concern expressed in order revising the above regular assessment. We deem its appropriate at this stage to throw some light on the nature and ambit of Form 3CL. The same comes under Rule 6(7A) of the Income Tax Rules, 1962 framed under the provisions of the Act. The above sub rule is relevant for approval of expenditure incurred on in house research & development facility by a company u/s.35(2AB). Sub clause (b) thereof is the specific provision thereto stipulating that the prescribed authority shall submit its report in relation to the approval of in house Research & Development facility in Form No.3CL to the Director General (Income Tax Exemptions) within 60 days of its granting approval. The same is merely in the form of intimation to be sent from prescribed authority’s end to the department. An assessee engaged in such Research & Development activity having already obtained Form 3CM approval of its facility has no role to play in such correspondence. We notice that a co-ordinate bench of this tribunal in ACIT vs. M/s. Torrent Pharmaceuticals ITA No.3569/Ahd/2004 decided on 13.11.2009 holds that the impugned weighted deduction is not to be restricted to the extent of the amount of the necessary expenditure incurred stated in such Form 3CL. We further find that hon’ble jurisdictional high court’s decision in CIT vs. CLARIS LIFESCIENCES Ltd. (2010) 326 ITR 251 (Gujarat) upholds this tribunal’s decision in the very assessee’s case observing that expenses incurred before Form 3CM approval cannot be denied for the purpose of Section 35(2AB) weighted deduction. We follow the very reasoning to opine that facts of the instant case rather go a step further wherein the appellant has only claimed those expenses which relate to the time period as approved in the Form 3CM. We accordingly hold that the assessee is very much entitled for claiming the above capital and revenue expenses incurred on in house research 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 com309 (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 is (2000) 242ITR 659(SC) EIMCO KCP Ltd. vs. CIT wherein ambit of Section 263 jurisdiction in case pendency of appeal preferred before the CIT(A) is discussed. The same is once again not relevant. Third case law is that of Mukul Corporation (supra) once again throwing light on nature and scope of Section 263 jurisdiction. We have no reason to disagree with the same except the fact that the assessee has already made out its case for claiming the impugned weighted deduction. Ld. Departmental Representative then invites our attention to MASTEK case laws involving Section 35 deduction claim vis-à-vis Section 43(4) of the Act defining scientific research which is not germane to the issue involved before us. Ld. Departmental Representative at last cites hon’ble Karnatka high court’s decision in (2015) 60 taxmann.com 309 Tejas Networks Ltd. vs. DCIT involving Section 35 deduction claim in light of Section 43 once again. We have already observed that hon’ble jurisdictional high Court has settled the very proposition in CLARIS case (supra). We therefore find no reason for not following on hon’ble jurisdictional high court’s decision binding upon us. Ld. Departmental Representative then invites our attention of this tribunal’s Hyderabad bench’s decision in Electronics Corporation of India Ltd. not taking into consideration the above hon’ble jurisdictional high court’s decision which is accordingly distinguished. We thus decline Revenue’s arguments.

9. This assessee’s appeal is allowed.”

In the light of the above facts and findings of the ITAT, Ahmedabad in the case of the assessee itself as supra, we direct the Assessing Officer to allow the claim of the assessee after verification of the necessary particulars as directed in the above decision of the ITAT. Therefore, this ground of appeal of the assessee is allowed

Ground No. 10 ( Erred in not adjudicating claim of weighted deduction u/s. 35(2AB) on cost of assets provided to employees working in approved R & D facilities and engaged in execution of R &D activities)

18. During the course of appellate proceedings before us, at the outset,

the ld. counsel has brought to our notice that the identical issue on similar facts has been set aside to the Assessing Officer for fresh adjudication by the ITAT in the case of the assessee itself for assessment year 2010-11 vide ITA No. 781/Del/2015. 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 earlier years same may be allowed. In the result, ground 13 of the appeal is allowed with above direction.”

74.1. The ground raised before us is identical to the issue raised before Delhi ITAT in the case no. 196/Del/2013. Hence taking the same view on such issue, we set aside the order of ld. CIT-A to the AO for fresh adjudication. Hence the ground of appeal of the assessee is allowed for statistical purposes.”

Respectfully considering the decision of ITAT in the case of the assessee as cited above after taking the similar view on such issue, we set aside the issue to the Assessing Officer for adjudicating afresh as per the direction laid by the ITAT in the decision as cited above. Therefore, this ground of appeal is allowed for statistical purposes.

Ground No. 11 (Erred in not adjudicating claim of Rs. 13,25,11,156/-(Rs. 3,24,80,643/ on cost of fixed asset + Rs. 10,00,30,513/- towards investment made by company in overseas subsidiaries expenses) on account of adjustment of hedging charges)

19. During the course of appellate proceedings before us, at the outset, the ld. counsel has brought to our notice that identical issue on same facts have been adjudicated in the case of the assessee for assessment year 2009- 10 by the ITAT vide ITA No. 1782/Del/2014 and for assessment year 2010- 11 vide ITA No. 781/Del/2015. With the assistance of ld. representatives, we have gone through the aforesaid decision of the Co-ordinate Bench of the ITAT in the case of the assessee itself and noticed that similar issue on identical facts has been set aside to the Assessing Officer for fresh adjudication. In this regard, the relevant part of the decision of ITAT Ahmedabad for assessment year 2009-10 vide 1781/Del/2015 is reproduced as under:-

“79. This issue raised before us by the assessee has already been adjudicated by the Delhi ITAT in its case vide case no 196/Del/2013 by observing as under.

“We have carefully considered the rival contentions and we set aside this ground of appeal to the file of AO to verify the amount of expenditure incurred by the assessee on account of fluctuation of foreign exchange; and if they are on capital account related to acquisition of asset then to grant depreciation thereon in accordance with the provisions of law. In case if this expenditure is found to be of revenue, nature then allows the same u/s 37(1) of the Act. In the result ground No.15 of the appeal is allowed.”

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 passed by the Assessing Officer on 5th May, 2016 as per page no. 203 to 205 of the paper book, therefore, he is not pressing this ground of appeal. Since the assessee has not pressed this ground of appeal, therefore, the same stands dismissed for the reason cited above.

Ground No. 13 (Not allowing credit of TDS to the extent of Rs. 15654/-)

21. Heard both the sides on this issue. We direct the Assessing Officer to allow the credits subject to verification. Therefore, this ground of appeal is allowed for statistical purposes.

Ground No. 14 (Charging of interest u/s. 234B & 234C of the Act)

22. This ground of appeal pertaining to the charging of interest u/s. 234B and 234C of the Act. This ground of appeal of the assessee stands dismissed as charging of interest u/s. 234B and 234C is mandatory as per provision of the law.

Ground No. 15 (Not granting deduction u/s. 80G of the Act of Rs. 6 lacs)

23. Heard both sides on this issue and we restore this issue to the file of the Assessing Officer for deciding after verification of the relevant material, therefore, this ground of appeal is allowed for statistical purposes.

Additional ground of appeal (The Assessing Officer gross erred in not allowing deduction for the cess paid by the assessee without appreciating that (i) the said cess is revenue expenditure (ii) the said cess is not rate or tax debarred by seciton40(a)(ia) of the act.)

24. The assessee has filed additional ground of appeal on the issue that it has incurred expenses for education cess and secondary and higher education cess. The assessee has further submitted that the cess word was present in section 10(4) of the income Tax Act, 1922 and the same was omitted from provisions of section 40(a)(ia)(ii) of the act. In this regard, the assessee has also referred CBDT circular no. 91/58/61-ITJ (19) dated 18thMay, 1967 stating that the effect of the omission of the word contains from section 40(a)(ia) of the is that only taxes paid are to be disallowed and not cess. The assessee has also placed reliance on the decision of Hon’ble Rajasthan High Court in the case of Chambal Fertilizers Chemical Ltd. vs. DCIT (D.B. I.T. Appeal 52/2018 dated 31st July, 2018) and also on the latest decision of Hon’ble Bombay High Court in the case of Sesa Goa Ltd. vs. DCIT (2020) 117 com 96.

25. Heard both the sides on this issue. The similar 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 the assessee. The ld. Departmental Representative is fair enough not to controvert this undisputed fact.

27. Heard both the sides and perused the material on record. The ld. counsel has brought to our notice that identical issue on similar fact has been adjudicated in favour of the assessee by the ITAT in the case of the assessee itself vide 1781/Del/2014. The relevant part of decision of decision is reproduced as under:-

“45. We have heard the rival contention and perused the materials available on records. At the outset, we find that in the identical facts & circumstances in the own case of the assessee, the ITAT in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 taxmann.com 322, held as under:

“55. We have carefully considered the rival contentions. The ld. AO has imputed the addition u/s 115JB of the Act as disallowance computed u/s 14A, read with Rule 8D of the Income Tax Rule, 1962. As we have already deleted the disallowance as per ground No.10 of the appeal wherein we have held that the amount of disallowance cannot be worked out by ld. AO without recording satisfaction on examination of books about the correctness of disallowance made by the assessee which in this case has been made by assessee of Rs.3311708/-.We have also held that disallowance cannot exceed the amount of exempt income. Hence, now no disallowance survives u/s 14A of the act so far as normal computation of total income of the appellant. The AO has added to the book profit amount of expense disallowed u/s.14A applying rule 8D of the Income tax act. As per our considered view, no addition u/s.115JB is warranted for amount of disallowance u/s.14A of the IT Act. Our view is supported by following decisions :—

(i) Cadila Healthcare Ltd. v. Addl. CIT[2012] 21 com 483/67 SOT 110 (URO)(Ahd. – Trib.);

(ii) Reliance Industrial Infrastructure Ltd. [IT Appeal Nos. 69 & 70 (Mum) of 2009, dated 5-4-2013];

(iii) EssarTeleholdings Ltd. [IT Appeal No. 3850 (Mum.) of 2010, dated 29-7-2011];

(iv) J. K. Paper Ltd. [IT Appeal Nos. 979 (Ahd.) of 2006 & 4027 & 4080 (Ahd.) of 2008];

(v) National Commodity Derivatives Exchange Ltd. [IT Appeal No. 2923 (Mum) of 2010, dated 26-8-2011]; and

(vi) Quippo Telecom Infrastructure Ltd. [IT Appeal No. 4931 (De1hi) of 2010, dated 18-22011].

Respectfully following the propositions laid down in the previously mentioned decisions, we direct the Ld. AO to exclude the amount of addition of Rs.7,66,40,105/- made u/s.14A, while computing the book profit u/s.115JB.In view of this we allow ground no.11 of the appeal.”

46. In view of the identical issue raised before us in the ground of appeal no. 9 which is already considered by the ITAT Delhi, we are taking the same view and delete the addition made by the AO. Hence the ground of appeal of the assessee is allowed.”

Respectfully following the decision of Co-ordinate Bench as cited above and also considering the decision of ITAT Special Bench Delhi in the case of the Vinit Investment 165 ITD 27 (Del-SB) wherein it is held that disallowance made u/s. 14A is not to be added for computing the income u/s. 115JB of the Act, this ground of appeal of the revenue stands dismissed.

28. In the result, appeal filed by assessee is partly allowed for statistical purposes and appeal filed by revenue is dismissed.

Order pronounced in the open court on 08-04-2021.

Download Judgment/Order

Author Bio

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

June 2021
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
282930