CLR Editorial Notes:- Only where there is some inter unit transfer of goods or service between various units of the same assessee, then it has to be ensured that recording of such transfer of goods or services should be at market value of such goods or services on the date of transfer.
———————————————-
2013-ITS-79-ITAT-Cadila Healthcare Ltd. -Vs- Additional Commissioner of Income-tax, Range I, Ahmedabad , On. JANUARY 24, 2013
IN THE ITAT AHMEDABAD BENCH ‘A’
Cadila Healthcare Ltd.
v.
Additional Commissioner of Income-tax, Range – I, Ahmedabad
G.C. GUPTA, VICE-PRESIDENT AND A.K. GARODIA, ACCOUNTANT MEMBER IT APPEAL NO. 2902 (AHD.) OF 2011 [ASSESSMENT YEAR 2007-08]
JANUARY 24, 2013
Mukesh M. Patel for the Appellant. Shelley Jindal and K. Madhusudan for the Respondent.
ORDER
A.K. Garodia, Accountant Member – This is assessee’s appeal directed against the assessment order passed by the A.O. u/s 143(3) read with Section 144C of the Income tax Act, 1961 dated 24.10.2011 for the assessment year 2007-08 as per the direction of DRP, Ahmedabad dated 27.09.2011.
2. Ground No.1 of the appeal is as under:
“1. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 3,65,18,252/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.
2. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 1,69,53,133/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.”
2.1 It was submitted by the Ld. A.R. that both these issues are covered in favour of the assessee by the Tribunal decision in the assessee’s own case for the assessment year 2006-07 in I.T.A. No. 3140/Ahd/2010 dated 25.05.2012. He drawn our attention to para 3 to 3.12 of the tribunal order which are available on page 6-16 of this tribunal order. Copy of this tribunal order was also submitted.
2.2 Ld. D.R. of the revenue supported the orders of authorities below.
2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal decision cited by the Ld. A.R. We find that in assessment year 2006-07, this issue was raised before the Tribunal as per grounds No.2 & 3 and both these grounds were decided by the Tribunal in favour of the assessee as per para 3.12 of the tribunal order which is reproduced below for the sake of ready reference:
“3.12. We hereby hold that the payments in question are inextricably linked with the working of the assessee’s business. By incurring those expenditure the assessee has not acquired any new right of permanent character. The licenses or the registrations are required to be renewed and therefore part of the day to day running expenditure of the business. [ACIT v. Vodafone Essar Gujarat 38 SOT 51 (Ahd.)]. If an expenditure can give a benefit which is said to be endured for one year or even annually year after year then it is unreasonable to hold that any enduring benefit taken place to the assessee. [Cosmat Max Ltd.29 SOT 6 (Del.)]. An expenditure incurred in the existing line of business in order to run the business smoothly then4hough the business may run smoothly hi future in the years to come but in the absence of creation of “any new asset we hereby held that such an enduring benefit may not tantamount to rendering of capital expenditure. [DCIT v. Core healthcare 308 ITR 263 (Gujarat)]. A very identical case law has also been cited pronounced by the Hon’ble Supreme Court in the case of CIT v. Finley Mills Ltd. 20 ITR 475 and the opinion expressed was that an expenditure incurred in registering for the first time its trademark, then by registration the owner is merely absolved thereafter from obligation to prove his ownership of trademark. As per the Hon’ble Court the expenditure is neither for the creation of an asset nor an advantage for ever. We therefore hold that this precedent has direct application on the present issue, therefore following the same and considering the totality of the factual matrix, we hereby allow the claim. Resultantly, Ground Nos.2 & 3 are allowed.”
2.4 Since no difference in facts could be pointed out by the Ld. D.R. of the revenue, we find no reason to take a different view in this year and hence, this issue is decided in favour of the assessee. Both the grounds No.1 & 2 of the assessee are allowed.
3. Ground No.3 is as under:
“3. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 23,90,72,7887- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trial and Bio-equivalence Study.”
3.1 It was submitted by the Ld. A.R. that this issue is also covered in favour of the assessee by the same Tribunal order in the assessee’s own case for the assessment year 2006-07 and our attention was drawn to para No.4-4.8 of this tribunal order which is available on pages 16-26 of this tribunal order.
3.2 In reply, it was submitted by the Ld. D.R. that the Tribunal order in the case of Concept Pharmaceuticals Ltd. v. ACIT as reported in 43 SOT 423, is against the assessee and in favour of the revenue. He also submitted a copy of this tribunal order which is available on pages 48-54 of the paper book submitted by the Ld. D.R. He also placed reliance on the judgement of Hon’ble Gujarat High Court rendered in the case of CIT v Claris Lifesciences Ltd. as reported in 326 ITR 251 (Guj.). It was submitted by him that since contradictory Tribunal orders are available, either the matter should be decided by following the earlier order which of dated 19.11.2010 or the matter should be referred to the Special Bench.
3.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal decision cited by both the sides. We first discuss the applicability of the tribunal decision cited by the Ld. D.R. In that case also, the issue involved was regarding allowability of weighted deduction u/s 35(2AB) in respect of expenditure incurred by the assessee outside or for trial run which had been got conducted by outside agency. This issue was decided by the Tribunal in that case against the assessee by following the judgement of Hon’ble Gujarat High Court rendered in the case of CIT v. Claris Lifesciences Ltd. (supra). The relevant paras of this tribunal order are para 2.4 to 2.9 and the same are reproduced below:
“2.4 The Learned DR on the other hand strongly supported the orders of authorities below and/argued that only the expenditure incurred on scientific research on in-house R & D ^facility could be allowed and therefore the orders of authorities below should be upheld.
2.5 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of weighted deduction under section 35(2AB) in respect of expenditure incurred on part of the scientific research out-sourced by the assessee. The assessee was engaged in the business of manufacturing and trading of medicines, pharmaceutical formulations, bulk drug etc. It had set up an in-house research and development facility. The expenditure incurred on scientific research on such in-house research and development facility which is approved by the prescribed authority is allowable as deduction at the rate of 150 per cent of expenditure incurred. The assessee had incurred an expenditure of Rs. 14.89 lakhs on clinical trials which had been got conducted from outside agencies as the assessee did not have the facility for the same in the in-house R & D centre. The issue is whether such expenditure which had not been incurred in-house can be eligible for weighted deduction. The argument of the assessee is that clinical trial is an integral part of scientific research in pharmaceutical industry and this position had also been clarified in the Explanation to section 35(2AB). The expenditure should therefore be eligible for weighted deduction. It has also been argued that in case the expenditure is held not allowable the Explanation would lose its relevance.
2.6 We are unable to accept the arguments raised by the Learned AR of the assessee. Under the provisions of section 35(2AB)(1), the expenditure incurred on scientific research on in-house research and development facility is eligible for weighted deduction. It is very clear from the plain reading of the provision that for an expenditure to be eligible for weighted deduction it must be incurred on (i) scientific research and (ii) on in-house research and development facility approved by the prescribed authority. The phraseology used is “on in-house research or development facility” and not “by in-house research and development facility” and therefore only the expenditure incurred on in-house research can be allowed under section 35(2AB) and not any expenditure incurred outside such facility. What the Explanation to section 35(2AB)(1) has clarified is that expenditure incurred on clinical trial in relation to drugs and pharmaceuticals, will be part of the expenditure on scientific research. The Explanation nowhere states that expenditure incurred on clinical trial even outside the in-house research and development facility can be allowed. The Explanation has only clarified the ambiguity whether the clinical trials can be claimed as part of scientific research. Normally, trial is a post research activity which is only for testing of research and one could argue that this is not an integral part of research. However in view of the Explanation, the clinical trial has to be considered as a part of scientific research in relation to drugs and pharmaceuticals. Thus the Explanation has only clarified the position that clinical trial is part of scientific research. But for allowability of weighted deduction under section 35(2AB), the second condition that the expenditure should be incurred ‘on in-house research and development facility’ is also required to be fulfilled. In other words, in case the clinical trial is not done in the in-house facility, the expenditure will not be eligible for deduction as the weighted deduction is only in relation to expenditure on in-house research facility.
2.7 The Learned AR for the assessee has referred to Circular No. 763, dated 18-2-1998 and Circular No. 14, dated 22-11-2002 of the CBDT in support of the argument that expenditure on trial conducted outside the R & D facility can also be allowed. We have carefully perused the said circulars. The CBDT in the para 18.2 of the said Circular No. 763 has only explained the provisions of section 35(2AB) and has clarified that the deduction will be available to companies having in-house research and development facility approved by the prescribed authority. There is nothing in the circular to show that even the expenditure incurred outside the approved research and development facility will be eligible for weighted deduction. Again the para, 32.4 of the Circular No. 14, dated 22-11-2002 of CBDT only states the provisions of law that the Explanation has been inserted which provides that “expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical trials etc. Nowhere it is provided that expenditure incurred on clinical trial outside in-house research and development facility will also be eligible.”
2.8 The Learned AR for the assessee has also placed reliance on the judgment of Hon’ble High Court of Gujarat in case of Claris Lifesciences Lid. (supra). The said case in our view is distinguishable and not applicable to the issue raised in this appeal. In that case, in-house research and development facility had been approved with effect from 27-2-2001. The Assessing Officer in the assessment order held only the expenditure incurred from 27-2-2001 would be eligible for deduction. On appeal the Tribunal held that the intention of the Legislature was clear that entire expenditure incurred on in-house research and development facility if approved has to be allowed. It was accordingly held that once the approval had been granted the assessee will be entitled for deduction in respect of the entire expenditure but not only the expenditure incurred after 27-2-2001. There was no issue before the Tribunal as to whether expenditure incurred outside the approved in-house R & D facility can be allowed. The Learned AR has also placed reliance on the decision of Tribunal in case of Bharat Bio Tech International (P.) Ltd. (supra). In that case expenditure on clinical trials conducted outside the approved authorities had been claimed for weighted deduction. The Tribunal allowed the claim only on the ground of consistency as similar claim in the assessee’s own case in the earlier year had been allowed. There was no decision of the Tribunal on the merit of the case and therefore the said decision cannot be considered as precedent on the issue of allowability of weighted deduction in respect of expenditure incurred outside the approved research and development facility.
2.9 In view of the foregoing decision, we are of the view that the expenditure on clinical trial though the same is an integral part of scientific research will be eligible for weighted deduction under section 35(2AB) only if the expenditure is incurred on an in-house research and development facility. The expenditure incurred on trial conducted outside the in-house R & D facility will not be eligible for weighted deduction under section 35 (2AB). We therefore see no infirmity/in the order of CIT(A) confirming the disallowance and the same is therefore upheld.”
3.4 From the above paras of the tribunal order, we find that in that tribunal order, the contents of explanation to Section 35(2AB) is discussed only with regard to clinical trial run expenditure but the same explanation also covers other expenditure also and hence, we feel that it is necessary to reproduce the full contents of this explanation to Section 35(2AB), which is as under:
“35(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to [two] times of the expenditure so incurred.
Explanation.-For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).”
3.5 From the contents of the explanation as reproduced above, we find that not only the expenditure incurred on clinical drug trial but the expenditure incurred for obtaining approval from any regulatory authority under any Central, State or Provincial Act and also the expenditure incurred for filing an application for a patent under the Patent Act 1970 are stated to be covered within the definition of expenditure on scientific research as per sub-section (1) to Section 35(2AB). Now, the question is as to whether these expenditure such as clinical trial expenditure, expenditure for obtaining approval from any regulatory authority and expenditure for filing application for a patent under the Patent Act 1970 are also required to be incurred in house or whether it is sufficient that these expenses are incurred in relation to the scientific research carried out in house. The tribunal in that case held that clinical drug trial expenditure is to be incurred in-house without examining this aspect for remaining two expenditures & without examining as to whether these three expenses can be incurred in-house or not. When we examine the other expenditure included in the explanation i.e. expenditure for obtaining approval from any regulatory authority and expenditure for an application for a patent under the Patent Act 1970, it is clear that these two expenses cannot be incurred in house and the same expenditure can only be incurred outside the in-house research facility. Now, the question is whether clinical drug trial expenditure is required to be incurred in-house only or the same can be incurred outside also although there is no separate provision to this effect in this Explanation for Clinical Drug trial as compared to remaining two expenses. In this regard, we would like to observe that after some drug is developed in a research and development facility, trial has to take place of such drug. Such trial of drug is first carried out in a laboratory and this trial is generally carried out on some animals and after successful trial of such drug in the laboratory on animals, the stage of clinical drug trial is reached. In order to see as to whether clinical drug trial can be carried out inside an in-house research and development facility, we have to first understand what clinical drug trial is. For this purpose, we have gone through the definition of clinical trial in Wikipedia (the free encyclopedia) and the same is reproduced as under for the sake of ready reference:
“Clinical trials are sets of tests in medical research and drug development that generate safety and efficacy data (or more specifically, information about adverse drug reactions and adverse effects of other treatments) for health interventions (e.g., drugs, diagnostics, devices, therapy protocols). They’re conducted only after satisfactory information has been gathered on the quality of the non clinical safety, and health authority/ethics committee approval is granted in the country where approval of the drug or device is sought.
Depending on the type of product and the stage of its development, investigators initially enroll volunteers and/or patients into small pilot studies, and subsequently conduct larger scale studies in patients that often compare the new product with others already approved for the affliction of interest. As positive safety and efficacy data are gathered, the number of patients is typically increased. Clinical trials can vary in size, and can involve a single research entity in one country or many such entities in multiple countries.
A full series of trials may incur sizable costs, and the burden of paying for all the necessary people and services is usually borne by the sponsor, which may be a governmental organization or a pharmaceutical or biotechnology company. When the diversity of required support roles exceeds the resources of the sponsor, a clinical trial is managed by an outsourced partner, such as a contract research organization or a clinical trials unit in the academic sector.”
3.6 From the above definition of clinical trial, it comes out that for a clinical drug trial, the first stage is to enroll volunteers and/or patient into small pilot studies and subsequently large scale studies are carried out on patients and such clinical drug trial may be in one country or in multiple countries. Carrying out drug trial is essential for approval of the drug in question to be sold in the public and hence, in our considered opinion, clinical drug trial cannot be carried out inside an in-house research facility i.e. usually the laboratory. Hence, in our considered opinion, this explanation to Section 35(2AB)(1) does not require that these expenses which are included in this explanation are essentially to be incurred inside an in-house research facility because in our considered opinion, it is not possible to incur these expenses inside in-house research facility. In the tribunal order cited by the Ld. D.R., we have seen that they have not gone into this aspect as to whether these expenses specified in this explanation to Section 35(2AB)(1) can be incurred inside an in-house research facility or not and without examining this aspect, the tribunal has proceeded to hold that clinical drug trial expenditure has to be incurred within the in-house research and development facility. Since, we find that it is not possible to incur such expenditure on clinical drug trial within the in-house research and development facility and this aspect was not looked into by the Tribunal in that case, we feel that this tribunal order is not a binding precedent because we cannot lay down an impossible condition of incurring the expenditure within the in-house research and development facility, when it is not possible to do so.
3.7 Now, we examine the applicability of the judgement of Hon’ble Gujarat High Court rendered in the case of Claris Life sciences Ltd. (supra) on which reliance has been placed by the Ld. D.R. and support has been taken by the Tribunal also while deciding the issue in the case of Concept Pharmaceuticals Ltd. (supra). In the case of Claris Life sciences Ltd (supra), the question before the Hon’ble Gujarat High Court was this:- “Whether the appellate tribunal is right in law and on facts in deleting the disallowance of claim of deduction made u/s 35AB(2) amounting to Rs. 40,80,942/-?” As per the facts noted by the Hon’ble Gujarat High Court in that case, application was filed by the assessee in that case before the Ministry of Science and technology for approval on 07.08.2000 but the approval was given only on 27.02.2001. It was also mentioned in the approval therein that the approval for the purpose of Section 35AB (2) was from Feb 27, 2001 till March 31, 2003. In the return filed by the assessee for the assessment year 2001-02, the assessee claimed weighted deduction u/s 35AB(2) @ 150% of the expenses incurred on entire expenditure incurred on establishment of research and development facilities. But the A.O. held that as approval u/s 35AB (2) has been granted w.e.f. 27.02.2001, the deduction for expenditure incurred only from this date will be eligible for weighted deduction and accordingly, he disallowed weighted deduction on the expenditure incurred before 27.02.2001. Against this assessment order, the assessee preferred an appeal before the Ld. CIT(A) who upheld the action of the A.O. The assessee then filed appeal before the tribunal and the tribunal held that since the facility is approved, the entire expenditures incurred has to be allowed as provided by Section 35AB(2). Against this Tribunal order, appeal was filed by the revenue before the Hon’ble Gujarat High Court and under these facts, it was held by Hon’ble Gujarat High Court that the assessee is eligible for weighted deduction in respect of the entire expenditure incurred by the assessee u/s 35AB(2) of the Act. Hence, we find that this judgment of Hon’ble Gujarat High Court is in fact in favour of the assessee and not in favour of the revenue. Moreover, the issue involved was different as to whether even if approval is granted by the Ministry of Science & Technology from a particular date, deduction is allowable for the entire expenditure or for only those expenses which are incurred on or after the date of approval. In the present case, the dispute is not such and hence, this judgement of Hon’ble Gujarat High Court is not applicable in the present case. We also find that in that case, the dispute was regarding allowability of deduction u/s 35AB(2) whereas in the present case, the dispute is regarding allowability of deduction as per Explanation to Section 35(2AB) and for this reason also, this judgement of Hon’ble Gujarat High court is not relevant in the present case.
3.8 We find that this issue is squarely covered in favour of the assessee by the Tribunal decision rendered in the assessee’s own case for the assessment year 2006-07 and only this argument was made by the Ld. D.R. that the Tribunal order rendered in the case of Concept Pharmaceuticals Ltd. (supra) and the judgement of Hon’ble Gujarat High Court rendered in the case of Claris Lifesciences Ltd. (supra) should be considered and we have already considered these two judgements cited by the Ld. D.R. and we have found that the judgement of Hon’ble Gujarat High Court is not applicable in the present case whereas in the Tribunal decision rendered in the case of Concept Pharmaceuticals Ltd. (supra), this aspect was not discussed, examined and decided as to whether clinical drug trial expenditure can be incurred inside the in-house research and development facility or not. We have seen that such expenditure on clinical drug trial cannot be incurred inside the in-house research and development facility. We have seen that in the said Tribunal order rendered in the case of Concept Pharmaceuticals Ltd. (supra), the other two expenses included in the relevant explanation to Section 35(2AB)(1) were not examined at all by the Tribunal to find out whether those expenses can be incurred inside the in-house research and development facility or not and hence, this aspect was not discussed and decided specifically as to whether the explanation also requires that the expenditure included in the explanation are also to be incurred inside the in-house research and development facility or not. We have seen that all the three expenses included in the explanation are not capable of being incurred inside the in-house research and development facility and, therefore, in our considered opinion, for all the expenditures included in the explanation including the expenditure on clinical drug trial, it is not required that the same has to be incurred inside the in-house research and development facility and if the same are incurred in relation to drug developed in an in-house research and development facility, the same becomes eligible for deduction u/s 35(2AB)(1). Hence, we are of the considered opinion that the Tribunal order rendered in the case of Concept Pharmaceuticals Ltd. (supra) does not lay down a binding precedent and, therefore, we decide this issue in favour of the assessee by respectfully following the Tribunal decision in assessee’s own case for assessment year 2006-07. This ground is also allowed.
4. Ground No.4 is as under:
“4. That the learned Assessing Officer erred in law and on facts in making a disallowance of Rs. 5,00,37,043/- u/s. 14A.”
4.1 It was submitted by the Ld. A.R. that the tribunal has restored this matter back to the file of the A.O. for a fresh decision in the light of the judgment of Hon’ble Bombay High court rendered in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT as reported in 328 ITR 81. In this regard, he drawn our attention to para 5.5 on page 33 of the Tribunal order in assessee’s own case for assessment year 2006-07 as per which, this issue was restored back by the tribunal to the file of the A.O. for a fresh decision in the light of this judgement of Hon’ble Bombay High Court. He submitted that in the present year also, the matter may be restored back to the file of the A.O. for a fresh decision as was done by the tribunal in assessment year 2006-07 because as per this judgement of Hon’ble Bombay High Court, Rule 8D is applicable from assessment year 2008-09. Ld. D.R. supported the orders of authorities below.
4.2 We have considered the rival submissions and we find that in the preceding year i.e. in assessment year 2006-07, the tribunal in assessee’s own case has restored back this matter to the file of the A.O. for a fresh decision in the light of the judgement of Hon’ble Bombay High court rendered in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) and hence, in the present year also, we restore this matte back to the file of the A.O. for a fresh decision in the light of this judgement of Hon’ble Bombay High court rendered in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). The A.O. should pass necessary order as per law after proving adequate opportunity of being heard to the assessee. Needless to say, if any judgement is available of Hon’ble Gujarat High Court or of Hon’ble Apex Court by that time, the A.O. should follow such judgement in preference to this judgement of Hon’ble Bombay High court. This ground is allowed for statistical purposes.
5. Ground No.5 and 6 are interconnected which are as under:
“5. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 11,63,644/- as alleged unexplained investment u/s. 69 for purchase of Hummer H2 imported motor car.
6. That the learned Assessing Officer erred in law and on facts in disallowing depreciation of Rs. 4,54,6847- on the cost of Hummer H2 imported motor car, alleging that the vehicle was owned by the Director and not by the appellant.”
5.1 As per the discussion in the assessment order and in the order of DRP, we find that the only objection of the revenue is this that since the car was imported in the name of Shri Pankaj Patel, who is de-facto and de-jure owner of the car, the assessee is not eligible for depreciation on this car. In respect of the same car, the A.O. has made addition of Rs. 11,63,644/- as unexplained investment u/s 69 on this basis that the value of the car stands at US$86,831 as against the value declared by the assessee as US$60,955. The difference has been explained being on account of US$20,800 on account of conversion charges of the car from LHD to RHD and US$2200 on account of shipping charges and US$2876 on account of suppression in the price of car for claiming it to be second hand car. In this manner, the A.O. worked out the total unexplained investment at US$25,876 and by adopting a conversion rate of Rs. 44.97 per US$, the A.O. worked out addition at Rs. 11,63,644/-.
5.2 It was submitted by the Ld. A.R. that there is no suppression in the value of the car because the vehicle was sent to Thailand for conversion for which the concerned party’s bill of U$20,800 was not paid till date because the car was having some defects. He further submitted that no evidence could be brought out on record by the Revenue to show that US$20,800 was in fact paid by the assessee. Regarding other two amounts also, it was submitted that these are mere objections without any supporting evidence and hence, no addition on this account is justified. Regarding the payment of custom duty on this car after including cost of conversion etc, it was submitted that irrespective of price paid by the assessee for importing the car or any other item, custom duty has to be paid as per the valuation done by the custom authorities and only because custom duty had been paid on enhanced valuation done by custom department, it cannot be said that extra price was also paid by the assessee.
5.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Regarding the first aspect i.e. ground no.5, we find that the addition of Rs. 11,63,644/- has been made by the A.O. u/s 69 as alleged unexplained investment for the purchase of Hummer H2 imported motor car. As per the provisions of Section 69, addition can be made only if it is found that the assessee has made investments, which are not recorded in the books. Hence, it is essential that first it has to be established that some investments are made by the assessee which have not been recorded in the books of the assessee. Regarding the alleged difference in the price of imported car, it is the explanation of the assessee that whatever had been paid by the assessee is properly accounted for in the books and disclosed. Regarding the cost of US$20,800 in respect of conversion of this car from LHD to RHD, it is the submission of the Ld. A.R. before us and also before the authorities below that this payment is not actually made and is still outstanding. Once this explanation is furnished by the assessee, it was incumbent upon the A.O. to bring evidence on record to establish that payment was in fact made by the company. The A.O. has not done so. It could have been done by obtaining the confirmation from the concerned party as to whether the payment is received by that party or not and if received, in which year. Even this simple exercise was not even attempted to by the A.O. and hence, the addition is not justified in the absence of any evidence regarding actual payment by the assessee on this cost of conversion of the car. Similarly, for the remaining two amounts of US$ 2200 and US$2876, we find that difference of US$2,876 was worked out by the A.O. on the basis of price paid by the assessee of US$60,955 to Pride City General Traders LLC Dubai and bill amount of US$63,831 regarding the price as the same was sold by M/s. Moore Cadulae Hummar to M/s. Auto Value LLC and nothing has been brought out on record to establish that this difference of Rs.2,876 had been paid by the assessee. In the absence of any such evidence, this addition is not justified u/s 69 of the Income tax Act, 1961. The 3rd amount is US$ 2200 on account of shipping charges. Regarding this amount, it is explained that for this payment of shipping charge also, no evidence has been brought on record by the A.O. that this amount was actually paid by the assessee and hence, in our considered opinion, the addition of this amount is also not justified u/s 69 of the Income tax Act, 1961. As per the above discussion, ground No.5 of the assessee’s appeal is allowed.
6. Now, we consider the allowability of depreciation on this Hummar H2 motorcar. First of all, we would like to observe that the revenue is taking a contradictory stand. When the A. O. has alleged extra payment for this very car, he has made addition in the hands of the assessee company for the alleged unaccounted payment/investment but when the question of depreciation is being decided by the A.O., it is held that the assessee company is not eligible for depreciation on this car because Mr. Pankaj Patel is the owner of this car. Secondly, we also find that reliance has been placed by the Ld. A.R. on the judgement of Hon’ble Allahabad high court rendered in the case of CIT Vs Varanasi Auto Sales Pvt. Ltd. as reported in 326 IT 182 where, it was held that even if the trucks are in the name of the Director, depreciation is allowable to the assessee because the trucks were purchased in the name of the Director just for the convenience but the funds have been invested by the assessee company and hiring rent received from such tucks have been credited by the company in their account. In the present case, this is not in dispute that the payment for the car was made from the funds of the assessee company. But this is also to be seen as to whether the car in question was used for the business purpose the assessee. In fact, this is also to be seen as to whether it is possible to use this car for bs9nes purpose of the assessee company. There is no finding o the authorities below on this aspect of the matter and disallowance was made merely on this basis that the car in question is in the name of the Director of the assessee company. In our considered opinion, if the assessee is able to establish that the car in question was used by the assessee company for its business purpose, then the claim of the assessee regarding depreciation on this car cannot be rejected but if the assessee fails on this aspect then obviously, depreciation is not allowable in the present case. Since this aspect was not examined and decided by the authorities below, we feel it proper that this issue should be restored back to the file of the A.O. for a fresh decision. Hence, on this aspect of the matter, we set aside the order of Ld. CIT(A) and restore this matter back to the file of the A.O. for a fresh decision. The burden is on the assessee to establish the business use of this car and, thereafter, the A.O. should pass necessary order as per law in the light of our above discussion after providing reasonable opportunity of being heard to the assessee. Ground No.6 is allowed for statistical purpose.
7. Grounds No.7 & 8 are interconnected which are as under:
“7. That the learned Assessing Officer erred in law and on facts in restricting the deduction u/s. 80IC in respect of Baddi Unit to Rs.14.45 crores as against the appellant’s claim of Rs. 133.45 crores.
8. That the learned Assessing Officer erred in law and on facts in restricting the deduction u/s. 80IB in respect of Goa Unit to Rs.18,40,530/- as against the appellant’s claim of Rs.1,28,03,700/-.”
7.1 It was submitted by the Ld. A.R. that both these grounds are squarely covered in favour of the assessee by the same Tribunal decision in assessee’s own case for the assessment year 2006-07 and he drawn our attention to para 6-10.13 on pages 34-77 of this tribunal order. As against this, it was submitted by the Ld. D.R. that even if the issue was decided by the tribunal in earlier year in favour of the assessee, the Tribunal can take a different view if it is found that some judicial precedence which were not brought to the notice of the Tribunal in such earlier year or provisions of law or correct interpretation of law came to its knowledge subsequently. He submitted that in this view of the matter, the issue in dispute should be decided on merit afresh. In support of this contention, reliance was placed on the judgement of Hon’ble Madras Bench of the Tribunal rendered in the case of Shriram Transport and Finance Co. Ltd. v. ACIT as reported in 70 ITD 406. Reliance was also placed on one more decision of the tribunal rendered by Special bench of the Tribunal in the case of ACIT v. Gold Mine Shares Pvt. Ltd. as reported in 113 ITD 209 (Ahd.) (S.B.). It was submitted that it was held by the Special bench of the Tribunal in that case that when the provisions of statute is not considered, it cannot be said that point is concluded by the Hon’ble Supreme Court decision and the same was no longer res-integra. He also placed reliance on a judgement of Hon’ble Apex Court rendered in the case of Distributors (Baroda) P. Ltd. v. Union of India & Others as reported in 155 ITR 120 in support of this contention that there may be circumstances where public interest demand that the previous decision is reviewed and reconsidered. He submitted that in the present case also, the circumstances demand in public interest that the view taken by the tribunal in earlier year should be reconsidered. It was submitted by him that various factors were incorrectly taken by the Tribunal in the order for the assessment year 2006-07. It is submitted that the tribunal has noted that for Baddi Unit, assessee has maintained separate books of accounts and profit is computed based on these books maintained. He submitted that this is so noted by the tribunal in para 10.3. But actually the assessee company has not maintained separate books for Baddi unit and the company has maintained combined accounts in advanced software for whole of its business.
7.2 The 2nd submission is this that the statute has provided to give benefit only to any business of direct manufacturing activity and those incurring expenditure on research activity is eligible for this prescribed weighted deduction. It was submitted that this observation of the tribunal is in para 10.13 but actually deduction u/s 80IC is not a weighted deduction and 80-IC deduction is not linked to research activities of the assessee company.
7.3 Again he drawn our attention to para 10.3 of the tribunal order where it is observed by the tribunal that where two or more product are produced in a unit, it is not possible to segregate margin in the profit. It was submitted that it is very much possible to segregate margin. Cost accounting is separate subject dealing with this issue.
7.4 Again, he drawn our attention to para 10.3 of the tribunal order where it is observed by the tribunal that the A.O. has not pin pointed any defect in the working of the profit of Baddi unit. He submitted that the A.O. has pointed out that correct profit derived form Baddi Unit need to be worked out taking a fair market value as against final sale price taken by the assessee.
7.5 He again drawn our attention to para 10.4 on page 62 of the tribunal order where it is observed by the tribunal that segregation between 80% and 6% was not on account of any evidence through which it can 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. In this regard, it was submitted by the Ld. A.R. that the A.O. has proved the same and in this regard, our attention was drawn to para 9.7, 9.11 and 9.12-9.23 of the assessment order.
7.6 He has also objected to some of other findings of the tribunal in its order in the earlier year and the first objection is this that it is stated by the tribunal in para 10.3 of the earlier year that A.O. is not empowered to disturb the computation of profit. In this regard, it was submitted by him that he A.O. has to compute profit and gain of eligible unit on reasonable basis as he may deem fit as per proviso to Section 80-IA(8).
7.7 He further submitted that it is observed by the Tribunal in Para 10.8 of the tribunal order that if there is no intercorporate transfer then the A.O. has no right to determine the fair market value of such goods or to compute the arms length price of such goods and for section 80-I A(8) to apply, intercorporate transfer has to be there. In this regard, it was submitted by him that Section 80-IA (8) deals with transfer of goods between different units of the same assessee i.e. intra corporate transfer.
7.8 He again drawn our attention to para 10.8 of the tribunal order on page 66 where it is observed by the Tribunal that Section 80-IA(8) has its own impact but it will apply when whole or eligible business is transferred to any other business. In this regard, it was submitted that Section 80-IA(8) does not deal with transfer of business but it deals with transfer of goods between units of the same assessee.
7.9 He also drawn our attention to para 10.8 of the tribunal order in earlier year where it is observed by the Tribunal that the decision of the A.O. does not have legal sanction in the eyes of law. It was submitted in this regard that proviso to Section 80-IA(8) provides legal sanction to the action of the A.O. He again drew our attention to para10.9 on page 68 of the tribunal order for assessment year 2006-07 where it is observed by the Tribunal that the A.O. has complicated the issue and any diversion from the consistent method followed by the assessee is not workable and the assessee followed simple method i.e. on one side of the P & L account, production cost, overheads were debited and on the other side of the P & L account, sale price was credited to compute the profit. After pointing out these observations, of the tribunal in para10.9, no comments have been given by the Ld. D.R. in his written submissions. He has submitted that these facts and provisions pointed out by him were not fully considered in the tribunal order for assessment year 2006-07 and therefore, the same may be taken on record as argument of the department for deciding the issue in the present year.
7.10 He again drawn our attention to para 10.13 of the tribunal order for the assessment year 2006-07 where it is observed by the Tribunal that the A.O.’s proposition of segmentation of eligible profit of manufacturing unit was not altogether meaningless and this approach of the A.O. cannot be brushed aside on the face of it. But since the statute does not suggest such segmentation and bifurcation then it is not fair to draw a marginal line to compute the assessee’s profit of Baddi unit. It was submitted by him in this regard that the Tribunal has accepted segregation of profit to find out eligible profit for the purpose of deduction allowable u/s 80-IC but for the reasons given in the later part of this para of the tribunal order it did not accept the stand of the A.O. He further submitted that the reasons enumerated by the tribunal in the order for the assessment year 2006-07 are factually incorrect and are also based on incomplete reading of the provisions of the Act. It was his main submissions that the eligible unit in Baddi unit who has transferred certain goods to the company who is a non eligible entity and therefore, the A.O. invoked the provisions of Section 80-IA (8) and proceeded to find the profit of the eligible unit on reasonable basis as per the provisions of Section 80-IA(8). Ld. D.R. has submitted para-wise comments on the findings of the tribunal in its order for A. Y. 2006-07 on the issue of deduction u/s 80-IC. The same are available on pages 8-15 of the written submissions filed by the Ld. D.R. For the sake of ready reference, the same is reproduced below:
“Paragraph wise comments on the findings of the ITAT in the order for AY 2006-07, on the issue of deduction u/s 80IC
Para/page Findings of ITAT Comments on findings of the ITAT
10.2/59 In a case where products ‘A’ and ‘B’ are produced, where in one of the product requires more labour but fetches less price and the other takes less effort but fetches more price, in the processing department it is not possible to segregate the two components to determine the segregated margins. It is always possible to maintain the records at each stage of input and output and determine the margins of each product. Cost accounting deals with such a study and it is possible to find costing of each product and also the margins in each product.
10.3/60 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. The assessee did not maintain separate books under the title ‘Baddi unit’. Company maintained combined accounts in advanced software for the whole business.
10.3/60 In the case of ACIT v. Delhi Press Patra Prakashan 103 TTJ 578 (Delhi), the AO recomputed the profit of the said Unit by applying subsection section 80IA(10) 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.
Differences
(1) In that case the AO applied section 80IA(10), here the section applied by the AO is 80IA(8)
(2) Separate books are not maintained in this case. Unified books are maintained in advanced software in our case.
(3) Disallowance of deduction in our case not made on the ground of excess profits, but because the goods were transferred to non eligible business and the AO applied section 80IA(8) and market value as per Explanation.
(4) Said order of the Delhi bench is not accepted by the department and filed further appeal.
10.3/60 AO has not pinpointed out any defect in the working of the profit of Baddi unit Defect is pointed out: The sale price realized by the company is recorded as sales of Baddi unit, which is incorrect in view of section 80IA(8) and the definition of ‘market value’ given in Explanation there under.
10.3/60 Whether the AO is empowered to disturb the computation of profit is subject matter of controversy.
It is settled position that the AO can disturb the computation of profit while examining the deduction claimed in scrutiny proceedings if the claim is not as per the Act.
The P&L account of Baddi unit was prepared for Income-tax purpose for claiming the deduction, as an attachment to form 10CCB.
The found that there is a defect in total receipts credited to such P&L account. The defect needs to be removed following the provisions of section 80IA(8), the proviso and the Explanation given there under.
10.4/61
The facts of the case of Rolls Royce PLC v. DDIT 19SOT 42 relied by the AO are different.
In that case: there was PE in India, section 9(1) was applied, there was no separate account in India, the word business connection was considered, circular 23 of CBDT was also applied.
Rolls Royce case has been later confirmed by the Delhi High court, 339 ITR 147(Del)
AO relied on the said case to buttress his argument that ‘separation of profits is possible’ under the Act for taxation purposes.
Distinction made in the order is not correct. In Rolls Royce case, business connection, circular 23 and section 9(1) applied, because that case involved non-resident assessee.
10.4/62 In the present case there was no finding that up to 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.
Factually incorrect. The basis on which this percentages were arrived by the AO is mentioned by the ITAT in para 10.4 of the order. When assessee’s own records are evidence, then there is no need of other evidence.
From the records of the assessee, with the help of tables supplied by the company itself, AO came to conclusion the company was earning 80% profits on the same drugs purchased from P2P supplier and sold under its brand name with its marketing network. It was mentioned in no-uncertain words in the assessment order that after the Baddi unit was started for the same drugs, the profit increased to 86%, therefore the incremental profit of 6% was received by the assessee after putting up the manufacturing unit at Baddi.
10.5/63 The difference between the two percentages of profit, i.e. about 28% (G.P. of 86% – N.P. of 58.67%) represented the expenditure which could be said to be in respect of marketing network and brand of the product related expenses. 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. Main contention of the department is not allocation of expenses by the assessee or further allocation of expenses during scrutiny. The entire issue is that the assessee has worked out the profit and gains of the eligible business by crediting the P & L account with ultimate sale price realized by the ‘Company’ for the drugs manufactured by the eligible Baddi unit, instead of market value, those goods will ordinarily fetch in the open market.
10.6/65 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 sub-section, 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. Manufacture and sale of pharmaceuticals as a whole is not the eligible business. In the present case eligible undertaking is Baddi unit and the eligible business is ‘manufacture of pharmaceuticals by Baddi Unit’. In other words, it is the profit derived by ‘Baddi unit from the manufacture of pharmaceuticals’ is only eligible for deduction u/s.80IC.
10.6/65 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. Section 80IA(8) lays down that the profits of eligible unit have to be found out strictly as the word used is “derived from” which has a restricted meaning. Pandian Chemicals 262 ITR 278 (SC) Sterling Foods 237 ITR 579 (SC) Section lays down that the profits of eligible units have to be arrived taking the market value whenever there is transfer of goods or services from eligible business unit to non eligible business. Section has defined the ‘market value’ as prevention against the tax arbitrage.
10.7/65
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 Baddi Unit to the head office marketing unit and that too at arm’s length price.
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.
AO has not suggested, but applied the section 80IA(8) as it requires the AO to do so.
Possible difficulty that may arise in finding the market value is not an issue to be debated as the Act requires the AO to do so under the mandate of section. The fear of possible dispute, controversy is misplaced. When the IT Act wants the AO to do so, the AO is duty bound to implement the provisions, particularly when substantial tax due to exchequer is involved.
Easy availability of sales figures is a not a criteria, which will determine the tax.
Matter of taxability cannot be decided on the basis of entries which the assessee may choose to make in his accounts, but has to be decided in accordance with the provisions of Income tax Act.
CIT v. Mogul Line Ltd 46 ITR 590 (Bom) and
Sutlej Cotton Mills Ltd 116 ITR 1 (SC)
Therefore the finding of the ITAT is against the law laid down by the Supreme Court and needs to be re examined.
10.7/65 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.
In case there is transfer of goods from eligible business unit to the non eligible business (here the company as a whole), Act requires that the same has to be transferred at market value, which in other words a line has to be drawn by passing entries at market value as on that date.
The question raised by the AR is against the provisions of section 80IA(8)
10.8/67 It 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.
Transfer does not always mean by ‘sale’. Transfer can be without sale. When the goods are transferred from one unit of the assessee to another unit, it may be just a branch transfer.
When there is such transfer as mentioned, Act lays down that the market value of such goods has to be taken as on that date.
10.8/67 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.
Section 80IA(8) deals with a situation of transfer from one unit to other unit of the same assessee. It does not talk of inter-corporate transfer.
Therefore there need not be an ‘intercorporate’ transfer to apply 80IA(8).
10.8/66
Though the section 80IA(8) has its own importance, but the area under which this section operates is that where one eligible business is transferred to any other business…
.. 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
There need not be transfer of whole business for application provisions of section 80IA(8). The section lays down that when ‘goods and services (held for the purpose of the eligible business) are transferred’.
Clause 80IA(8) prevents misuse of deduction by shifting profits using pricing methods.
10.8/68 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.
AO has not suggested and there is no need of inter-corporate transfer to apply provisions of section 80IA(8). Proviso placed under section 80IA(8) lays down that the AO shall determine profits and gains of eligible business on reasonable basis, if there is transfer of goods from eligible unit. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however greater the hardship may appear to the judicial mind, to be.
Tarulata Shyam & Ors v. CIT 108 ITR 345(SC) Padmasundara Rao & ors 255 ITR 147 (SC) ACIT v. Veliappa Textiles Ltd 263 ITR 550(SC) Prakashnath Khanna & Anr 266 ITR 1(SC)
10.8/68 Impugned suggestion of the AO does not have legal sanctity in the eyes of law. AO does have legal sanction under 80IA(8). AO is empowered to determine the eligible profit on reasonable basis if the situation warrants as per the provisions.
10.9/68
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.
Accounting method followed by the assessee consistently can be deviated, if it is found to be not as per the tax law. Practice of accounting cannot overrule tax law.
The accounting practice for calculating its profit followed by the assessee and accepted by the revenue for 30 years could not be treated as sanctioned by law and was not acceptable for tbe purpose of computation of taxable income.
B.S.C. (footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 26s).
Matter of taxability cannot be decided on the basis of entries which the assessee may choose to make in his accounts, but has to be decided in accordance with the provisions of Income tax Act.
CIT v. Mogul Line Ltd 46 ITR 590 (Bom) and Sutlej Cotton Mills Ltd 116 ITR 1 (SC)
10.9/68 And why at all this complex working of computation to be adopted by the 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.
Because : (1) The method of accounting followed by the assessee is giving wrong profits of the eligible business. (2) The method of working is against the provisions of section 80IA(8).
Accounting practice cannot override section 56 or any other provision of the Act.
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC)
If the Act requires a method to be adopted for accounting for the purpose of claiming a deduction, the same has to be adopted by the assessee. Assessee cannot follow a wrong method which is against very provisions under which he wanted to claim deduction, to get undue benefit. AO is duty bound to enforce the law to contain the misuse.
10.10/69 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.
To be precise, the AO did not find overall profit and tried to segregate it.
He only applied section 80IA(8) and determined the profits and gains of eligible business (Baddi) because the deduction u/s.80IC is a profit linked incentive. The word used is “derived” in section 80IC which is a narrower connotation. 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 to the exclusion of the others.
10.11 and 10.12
For segmentation of profit reliance was placed by the department on old precedent CIT v Ahmedbhai Umarbhai 18 ITR 472 (SC).
Assessee was manufacturing oil at Raichur (Hyderabad state) and was selling partly at Raichur and partly in Bombay. The question was in respect of the liability under Excess Profit Tax Act (EPT Act) payable in British India. After detailed discussion we conclude that 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.
In that case, assessee 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. The opinion expressed was very specific that a profit can accrue in respect to that part of a business only when apportionment is possible. In that case, the transaction was closed at Bombay, though manufacturing was at Raichur. However it was accepted that the apportionment was possible and it was implied there in EPT.
Here in our case also (1) apportionment is required by the Act under section 80IA(8) and (2) it is possible as the eligible unit has to be deemed as separated unit for the deduction purposes. The conclusion of the ITAT that the assessee has computed the profit of the Baddi Unit on the basis of the well accepted principle of accountancy is not correct under the law laid down by Supreme Court.
Accounting practice cannot override section 56 or any other provision of the Act.
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC)
CIT v. Mogul Line Ltd 46 ITR 590 (Bom) Sutlej Cotton Mills Ltd 116 ITR 1 (SC)
It may be seen from the above that the Hon’ble Tribunal has (1) not considered certain facts of the case, (2) some of the facts were taken wrongly on record for the purpose of the case and (3) Provisions of section 80-IA(8) were not fully applied and (4) Proviso placed under section 80-IA(8) was not at all considered or applied which is vital to the issue. Non consideration of the proviso to section 80-IA(8) resulted in Hon’ble ITAT concluding that there is no provision in the Act which empower the AO to disturb the computation of profit made by the assessee. Hon’ble ITAT has also not considered the Supreme Court laid law and concluded that the entries passed by the assessee have to be taken as final and accepted. Had these vital facts and law been considered, the outcome would have been different. Therefore it is requested that the same may be considered by your honor and decide the appeal pending for the AY 2007-08 in the interest of justice.”
7.11 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and also the tribunal order in assessee’s own case for the assessment year 2006-07. Regarding the arguments of the Ld. D.R., we find that his main argument is this that instead of following the tribunal order in assessee’s own case for the assessment year 2006-07, the issue should be decided in the present year afresh on the basis of factual and legal position. In support of this contention, he has pointed out that some facts and legal position is wrongly considered by the tribunal in its order for the assessment year 2006-07. We do not want to comment on the decision of the tribunal for the assessment year 2006-07 and we do not want to discuss various comments of the Ld. D.R. regarding this tribunal order in assessee’s own case for the assessment year 2006-07. But we feel that there is no harm in examining the issue on independent basis without making reference to the tribunal order in assessment year 2006-07 and if we find that we are coming to the same conclusion then there is no reason to discuss as to whether we should follow the tribunal order or to decide the issue afresh but in case, we come to a different conclusion then we will discuss and decide as to whether we should follow the earlier year order or we should decide independently and contrary to the tribunal order in the earlier year or whether we should refer the matter to the Special bench of the Tribunal. Hence, we first decide the issue in dispute independently as under:
7.12 When we go through the assessment order and the order of DRP, we find that the objection of the A.O. is this that prior to manufacture of the product at the Baddi unit i.e. when product was being manufactured either through P2P supplier or at the formulation unit at Morauya, the assessee was having margin of about 80.12% from all the products taken together which has increased to about 86.32%. He has observed that by setting up the manufacturing unit at Baddi, the assessee earned further profit of 6.2% on overall basis. On this basis, it is held that only additional 6.2% profit had been earned due to this unit at Baddi and therefore, the profit derived form Baddi unit was worked out to 6.2% on total turnover of Baddi unit and in this manner, he has worked out deduction allowable to the assessee u/s 80-IC in respect of Baddi unit at Rs. 14,44,65,492/-.
7.13 Now, we examine the legal provisions in this regard and hence, we reproduce provisions of section 80-IC, which are as under:
“80-IC. (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).
(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 article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning”
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], 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 Sikkim; or
(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 Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, 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 any of the North-Eastern States;
(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning”
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-Eastern States.
(3) The deduction referred to in sub-section (1) shall be”
(i) in the case of any undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub-section (2), one hundred per cent 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 clause (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 cent (or thirty per cent where the assessee is a company) of the profits and gains.
(4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:”
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment., reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.”The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (ii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.
(5) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in section 10A or section 10B, in relation to the profits and gains of the undertaking or enterprise.
(6) Notwithstanding anything contained in this Act, no deduction shall be allowed to any undertaking or enterprise under this section, where the total period of deduction inclusive of the period of deduction under this section, or under the second proviso to sub-section (4) of section 80-IB or under section 10C, as the case may be, exceeds ten assessment years.
(7) The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section.
(8) For the purposes of this section,”
(i) “Industrial Area” means such areas, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(ii) “Industrial Estate” means such estates, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(iii) “Industrial Growth Centre” means such centre, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(iv) “Industrial Park” means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(v) “Initial assessment year” means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion;
(vi) “Integrated Infrastructure Development Centre” means such centre, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(vii) “North-Eastern States” means the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura;
(viii) “Software Technology Park” means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry;
(ix) “Substantial expansion” means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken;
(x) “Theme Park” means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government.]
7.14 As per sub-section (d) of Section 80-IC of the Income tax Act, 1961 as reproduced above, sub-section (5) and sub-sections 7-12 of Section 80-IA are also applicable in the present case. The A.O. has invoked the provisions of sub-section (8) of Section 80-IA of the Income tax Act, 1961 and therefore, we reproduce the provisions of sub-section (8) of Section 80-IA along with its proviso which are as under:
“(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.]
The following Explanation shall be substituted for the existing Explanation to sub-section (8) of section 80-IA by the Finance Act, 2012, w.e.f. 1-4-2013 :”
7.15 As per the provision of sub-section (8) of Section 80-IA, from the eligible business, if the assessee has transferred any goods or services to any of the business carried on by the assessee and vice versa, and if it is found by the A.O. that for such transfer as recoded in the books of the eligible business, the price adopted do not correspond to the market value of such goods or services as on the date of transfer then for the purpose of deduction under this section, the profits and gains of such eligible business should be computed by considering the transfer at the market value of such goods or services as on the date of transfer. As per the provisions of sub-section (8) of Section 80-IA where in the opinion of the A.O., the computation of profits and gains of eligible business in this manner presents exceptional difficulty, the A.O. may compute such profit and gains on such reasonable basis as he may deem fit. Hence, in order to invoke the provisions of this proviso to sub-section (8) of Section 80-IA, it is necessary for the A.O. to establish that some goods or services have been transferred by the eligible unit to some other unit of the assessee or by some other unit of the assessee to the eligible unit and then he has to further establish that for recording such transfer, the value adopted for recoding in the books is not as per market value of such goods or services and then he has to establish that there is exceptional difficulty in computation of profit of eligible unit as provided in sub-section (8) of Section 80-IA and then only he can proceed to compute the profits of eligible unit on a reasonable basis as he may deem fit. Even in such circumstances, the basis adopted by the A.O. should be reasonable basis.
7.16 Hence, first, we examine as to whether the basis adopted by the A.O. is permissible or not. The A.O. has proceeded on this basis that since the assessee company was earning around 80% profit by purchasing the goods and selling them, only the additional profit earned by the assessee after putting the manufacturing at Baddi unit could only be stated to be the profit of Baddi unit which is an eligible unit and for doing this exercise, he has not given a finding that there is exceptional difficulty in computing the profit and gain of Baddi unit in the manner specified in sub-section (8) of Section 80-IA of the Act. Secondly, regarding transfer of goods form eligible unit to a non eligible unit, the A.O. has stated that Baddi unit has transferred the goods to the company who has sold such goods in the market and, therefore, it is a transfer of goods by the eligible unit to a non eligible unit. In our considered opinion, the action of the A.O. is not justified on any aspect. First of all, in the present case, there is no transfer of goods by the Baddi unit to any other unit of the assessee company and hence, the provisions of sub-section (8) of Section 80-IA are not applicable. We hold so because if Baddi unit is manufacturing the goods and it is sold by the company, it cannot be said that the goods were transferred by Baddi unit to some other unit. The assessee as a whole cannot be equated with any other business carried on by the assessee. In our considered opinion, the conditions of sub-section (8) of Section 80-IA will be fulfilled if goods or services are transferred form one unit to other unit of the same assessee e.g. if an assessee is having a flour mill and also a bread manufacturing unit and the flour is transferred from flour mill unit to bread manufacturing unit, it can be said that there is transfer of goods by one unit of the assessee to other unit of the assessee and if one of them is eligible unit and another is non eligible unit then, it has to be seen that price adopted for recording such transfer of goods is market value or not and even then, if the A.O. establishes that there is exceptional difficulty in finding out market value of such goods then only, the A.O. can proceed to compute the profits of the eligible unit on reasonable basis. In the present case, the A.O. has not established that there is any transfer of goods or services by the Baddi unit to any other unit of the assessee company. Secondly, this is not a finding of the A.O. that any transfer entry has been made at Baddi unit at some price and such price adopted by the assessee is not market value of the goods transferred from the Baddi unit. Thirdly, it is not established by the A.O. that even if it amounts to transfer of goods by Baddi unit to some other unit of the assessee company then there is exceptional difficulty in computing the profits as per the provisions of sub-section (8) of Section 80IA by adopting fair market value of the goods so transferred and therefore, the A.O. has to adopt computation of such profit and gains of Baddi unit on reasonable basis. Lastly, the basis adopted by the A.O. has to be reasonable basis and in the facts of the present case, it is not so in our opinion.
7.17 In the absence of any transfer of goods by Baddi unit to any unit of the assessee company, the provisions of section 80-IA(8) are not applicable and there is no occasion for the A.O. to compute the profits of Baddi unit on reasonable basis. Secondly, no price had been adopted by Baddi unit to record for any transfer of goods by it to some other unit of the assessee company and hence, there is no occasion to examine as to whether such price adopted by the Baddi unit is as per the market value of such goods or not. Assuming that that there is transfer of goods by Baddi Unit, the A.O. can find out the market value of goods on the date of transfer and can adopt the same to work out profit of Baddi Unit. The best indicator of market value on date of transfer is actual sale price at which the goods are sold by the assessee company and hence even this exercise will not alter the profit of Baddi unit as declared by the assessee. Even if we assume that there is a case for the A.O. to compute the profits and gains of Baddi unit on a reasonable basis, then also, we find that the basis adopted by the A.O. is not a reasonable basis. The basis adopted by the A.O. is this that since 80% of the profit was earned by purchasing the goods form outside and selling the same, only profit over and above 80% has to be considered as profit of Baddi unit. In our considered opinion, it amounts to say like this that if one unit has been put up by one assessee by using own funds and other similar unit is put up by another assessee by using borrowed funds, then to the extent of interest payment by the 2nd unit, profits of the first unit is not on account of the profits from the eligible unit but is on account of interest savings and hence, not eligible for deduction u/s 80-IC.
7.18 There may be a different instance that suppose one unit is selling the goods directly to consumers as by Bata e.g. and some other unit is selling goods to distributors who in turn sells to the stockiest and who in turn sells it to whole seller and then to retailer and the retailer sells it to consumers, and therefore, even if higher profit is earned by the first assessee who is selling the goods directly to the consumers, the same cannot be attributed to the unit of this assessee who is manufacturing the goods any profit in excess of profit of the second assessee who is selling the goods to distributors because any additional profit earned by the first assessee has to be considered as profit of the distributors, stockiest, whole sellers, retailers etc. whose role had been undertaken by the first assessee which were not undertaken by the second assessee. In our considered opinion, this bifurcation of profit is ridiculous and without any sanctity in the eyes of law.
7.19 The third instance may be that one of the assessee is selling the goods locally and other assessee is exporting the goods and earning higher profit and is an eligible unit but the profit of the eligible unit of this assessee cannot be considered at more than the profit of the first assessee who is selling the goods locally because it can be said that the extra profit is on account of export and not on account of manufacturing activity of the eligible unit.
7.20 The next instance could be that on the date of sale of goods to an outside buyer, the rate of dollar was Rs. 40 per dollar but at the time when the remittance was received in India and converted into rupees, the dollar price rose to Rs. 50/dollar and hence, such additional profit on account of increase in price of dollar is not the profit of eligible unit but this profit is on account of increase in exchange rate and therefore, to this extent, the profit is not eligible for deduction u/s 80-IC or 80-IB.
7.21 There may be numerous other instances where the profit of eligible unit has to be bifurcated if the stand of the A.O. is approved. In our considered opinion, the stand of the A.O. cannot be approved because it is not a reasonable basis for computation of profit of an eligible unit. In our considered opinion, the profit has to be computed on the basis of selling price (-) cost of goods produced along with various overheads and only where there is some inter unit transfer of goods or service between various units of the same assessee, then it has to be ensured that recording of such transfer of goods or services should be at market value of such goods or services on the date of transfer and even if such recording of transfer is not as per market value, the A.O. can bring it to market value and he cannot proceed to estimate the profits and gains on a reasonable basis unless he establishes that there is any exceptional difficulty in adopting the market value and even then, the basis adopted by the A.O. to compute the profits and gains, should be reasonable basis. In the present case, we have seen that neither the pre requirement of sub-section (8) or its proviso to section 80-IA has been fulfilled by the A.O. nor the basis adopted by him is a reasonable basis and, therefore, we do not find any basis to confirm or approve the action of the A.O.
7.22 As per above discussion we have seen that even while examining the issue in dispute independently without considering the tribunal order in assessment year 2006-07 in assessee’s own case, we have reached to the same conclusion and hence, this ground of the assessee deserves to be allowed even without following this Tribunal order in assessee’s own case for the assessment year 2006-07. No argument has been made by the Ld. D.R. as to how the A.O. is fulfilling the pre requirement of sub-section (8) of Section 80-IA except this submission of the Ld. D.R. that goods were transferred form Baddi unit to the company and, therefore, Section 80-IA(8) is applicable. We have already observed hereinabove that the company as a whole cannot be equated with any other business carried out by the assessee and hence, the pre requirement for invoking provision of Section 80-IA(8) are not being fulfilled in the present case and moreover, the basis adopted by the A.O. is also not a reasonable basis. Moreover, there is no other objection of the A.O. about allowability of this deduction or regarding commutation of the amount of this deduction such as non allocation or wrong allocation of expenses to the eligible unit. Hence, these grounds of the assessee are allowed.
8. Regarding grounds No.9 & 10, it was submitted by the Ld. A.R. that the same are not pressed and accordingly, these grounds are rejected as not pressed.
9. Ground No.11 is as under:
“11. That the learned Assessing Officer erred in law and on facts in disallowing the mark to market exchange loss on foreign exchange derivatives of Rs. 28,06,887/-.”
9.1 It was submitted by the Ld. A.R. that this issue is covered in favour of the assessee by the Tribunal decision rendered in the case of DCIT v. Bank of Bahrain & Kuwait as reported in 41 SOT 290 (Mum.). He further submitted a copy of this judgement which is available on page 34-38 of the paper book submitted by the assessee.
9.2 Ld. D.R. supported the order of authorities below but it could not be pointed out as to how, this issue is not covered in favour of the assessee by this decision of Special bench of the Tribunal cited by the Ld. A.R.. Hence, we decide this issue in favour of the assessee by respectfully followings the decision of Special bench of the Tribunal cited by the Ld. A.R. This ground is allowed.
10. Ground No.12 is as under:
“12. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 10,81,1437- as upward adjustment on international transactions under the provisions relating to Transfer Pricing.”
10.1 It was submitted by the Ld. A.R. that in assessment year 2006-07, similar issue was decided by the tribunal and the matter was sent back by the Tribunal to the file of the A.O. to examine correctness of the computation of the assessee so that further relief could be granted to the assessee. He submitted that in the present year also, this issue may be restored back to the file of the A.O. for a fresh decision with similar directions. In this regard he drawn our attention to para 11-11.8 on pages 77-84 of the tribunal order. Ld. D.R. supported the order of the A.O.
10.2 We have considered the rival submissions. Since in the earlier year, similar issue was restored back to the file of the A.O. for a fresh decision, we restore this mater back to the file of the A.O. for a fresh decision for this year also with similar directions. This ground is allowed for statistical purposes.
11. Ground No.13 is as under:
“13. That the learned Assessing Officer erred in law and on facts in making the adjustment on account of ‘Expenses disallowed u/s. 14A’ of Rs. 5,00,37,0437- for purposes of computation of book profit u/s. 115JB.”
11.1 It was submitted by the Ld. A.R. that this issue was decided by the tribunal in favour of the assessee in the case of Goetz (India) Ltd. v. CIT as reported in 32 SOT 101 (Del.). He also submitted that there is no contrary decision on this issue till date. Ld. D.R. supported the order of authorities below and he could not point out any contrary decision or any difference in the facts of the present case as compared to the facts of the case of Goetz (India) Ltd. (supra). We do not find any reason to take a contrary view in the present case and, therefore, respectfully following this Tribunal decision rendered in the case of Goetz (India) Ltd. (supra), we decide this issue in favour of the assessee. This ground of the assessee is allowed.
12. It was further submitted by the Ld. A.R. that ground No. 14 is not pressed and accordingly rejected as not pressed.
13. Regarding grounds No.15 & 16, it was submitted that these are consequential in nature and held accordingly.
14. In the result, appeal of the assessee stands partly allowed.
