2011 (8) TMI 620 - AT - Income Tax

Deduction u/s 80IB - applicability of Eleventh Schedule - held that - With regard to revenue s claim that assessee is producing articles or things specified in Eleventh Schedule, we hold that units set up in backward states specified in Eighth Schedule will not attract the applicability of Eleventh Schedule. The units have been allowed deduction u/s 80IB in the preceding years. In the result, we allow grounds of appeal related to claim of deduction u/s 80IB of Income-tax Act. - Decided in favor of assessee. Benefit of carry forward of losses of amalgamated company for the period prior to the amalgamation. - held that - provisions of section 72A are applicable when the amalgamating company is engaged in the business and have accumulated loss or unabsorbed depreciation. - Provisions of section 78 and 79 are not applicable to the assessee - Decided in favor of assessee. Arms length adjustment in respect of international transactions - Cost plus method - held that - We agree with the view of the TPO that two clearly comparable segment are available within financial results of the assessee company which is the tested party. Hence a more direct and proximate comparable is available internally. Thus, internal Cost Plus Method used by the TPO taking GP/Direct Cost of production as the PLI is justified. Hence, the assessee s objections are rejected. - Taking all material into consideration and giving due weightage to the relevant factors as stated above including small market and credit risk, we direct to adopt 60% as profit margin mark-up on the direct cost. In view of these, grounds of the assessee are partly allowed.

Issues Involved:
1. Validity of the order passed under section 143(3) read with section 144(C) of the Income-tax Act.
2. Assessment of returned income at Rs. 186,681,654.
3. Confirmation of additions/disallowances by the Dispute Resolution Panel (DRP).
4. Disallowance of deduction under section 80-IB.
5. Disallowance of brought forward losses and unabsorbed depreciation.
6. Adjustment of arm's length price for international transactions.
7. Levy of interest under sections 234A, 234B, and 234C.
8. Initiation of penalty proceedings under section 271(1)(c).
9. Initiation of prosecution proceedings under sections 276C, 277A, and 278B.

Detailed Analysis:

1. Validity of the Order:
The appellant challenged the validity of the order passed under section 143(3) read with section 144(C) of the Income-tax Act, but these grounds were dismissed as they were general in nature and did not require adjudication.

2. Assessment of Returned Income:
The appellant contested the assessment of returned income at Rs. 186,681,654, but this issue was not separately adjudicated as it was intertwined with other specific grounds.

3. Confirmation by DRP:
The appellant argued that the DRP erred in confirming the additions/disallowances made by the Assessing Officer (AO). This issue was addressed in the context of specific grounds related to section 80-IB and transfer pricing adjustments.

4. Disallowance of Deduction under Section 80-IB:
- The AO disallowed the deduction under section 80-IB amounting to Rs. 5,75,01,364 on the grounds that the certificate in Form 10CCB was in the name of Joyco India Private Limited (JIPL), which ceased to exist after the amalgamation with Wrigley India Private Limited.
- The DRP upheld the AO's decision, noting that the deduction was also denied because the company was manufacturing items listed in the Eleventh Schedule and that the amalgamation resulted in the transfer of more than 20% of assets, violating section 80-IB(2).
- The appellant argued that the amalgamation was effective from 13.10.2006 and that the deduction should be allowed based on the revised Form 10CCB submitted in the name of Wrigley India Private Limited.
- The Tribunal held that the amalgamation was effective from 1.4.2005 as per the appointed date in the High Court order and that the business carried on by JIPL during the intervening period was deemed to be on behalf of Wrigley India Private Limited.
- The Tribunal concluded that the revised Form 10CCB should be considered and allowed the deduction under section 80-IB, noting that the deduction is undertaking specific and should be allowed to the amalgamated company as per section 80-IB(12).

5. Disallowance of Brought Forward Losses and Unabsorbed Depreciation:
- The AO denied the benefit of brought forward losses and unabsorbed depreciation, citing sections 72A, 78, and 79.
- The DRP agreed with the AO, stating that the amalgamation was a colorable device to evade taxes and that the scheme was approved for the purpose of the Companies Act, not the Income-tax Act.
- The appellant argued that section 72A applies only when the amalgamating company has losses, which was not the case here, and that more than 51% of the shareholding remained the same, fulfilling section 79.
- The Tribunal held that section 72A was not applicable as the amalgamating company was profit-making, and section 79 was not triggered as more than 51% shareholding remained unchanged. Section 78 was also not applicable as it pertains to firms and succession, not companies.
- The Tribunal set aside the orders of the authorities below and allowed the benefit of brought forward losses and unabsorbed depreciation.

6. Adjustment of Arm's Length Price:
- The Transfer Pricing Officer (TPO) adjusted the international transactions to bring them to arm's length price, resulting in an addition of Rs. 2,70,35,000.
- The appellant argued that the TPO erred in selecting the Cost Plus Method (CPM) and that the transactions were not comparable due to differences in domestic and export segments.
- The DRP upheld the TPO's decision, stating that the internal CPM was justified as the products were manufactured in the same factory with the same raw materials.
- The Tribunal upheld the method adopted by the TPO, noting that the internal CPM was appropriate given the circumstances. However, it directed a slight adjustment to the profit margin mark-up to 60% to account for market and credit risks.
- The Tribunal also dismissed the appellant's plea for the benefit of +/- 5% under the proviso to section 92C(2), stating that this benefit is only available if the value of the international transaction is within +/- 5% of the arithmetical mean.

7. Levy of Interest:
The Tribunal dismissed the ground challenging the levy of interest under sections 234A, 234B, and 234C, citing that the levy is mandatory and consequential to the assessment.

8. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground challenging the initiation of penalty proceedings under section 271(1)(c) as premature.

9. Initiation of Prosecution Proceedings:
The Tribunal dismissed the ground challenging the initiation of prosecution proceedings under sections 276C, 277A, and 278B as premature.

Conclusion:
The appeal was partly allowed, with the Tribunal granting relief on the issues related to the deduction under section 80-IB and brought forward losses and unabsorbed depreciation, while upholding the adjustments made by the TPO and dismissing the grounds related to the levy of interest and initiation of penalty and prosecution proceedings.

← Previous Next →