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2016 (1) TMI 752 - AT - Income TaxDisallowance as excess deduction claimed u/s 35(2AB) - Held that - The brief facts are that deduction u/s 35(2AB) was claimed by the assessee in respect of research and development expenses incurred at New Mangalore and KRS Gardens research centre. Application was made with DSIR dated 28.03.2001. The recognition of the research unit was granted by the DSIR vide its letter dated 03.07.2002 for New Mangalore unit and letter dated 04.12.2002 for KRS Gardens research unit. In view of these facts, it clearly emerges out that assessee had made the applications well in time. Thereafter, granting of approval by the competent authority was not in the control of the assessee. In our considered view, under these circumstances, the approval would relate back to the date of the application. Similar view has been taken by Hon'ble Madras High Court in the case of CIT vs. Wheels India Ltd. (2010 (11) TMI 42 - Madras High Court). Thus, keeping in view the clear position of law and the facts of this case, stand of the Revenue on this issue is rejected. The other issue raised by the AO in disallowing the deduction was that no agreement has been entered as contemplated by section 35(2AB). In this regard also we have noted that the assessee has made requisite compliance as has been required by the prescribed competent authority and compliance of all the procedural requirements has been examined by the competent authority while granting approval. In our considered view, we should look substantive compliance of the provisions. Documentation in any particular format and its approval in a particular manner is not object of this action. - Decided in favour of assessee Disallowance of interest expenditure u/s 14A - Held that - It is noted from the perusal of the schedule that there is no fresh investment towards investment of domestic companies. Only one entry is appearing in the name of addition of shares of BDH Industries Ltd.. It has been brought to our notice that during the year, the assessee has acquired shares of this company at book value on account of amalgamation of Bombay Drugs Pharma Ltd. into itself. It is further brought to our notice that no cash outflow was required for acquiring these shares. Thus, in fact no amount has been invested for making any fresh investment during the year. Thus, the facts remain identical to the assessment year 2001-02, and therefore, the benefit of decision taken by the Tribunal in aforesaid year shall also be available in the impugned year. Therefore we allow Ground of assessee's appeal, deleting the disallowance made by the AO in toto. - Decided in favour of assessee Disallowance relating to payments made beyond the grace period for Provident Fund and ESI u/s 36(1)(va) read with section 2(24)(x) - Held that - The undisputed facts are that the entire payment has been made before the due date of filing the return. Similar issue came before the Tribunal in assessee's own case for A.Y. 2001-02, wherein Hon'ble Tribunal has allowed relief to the assessee relying upon the judgment of in the case of Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT and Vinay Cement Ltd. 2007 (3) TMI 346 - Supreme Court of India - Decided in favour of assessee Computation of deduction u/s 80IB - CIT(A) in directing the AO to reduce 30% of the export profits of unit eligible for deduction u/s 80IB before claiming amount of deduction u/s 80HHC - Held that - This issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. v. DCIT Anr.(2011 (1) TMI 787 - BOMBAY HIGH COURT ) in which it has been held that restriction u/s 80-IA(9) is not applicable at the stage of computing deduction u/s 80HHC but only at the stage of allowing deduction u/s 80HHC.- Decided in favour of assessee Deduction of indirect costs by 10% of export incentives for the purpose of computing profits from trading exports u/s 80HHC rejected - Held that - This ground is also covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case of Hero Exports v. CIT 2007 (11) TMI 13 - Supreme Court of India . In this case it has been held that the principle of attribution is applicable to cases falling u/s 80HHC(3)(b) and therefore, part of indirect cost has to be apportioned to expenses incurred for earning export incentives. 10% of total income has been held as fair estimate in this case. - Decided in favour of assessee Foreign Exchange Fluctuation Gain - treated as income from other sources by CIT(A) as against the assessee's claim as business income - Held that - We have gone through orders of the lower authorities and showing and find that a sum of ₹ 2,17,810/- marked as foreign exchange fluctuation has been put under the head miscellaneous income. Thus in all fairness, we send this issue back to the file of Ld. CIT(A) to re-adjudicate the same after giving adequate opportunity hearing to the assessee.- Decided in favour of assessee for statistical purposes. Scrap sales - treated as part of total turnover for the purpose of claiming deduction u/s 80HHC - Held that - Hon'ble Supreme Court has decided this issue in favour of the assessee in CIT vs. Punjab Stainless Steel Industries (2014 (5) TMI 238 - SUPREME COURT) wherein it has been clearly held that sale proceeds generated from sale of scrap would not be included in total turnover. Thus, respectfully following the judgment of Hon'ble Supreme Court, we direct the AO to exclude the amount of sale proceeds of scrap sales, from amount of total turnover for the purpose of computing deduction u/s 80HHC. - Decided in favour of assessee Interest allowable u/s 57 - Held that - Assessee would be satisfied if claim is allowed u/s 57(iii). We find force in the alternative submissions of the Ld. Counsel. Ld. CIT(A) has rightly allowed the claim u/s 57 of the Act, therefore, we uphold the order of Ld. CIT(A) on this ground - Decided in favour of assessee Netting off of interest receipts against interest payment and apply the explanation (baa) of section 80HHC only in respect of net amount of interest confirmed Exclusion of Excise Duty from the total turnover for the purpose computation of deduction u/s 80HHC - Held that - This issue has also been settled by the Hon'ble Supreme Court in the case of CIT v. Laxmi Machine Works 2007 (4) TMI 202 - SUPREME Court holding that the excise duty is not includible in the 'total turnover' in the formula contained in section 80HHC.- Decided in favour of assessee Transfer pricing adjustment - price charged by the assessee company to its AE as reasonable and did not require any upward revision as per CIT(A) - Held that - The issues with regard to transfer pricing adjustment have to be resolved following a mechanism and complying with the provisions as contained in chaper X, dealing with the transfer pricing issues as contained in sections 92-92F and connected rules as contained in Rules 10A,10B,10C,10D and 10E of Income Tax Rules 1962. These sections and rules prescribe various methods that may be employed to establish arm's length price, explaining applicability of each method, the documentation required to be maintained and form of the certificate to be issued by auditors in this regard. These regulations provide that any income arising from the international transactions shall be determined having regard to the arm's length price. This issue has now been decided in various courts that where international transactions are involved with AE, then arm's length price has to be determined in line with the aforesaid provisions. It is noted by us that Ld. CIT(A) has decided this issue without taking into account the effect of these provisions. Therefore, in our considered view, this issue needs to be sent back. - Decided in favour of revenue for statistical purposes.
Issues Involved:
1. Disallowance of excess deduction claimed under Section 35(2AB). 2. Disallowance of interest expenditure under Section 14A. 3. Disallowance of payments made beyond the grace period for Provident Fund and ESI under Section 36(1)(va) read with Section 2(24)(x). 4. Reduction of export profits for deduction under Section 80HHC before claiming deduction under Section 80IB. 5. Reduction of indirect costs by 10% of export incentives for computing profits from trading exports under Section 80HHC. 6. Classification of Foreign Exchange Fluctuation Gain as "income from other sources" versus "business income". 7. Inclusion of scrap sales in total turnover for deduction under Section 80HHC. 8. Allowance of interest under Section 57(iii). 9. Netting off of interest receipts against interest payments for deduction under Section 80HHC. 10. Exclusion of excise duty from total turnover for deduction under Section 80HHC. 11. Determination of Arm's Length Price for transfer pricing adjustments. Issue-wise Detailed Analysis: 1. Disallowance of Excess Deduction Claimed Under Section 35(2AB): The assessee challenged the disallowance of Rs. 1,86,63,256/- made by the AO for excess deduction claimed under Section 35(2AB). The AO and CIT(A) denied the deduction because the recognition from DSIR was received after the assessment year, and no agreement as required by Section 35(2AB) was entered. The Tribunal, referencing judgments from various High Courts, concluded that the deduction cannot be denied merely because the approval was granted later. The approval should relate back to the date of application. The Tribunal allowed the deduction, directing the AO to grant the benefit under Section 35(2AB). 2. Disallowance of Interest Expenditure Under Section 14A: The AO disallowed proportionate interest of Rs. 1,46,87,526/- on the grounds that the assessee used borrowed funds for investment in shares. The Tribunal, following its earlier decision for AY 2001-02, noted that no fresh investment was made during the year and that the investments were made from the assessee's own funds. Thus, the disallowance was deleted. 3. Disallowance of Payments Beyond Grace Period for Provident Fund and ESI: The AO disallowed payments made beyond the grace period for Provident Fund and ESI. The Tribunal, referencing its earlier decision and Supreme Court judgments, concluded that if payments are made before the due date of filing the return, no disallowance is warranted. The disallowance was deleted. 4. Reduction of Export Profits for Deduction Under Section 80HHC Before Claiming Deduction Under Section 80IB: The AO reduced 30% of the export profits eligible for deduction under Section 80IB before computing deduction under Section 80HHC. The Tribunal, following the decision of the Bombay High Court in Associated Capsules Pvt. Ltd., held that no part of the profit eligible for deduction under Section 80IB is to be reduced while computing profits eligible for deduction under Section 80HHC. The reduction was disallowed. 5. Reduction of Indirect Costs by 10% of Export Incentives for Computing Profits from Trading Exports Under Section 80HHC: The Tribunal upheld the assessee's claim, referencing the Supreme Court's decision in Hero Exports vs. CIT, which allows the reduction of 10% export incentives from gross indirect costs. The reduction was allowed. 6. Classification of Foreign Exchange Fluctuation Gain: The CIT(A) classified a sum of Rs. 2,17,810/- as "income from other sources" instead of "business income." The Tribunal sent the issue back to the CIT(A) for re-adjudication after giving the assessee an opportunity to present its case. 7. Inclusion of Scrap Sales in Total Turnover for Deduction Under Section 80HHC: The AO included scrap sales in the total turnover. The Tribunal, referencing the Supreme Court's decision in CIT vs. Punjab Stainless Steel Industries, held that scrap sales should not be included in total turnover for computing deduction under Section 80HHC. The inclusion was disallowed. 8. Allowance of Interest Under Section 57(iii): The AO disallowed interest on borrowed funds used for investment in subsidiary companies. The CIT(A) allowed the deduction under Section 57(iii) for interest on funds used for investments in shares of foreign companies. The Tribunal upheld this decision. 9. Netting Off of Interest Receipts Against Interest Payments for Deduction Under Section 80HHC: The AO considered gross interest receipts for computing deduction under Section 80HHC. The Tribunal, following its earlier decision and the Supreme Court's ruling in Associated Capsules Pvt. Ltd., allowed the netting off of interest receipts against interest payments. 10. Exclusion of Excise Duty from Total Turnover for Deduction Under Section 80HHC: The AO included excise duty in total turnover. The Tribunal, referencing the Supreme Court's decision in CIT vs. Laxmi Machine Works, held that excise duty should be excluded from total turnover for computing deduction under Section 80HHC. The inclusion was disallowed. 11. Determination of Arm's Length Price for Transfer Pricing Adjustments: The AO made an upward adjustment for sales to the AE, comparing it with sales to an unrelated party. The CIT(A) deleted the adjustment without following the transfer pricing provisions. The Tribunal sent the issue back to the TPO for fresh analysis, directing the TPO to consider the assessee's objections and follow the TNMM method. Conclusion: Both appeals were partly allowed, with specific directions given for re-adjudication and compliance with judicial precedents and statutory provisions.
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