2016 (4) TMI 1316 - AT - Income Tax

Deduction u/s 35(2AB) denied - claim @ 150% of the expenditure incurred - assessee has failed to furnish copy of agreement with the prescribed authority - Held that - As decided in own case in assessment year 2002 03assessee 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 on the ground of advance made to Indian subsidiary - two of the companies to whom advances were made by the assessee are 100% subsidiary of the assessee - Held that - Following decision of CIT v/s S.A. Builders, 2006 (12) TMI 82 - SUPREME COURT as the advance made to the subsidiary are on account of commercial business / business expediency, proportionate disallowance out of interest expenditure cannot be made. Ground no.2, is allowed Disallowance on account of PF and ESIC - paid beyond the prescribed date under the relevant statute but before the due date of filing of return of income under the Income Tax Act - Held that - As decided in assessee s own case for the assessment year 2002 03 2016 (1) TMI 752 - ITAT MUMBAI as held the amount of employees contribution etc. deposited before the filing of return, cannot be disallowed u/s 43B - we allow assessee s claim of deduction in respect of payment made towards PF contribution and ESIC. Decided in favour of assessee Deduction in respect of DEPB credit un/s 80HHC - Held that - There is no income to the assessee in terms of section 28(iiid) having considered the submissions of the assessee in the light of the relevant statutory provisions and the decision of the Hon ble Supreme Court in Topman Exports 2012 (2) TMI 100 - SUPREME COURT OF INDIA , we find force in the submissions of the assessee. Moreover, it is seen, similar issue arose in assessee s own case for assessment year 2001 02 restore the matter back to the file of the Assessing Officer to allow assessee s claim in terms of principle laid down by the Hon ble Supreme Court. Addition on account of transfer pricing adjustment - disallowance of interest on the advances made to overseas subsidiaries - interest free advances to the overseas subsidiary on account of reimbursement of expenditure - Held that - Such type of international transaction, domestic PLR rate cannot be applied and the rate of interest has to be quantified either with reference to LIBOR or EURIBOR depending upon the country and currency in which the transaction has taken place. Considering the facts of the present case, we are of the considered opinion that LIBOR rate of 1.698% plus 300 basis point would be the appropriate interest rate applicable to the international transactions relating to advancement of interest free loan / extended credit facility to the overseas A.E. Accordingly, we direct the Assessing Officer / Transfer Pricing Officer to compute the interest on the interest free advances paid to the A.E Disallowance of interest expenditure - advances given to overseas subsidiary - Held that - there is a business / trade relationship between the assessee and overseas subsidiary. That being the case, it cannot be said that investments made are not wholly and exclusively for the purpose of business. - commercial expediency has to be seen through the position of a prudent businessman and the Assessing Officer cannot step into the shoes of a businessman to find out the necessity or reasonableness of expenditure incurred - no disallowance out of interest expenditure can be made. As far as the findings of the Commissioner (Appeals) that assessee is eligible for deduction under section 57(iii), only because the assessee accepted the decision of the learned Commissioner (Appeals) in assessment year 2002 03, for whatever may be the reason that will not deprive the assessee from claiming deduction of interest expenditure under section 36(1)(iii). - Decided in favour of assessee Rejection of indirect cost by 10% of the export incentives for computing profits under section - Held that - Tribunal for assessment year 2002 03, in assessee s own case, 2016 (1) TMI 752 - ITAT MUMBAI , it is noticed that while upholding the order of the learned Commissioner (Appeals) in assessee s own case claim of reduction in indirect cost by 10% of the export incentives the Tribunal followed its own order for assessment year 2001 02 in assessee s own case wherein the Tribunal had decided the issue by following the decision of the Hon ble Supreme Court in Hero Export v/s CIT 2007 (11) TMI 13 - SUPREME COURT OF INDIA as held 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 Treatment of foreign exchange fluctuation gain as business income for grant of deduction under section 80HHC - Held that - There is no dispute to the fact that foreign exchange gain was directly as a result of export made by the assessee. As observed from the order of the learned Commissioner (Appeals) similar relief was also granted to the assessee in the preceding assessment year. In view of the above, we do not find any infirmity in the order of the learned Commissioner (Appeals) Netting of interest expenditure against interest income for computation of deduction under section 80HHC - Held that - In assessment year 2002 03, it is noticed that while dealing with identical issue, the Tribunal followed its earlier decision in assessee s own case for assessment year 2001 02, wherein the Tribunal has allowed assessee s claim on the basis of ratio laid down by the Hon ble Supreme Court in ACG Associate Capsules P. Ltd. v/s CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA by holding that netting of interest is permissible. Exclude excise duty and sales tax from the total turnover for computation of deduction under section 80HHC - Held that - As in assessee s own case for the assessment year 2002 03 ollowing the decision of the Hon ble Supreme Court in CIT v/s Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME COURT as held that excise duty should be excluded from the total turnover for the purposes of section 80HHC Transfer pricing adjustment in respect of sale of finished goods - MAM selection - comparability - Held that - Restore the matter back to the file of the Assessing Officer with a direction to make a fresh analysis relating to most appropriate method which could be adopted for bench marking the international transaction and, thereafter, undertake a comparably analysis. Not to reduce the deduction computed under section 80HHC, while computing book profit under section 115JB - MAT - Held that - This issue is directly covered in favour of the assessee by the judgment of the Hon ble Supreme Court in the case of Ajanta Pharma Ltd. v. CIT 2010 (9) TMI 8 - SUPREME COURT in which it has been held that clause (iv) of the Explanation to section 115JB covers full export profits of 100% as ₹eligible profits and the same cannot be reduced to 80% by relying on section 80HHC(1B) Claim of deduction u/s 80HHC in respect of sales effected to SEZ unit Mission Pharma Logistic Pvt. Ltd. - Held that - Conclusion drawn by the Assessing Officer being merely on conjecture and surmises without substantiated by positive evidence cannot be accepted. More so, when he does not dispute the fact that Mission Pharma Logistic Pvt. Ltd. is an SEZ unit. In the aforesaid facts and circumstances, department has failed to establish / demonstrate with cogent material that Mission Pharma Logistic Pvt. Ltd. is not eligible for deduction under section 10A, we are not able to interfere with the findings of the learned Commissioner (Appeals). Accordingly, upholding the order of the learned Commissioner (Appeals) on this issue,

Issues Involved:
1. Disallowance of deduction under section 35(2AB) of the Income Tax Act, 1961.
2. Disallowance of interest on advances to Indian subsidiaries.
3. Disallowance related to PF and ESIC contributions.
4. Deduction under section 80HHC in respect of DEPB credit.
5. Transfer pricing adjustment for interest on advances to overseas subsidiaries.
6. Disallowance of interest expenditure related to investment in overseas subsidiaries.
7. Treatment of foreign exchange fluctuation gain for deduction under section 80HHC.
8. Netting of interest expenditure against interest income for deduction under section 80HHC.
9. Exclusion of excise duty and sales tax from total turnover for deduction under section 80HHC.
10. Transfer pricing adjustment in respect of sale of finished goods.
11. Computation of book profit under section 115JB after reducing deduction under section 80HHC.
12. Deduction under section 80HHC for sales to Mission Pharma Logistic Pvt. Ltd.

Issue-wise Detailed Analysis:
1. Disallowance of Deduction Under Section 35(2AB):
The Tribunal allowed the assessee's claim for deduction under section 35(2AB), stating that the approval from the prescribed authority relates back to the date of application. The Tribunal referenced its decision in the assessee's own case for the assessment year 2002-03 and judgments from higher courts, emphasizing that the delay in approval cannot be attributed to the assessee.

2. Disallowance of Interest on Advances to Indian Subsidiaries:
The Tribunal held that advances to subsidiaries were made on account of commercial expediency and thus, no proportionate disallowance out of interest expenditure can be made. The Tribunal noted that the assessee had sufficient interest-free funds and there was no actual cash outflow for advances to Strides Research and Specialties.

3. Disallowance Related to PF and ESIC Contributions:
The Tribunal allowed the assessee's claim for deduction of PF and ESIC contributions, following its decision in the assessee's own case for the assessment year 2002-03. The Tribunal ruled that contributions paid before the due date of filing the return are allowable.

4. Deduction Under Section 80HHC in Respect of DEPB Credit:
The Tribunal restored the matter to the Assessing Officer to allow the assessee's claim in terms of the decision of the Hon'ble Supreme Court in Topman Exports, which held that only the profit on transfer of DEPB credit is chargeable under section 28(iiid).

5. Transfer Pricing Adjustment for Interest on Advances to Overseas Subsidiaries:
The Tribunal held that interest-free advances to overseas subsidiaries constitute an international transaction. It directed the Assessing Officer to compute the interest on such advances using LIBOR plus 300 basis points, rejecting the application of domestic PLR.

6. Disallowance of Interest Expenditure Related to Investment in Overseas Subsidiaries:
The Tribunal deleted the disallowance of interest expenditure, holding that the investments were made out of interest-free funds available with the assessee and were for commercial expediency. The Tribunal referenced the decision of the Hon'ble Jurisdictional High Court in Reliance Utilities and Power Ltd.

7. Treatment of Foreign Exchange Fluctuation Gain for Deduction Under Section 80HHC:
The Tribunal upheld the decision of the learned Commissioner (Appeals) that foreign exchange fluctuation gain derived from export turnover is eligible for deduction under section 80HHC.

8. Netting of Interest Expenditure Against Interest Income for Deduction Under Section 80HHC:
The Tribunal upheld the decision of the learned Commissioner (Appeals) allowing netting of interest received against interest paid, following the Hon'ble Supreme Court's decision in ACG Associate Capsules P. Ltd.

9. Exclusion of Excise Duty and Sales Tax from Total Turnover for Deduction Under Section 80HHC:
The Tribunal upheld the exclusion of excise duty and sales tax from the total turnover for computing deduction under section 80HHC, following the Hon'ble Supreme Court's decision in CIT v/s Lakshmi Machine Works.

10. Transfer Pricing Adjustment in Respect of Sale of Finished Goods:
The Tribunal restored the issue to the Assessing Officer for fresh analysis and determination of the most appropriate method for benchmarking the international transaction, following its decision for the assessment year 2002-03.

11. Computation of Book Profit Under Section 115JB After Reducing Deduction Under Section 80HHC:
The Tribunal upheld the decision of the learned Commissioner (Appeals) that export profits deductible in calculating book profit should be based on book profits, not the amount allowed under section 80HHC, following the Hon'ble Supreme Court's decision in Ajanta Pharma Ltd.

12. Deduction Under Section 80HHC for Sales to Mission Pharma Logistic Pvt. Ltd.:
The Tribunal upheld the learned Commissioner (Appeals)'s decision allowing the deduction under section 80HHC for sales to Mission Pharma Logistic Pvt. Ltd., as the Department failed to substantiate the claim that the SEZ unit was not eligible under section 10A.

Conclusion:
The Tribunal's detailed analysis and decisions on the various issues involved reflect a thorough examination of the facts, adherence to legal precedents, and a consistent application of the principles of law. The Tribunal allowed several claims of the assessee, restored some issues for fresh consideration, and upheld the decisions of the learned Commissioner (Appeals) in multiple instances, ensuring a fair and just resolution of the disputes.

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