2017 (1) TMI 1109 - AT - Income Tax

Disallowance of overriding commission paid to Associated Enterprise pursuant to the order of the Transfer Pricing Officer - Held that - As decided n assessee s own case for assessment years 2002-03, 2003-04 & 2004-05 as held that none of the revenue authorities below have brought any comparable case on record to show that the payment of commission by the assessee is not at arm s length. On the contrary, we find that the A.O. has disallowed merely because he was of the opinion that no services have been rendered. This finding is beyond the provisions of Chapter 10 of the Act in as much as under chapter 10, the TPO/A.O. has to see whether the international transaction entered by the assessee is at arm s length or not. There are other provisions in the act wherein the A.O. can test the genuineness of the transaction but in any case not under Chapter 10 of the Act. As mentioned elsewhere, no comparable case have been brought on record which could justify that the payment of 3% 1% overriding commission is not at arm s length, we set aside the findings of the ld. CIT(A) and direct the A.O. to delete the entire transfer pricing adjustment made by it. -Ths we direct the A.O to delete the entire Transfer Pricing adjustment made by it - Decided in favour of assessee Disallowance of deduction u/s. 10B of the Act in respect of Ahmednagar Unit - Held that - As during the year under consideration, both the lower authorities have adjudicated the issue; therefore, there is no reason why the matter should be sent back for fresh adjudication. However, we find the LOP has been cancelled vide order dated 25.07.2006 which pertains to F.Y. 2007-08. Therefore, we do not find any reason why the exemption should be denied for the year under consideration. Since in earlier years, the exemption was allowed. Therefore, we direct the A.O to allow the claim of deduction u/s. 10B of the Act for the year under consideration.- Decided in favour of assessee Disallowance of trade mark registration and overseas product registration charges u/s. 35(2AB) - Held that - Tribunal in earlier years while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. 2012 (9) TMI 43 - ITAT MUMBAI allowed the claim of the assessee in respect of expenditure incurred in respect of patent application. Exclusion of interest on loans to employees for deduction u/s. 80IB - Held that - The assessee brought to the notice the decision of the Tribunal given in earlier assessment years and pointed out that the Tribunal has restored this issue to the files of the A.O with a direction to decide the issue afresh in the light of the ratio laid down by the Hon ble Supreme Court in the Liberty India 2009 (8) TMI 63 - SUPREME COURT . Respectfully following the decision of the Tribunal (supra), we direct the A.O accordingly. Ground no. 5 is treated as allowed statistical purpose. Reallocation of R & D expenses @ 12.5% for computing deduction u/s. 80IB - Held that - As decided in assessee s own case in ealier AYs the assessee vehemently submitted that the question related to the raw materials and not to all the items of expenditure and, therefore, the revenue authorities have erred in generalizing the statement of the Senior Vice President. We have given a thoughtful consideration to the findings of the lower authorities. We have also considered the statement of Dr. T. Rajamannar. Undisputedly, the question related to the raw materials and not to all the items of expenditure under this head. In our considered opinion one cannot carry out the allocation on the basis of pick and choose method. We accordingly direct the A.O to restrict the re-allocation only to the raw material, assessee gets partial relief. Non admitting and adjudicating grievance relating to the treatment of foreign exchange fluctuation gain - Held that - We find force in the contention of the ld. counsel unless the issue is decided in earlier years; the same cannot be decided in subsequent years. We, therefore, direct the A.O to decide these issues afresh. After deciding these issues in earlier assessment years and after giving a reasonable opportunity of being heard to the assessee. Addition of sales made to Sun Pharmaceuticals Industries - Held that - Tribunal in earlier assessment years held that we agree with the contention of the ld. counsel that no specific section has been mentioned in the assessment order for making the impugned additions. A perusal of the assessment order show that the additions have been made by treating the transactions u/s. 40A(2) of the Act. In that case, we have to state that provisions of section 40A(2) are applicable only in respect of payments made to related parties mentioned therein. But the transaction before us is of credit in nature i.e. sales so provisions of section 40A(2) are not at all applicable. Disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries - Held that - As per the agreement between the assessee company and the partnership firm, the assessee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee s business or the business of the partnership firm where the assessee is a majority stake holder. Therefore, in our considered opinion, the expenditures incurred by the assessee company deserves to be allowed Inclusion of interest on overdue bills in gross sales while computing deduction u/s. 80IB - Held that - CIT(A) was correctly convinced with the claim in the light of the decision of the Hon ble Jurisdictional High Court in the case of Nirma Industries Ltd. 2006 (2) TMI 92 - GUJARAT High Court and accordingly directed the A.O to include the interest on overdue bills while computing deduction u/s. 80IB. Direction to exclude income of Panoli Unit for calculation of Book Profit - Held that - Since the ld. CIT(A) correctly allowed the claim of deduction in respect of Panoli Unit, therefore, directed the A.O to exclude the income working of the book profit u/s. 115JB of the Act.

Summary

Issues Involved:
1. Disallowance of overriding commission paid to Associated Enterprise.
2. Disallowance of deduction u/s. 10B of the Act in respect of Ahmednagar Unit.
3. Disallowance of trade mark registration and overseas product registration charges u/s. 35(2AB).
4. Exclusion of interest on loans to employees for deduction u/s. 80IB.
5. Reallocation of R & D expenses @ 12.5% for computing deduction u/s. 80IB.
6. Treatment of foreign exchange fluctuation gain.
7. Disallowance of deduction u/s. 10B of Ahmednagar Unit for computing book profit.
8. Addition of sales made to Sun Pharmaceuticals Industries.
9. Disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries.
10. Rework of Arm’s Length Price with regard to commission paid to AE.
11. Grant of exemption u/s. 10B in respect of Panoli Unit.
12. Inclusion of interest on overdue bills in gross sales while computing deduction u/s. 80IB.
13. Reallocation of R & D expenses.
14. Exclusion of income of Panoli Unit for calculation of Book Profit.
15. Recalculation of disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries.

Detailed Analysis:

1. Disallowance of overriding commission paid to Associated Enterprise:
The Tribunal decided in favor of the assessee, directing the A.O to delete the entire transfer pricing adjustment. The Tribunal found that the payment of 3% + 1% overriding commission was at arm's length and there were no comparable cases brought by the revenue to prove otherwise.

2. Disallowance of deduction u/s. 10B of the Act in respect of Ahmednagar Unit:
The Tribunal directed the A.O to allow the claim of deduction u/s. 10B for the Ahmednagar Unit, noting that the LOP cancellation pertained to a later financial year and should not affect the current assessment year.

3. Disallowance of trade mark registration and overseas product registration charges u/s. 35(2AB):
The Tribunal followed its earlier decision favoring the assessee, directing the A.O to delete the disallowance. It was concluded that the expenses incurred were for validation and confirmation of research carried out, not merely for registration.

4. Exclusion of interest on loans to employees for deduction u/s. 80IB:
The Tribunal directed the A.O to decide the issue afresh in light of the Supreme Court's decision in Liberty India, considering the inclusion of income from scrap sale and miscellaneous income.

5. Reallocation of R & D expenses @ 12.5% for computing deduction u/s. 80IB:
The Tribunal upheld the reallocation of R & D expenses only to raw materials, as the revenue authorities had generalized the statement of the Senior Vice President. The A.O was directed to restrict the reallocation accordingly.

6. Treatment of foreign exchange fluctuation gain:
The Tribunal restored the issue to the A.O for fresh adjudication, emphasizing that legal issues can be raised at any stage, and the A.O should decide these issues after considering earlier assessment years.

7. Disallowance of deduction u/s. 10B of Ahmednagar Unit for computing book profit:
As the Tribunal directed the A.O to allow the deduction u/s. 10B for the Ahmednagar Unit, it also directed the A.O to allow the deduction for computing book profit.

8. Addition of sales made to Sun Pharmaceuticals Industries:
The Tribunal directed the A.O to delete the addition, noting that provisions of section 40A(2) were not applicable to the transaction of credit in nature and no specific section was mentioned for the addition.

9. Disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries:
The Tribunal directed the A.O to delete the addition, stating that the expenses were incurred for the purposes of the business and the revenue authorities did not prove otherwise.

10. Rework of Arm’s Length Price with regard to commission paid to AE:
The Tribunal dismissed the revenue's ground, aligning with its decision in favor of the assessee on the same issue in the assessee’s appeal.

11. Grant of exemption u/s. 10B in respect of Panoli Unit:
The Tribunal dismissed the revenue's ground, following its earlier decision confirming the exemption u/s. 10B for the Panoli Unit.

12. Inclusion of interest on overdue bills in gross sales while computing deduction u/s. 80IB:
The Tribunal upheld the First Appellate Authority's decision, which followed the Jurisdictional High Court's ruling in Nirma Industries Ltd., including the interest on overdue bills in the computation.

13. Reallocation of R & D expenses:
The Tribunal confirmed the findings of the First Appellate Authority, dismissing the revenue's ground for reallocation of R & D expenses.

14. Exclusion of income of Panoli Unit for calculation of Book Profit:
The Tribunal upheld the First Appellate Authority's decision to exclude the income of the Panoli Unit for calculating book profit u/s. 115JB, following earlier Tribunal decisions.

15. Recalculation of disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries:
The Tribunal dismissed the revenue's ground, following its earlier decision favoring the assessee on the same issue in the assessee’s appeal.

Conclusion:
The Tribunal's judgment largely favored the assessee, directing the A.O to delete various disallowances and adjustments, and to re-examine certain issues in light of earlier decisions and legal precedents. The revenue's appeal was dismissed on several grounds, affirming the assessee's claims and deductions.