2017 (9) TMI 727 - AT - Income Tax

DEPB income in computing Section 80HHC deduction without taking into account net profit element therein - Held that - As decided in Topman Exports case (2012 (2) TMI 100 - SUPREME COURT OF INDIA) holding the field till date that only the net profit component is to be taken as income. It further emerges that hon ble jurisdictional high court s judgment in Avani Exports vs. CIT (2012 (7) TMI 190 - GUJARAT HIGH COURT) has quashed retrospective operation of the above Section 80HHC amendments (supra) inserting two clauses as unconstitutional. We therefore direct the Assessing Officer to finalize assessee s deduction claim u/s.80HHC afresh thereby computing the same as per law after affording it adequate opportunity of hearing. This first substantive ground is accepted for statistical purposes. Prior period expenditure disallowance - said amount comprises of various heads of advertisement, processing fees, sample fees, membership subscription, maintenance, finished goods purchases, travelling charges, research and other expenses - Held that - Both the lower authorities are fair enough in not disputing assessee s basic plea that it had received the impugned bills only in the relevant previous year. The assessee s case therefore is that all the said expenses have crystallized in the impugned assessment year. AO holds that there is no such evidence of crystallization of the expenses in question. We observe in these peculiar facts that the assessee could not have paid or claimed the impugned bills without receiving the same from its payees. Non receipt of the corresponding earlier assessment years forms a sufficient reason on assessee s part in not raising its claim in earlier years. Both the lower authorities admittedly do not doubt genuineness of the above expenses. There is further no denial of the fact that the assessee has all along been taxed at uniform rate in said earlier as well as in the impugned assessment year. Hon ble jurisdictional high court s decision in PCIT vs. Adani Enterprises 2016 (7) TMI 1250 - GUJARAT HIGH COURT holds that such prior period expenses ought not to be disallowed if an assessee is assessed at the same rate in the two sets of assessment years. We adopt the same analogy herein as well to delete the impugned disallowance. Transfer pricing adjustment - Held that - We adopt the very course of action herein as well to restore the instant issue back to the Assessing Officer for afresh decision as finalized in preceding two assessment years. We are well conscious of the fact that our earlier remand order had restored the impugned ALP issue to the CIT(A). We however feel that the Assessing Officer needs to re-adjudicate the issue instead of the CIT(A) to avoid multiplicity of proceedings before the assessing authority and the CIT(A) since we have already restored first substantive ground hereinabove to former authority only. This substantive ground is therefore taken as accepted for statistical purposes. Disallowing Section 80G deduction claim - Held that - Both the lower proceedings on the ground that assessee did not file the relevant receipts of donations as well as their nexus with its business as stipulated u/s.31of the Act. The very factual position continues herein as well. We therefore reject assessee s instant last substantive ground. TPA - corporate guarantee adjustment - Held that - Case file indicates that a co-ordinate bench in assessee s appeal itself for assessment year 2010-11 has already deleted the said corporate guarantee adjustment after concluding that the same is not an international transaction u/s.92B of the Act. Learned Departmental Representative fails to indicate any distinction on facts or law in the impugned assessment year. We therefore adopt the very reasoning herein as well to delete the impugned corporate guarantee adjustment. Section 36(1)(iii) interest disallowance - Held that - Both the lower authorities have erred in invoking the impugned disallowance of interest in assessee s strategic interest free advances made to its sister concerns. This second substantive ground is accordingly accepted. Section 35(2AB) deduction disallowance deleted as relying on assessee own case for assessment year 2006-07 Amount spent on clinical trial/research & development - Total weighted deduction - Held that - It is evident that the DRP has worked out the impugned disallowance merely because the assessee has mentioned in its reconciliation an amount of ₹ 4,67,54,326/- is to be disallowed as per DSIR s form 3CL. There is therefore no independent adjudication. It emerges that the assessee s endeavor before the DRP was to appraise it about DSIR s form 3CL instead of suo mottu making the impugned disallowance. We notice in this factual backdrop that a co-ordinate bench in assessee s case holding that once an assessing authority accepts revenue expenditure claim regarding an amount spent on clinical trial/research & development, the very sum is eligible for the impugned weighted deduction as well since there is no stipulation incorporated in the Act that the same would be allowable only to the extent of relevant figures stated in Form no. 3CL . This is admittedly not the Revenue s case that the assessee has not incurred the impugned expenditure for the above specified purpose u/s.35(2AB) of the Act. We therefore draw support from the above co-ordinate bench finding in assessee s appeal for assessment year 2007-08 for directing the Assessing Officer to delete the impugned disallowance. Disallowing u/s.14A in relation to exempt income from dividends - Held that - Both the learned representatives inform us very fairly that a coordinate bench in assessment year 2007-08 has already restricted an identical disallowance to the extent of exempt income amount. We therefore follow the very course of action herein as well to restrict the impugned disallowance to ₹ 5,808/- only. The assessee s additional substantive ground as well as main ground pleaded herein partly succeed Section 80IB deduction disallowance - Held that - We treat assessee s above excise refund component to be an income eligible for Section 80IB deduction. Allocation of research and development expenses in proportion to turn over in Jammu unit - house R&D - Held that - The assessee admittedly has three production divisions at Jammu, Ankleshwar and Dholka; respectively. Case records indicate the same to be operating exclusively for formulation (domestic sales), bulk drugs (domestic and export sales) and formulations (domestic and international sales); respectively. The assessee pleaded before the DRP at page 409 that it had not done any research and development for any of the formulation product manufactured in Jammu unit in relevant previous year. The same has neither been specifically rebutted nor accepted in DRP s directions. Nor is there any specific material quoted to disturb assessee s accounts separately maintaining each and every minute detail pertaining to these three units in question. It thus emerges that the authorities below have adopted adhocism in applying the above turnover formula for allocating the impugned expenditure. Hon ble Bombay high court s decision in Zhandu Pharmaceutical Works Ltd. vs. CIT (2012 (9) TMI 620 - BOMBAY HIGH COURT ) deletes similar disallowance in absence of non establishment of any nexus between R&D facilities and other units. We find that the authorities below have nowhere arrived at such a nexus in instant case as well. We therefore delete the impugned allocation by adopting the above discussed reasoning. The assessee succeeds in its substantive ground. Foreign currency loss disallowed - Held that - We find that hon ble jurisdictional high court s decision in Pankaj Oil Mills vs. CIT (1976 (5) TMI 3 - GUJARAT High Court) holds inter alia that hedging contracts; in order to be out of speculative transactions, must be in respect of raw materials only in manufacturers cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis- -vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance. Disallowing sales promotion expenditure u/s. 37(1) deleted. Business promotion expenses are allowable as business expenditure not hit u/s. 37(1) explanation.

Summary

Issues Involved:
1. Disallowance of Section 80HHC deduction claim.
2. Disallowance of prior period expenditure.
3. Transfer pricing adjustment addition.
4. Disallowance of depreciation related to foreign exchange loss.
5. Disallowance of Section 35(2AB) deduction claim.
6. Disallowance of Section 80G deduction claim.
7. Upward transfer pricing adjustment of corporate guarantee fee.
8. Section 36(1)(iii) interest disallowance.
9. Disallowance of Section 35(2AB) deduction for clinical trial expenditure.
10. Disallowance of foreign currency loss as speculation loss.
11. Disallowance of sales promotion expenditure under Section 37(1).
12. Disallowance of product registration expenditure as capital in nature.

Detailed Analysis:

1. Disallowance of Section 80HHC Deduction Claim:
The assessee's Section 80HHC deduction claim of ?18,85,093 was disallowed by the Assessing Officer and CIT(A) based on legislative amendments and negative profit figures. The tribunal found that the CIT(A) did not consider the net profit element in DEPB income, contrary to the Supreme Court’s decision in Topman Exports. Additionally, the Gujarat High Court’s judgment in Avani Exports quashing the retrospective amendments was upheld by the Supreme Court. The tribunal directed the Assessing Officer to re-compute the deduction claim.

2. Disallowance of Prior Period Expenditure:
The assessee's claim for prior period expenses of ?10,83,885 was disallowed due to lack of evidence of crystallization in the relevant year. The tribunal observed that the expenses were genuine and incurred in the relevant year due to delayed receipt of bills. Following the Gujarat High Court’s decision in Adani Enterprises, the tribunal deleted the disallowance since the assessee was taxed at a uniform rate.

3. Transfer Pricing Adjustment Addition:
The tribunal remitted the issue of transfer pricing adjustment of ?38,14,000 back to the Assessing Officer for fresh adjudication, aligning with the tribunal’s order in preceding assessment years.

4. Disallowance of Depreciation Related to Foreign Exchange Loss:
The tribunal upheld the disallowance of depreciation related to foreign exchange loss of ?42,66,137, following the tribunal’s earlier decision for assessment year 2002-03.

5. Disallowance of Section 35(2AB) Deduction Claim:
The tribunal rejected the assessee’s claim for Section 35(2AB) deduction of ?5,34,000 as the assessee did not press the corresponding ground in lower appellate proceedings.

6. Disallowance of Section 80G Deduction Claim:
The tribunal rejected the assessee’s claim for Section 80G deduction of ?3,50,000 due to the absence of relevant receipts and their nexus with the business.

7. Upward Transfer Pricing Adjustment of Corporate Guarantee Fee:
The tribunal deleted the upward transfer pricing adjustment of ?60,83,440, following its earlier decision that such corporate guarantee adjustments are not international transactions under Section 92B.

8. Section 36(1)(iii) Interest Disallowance:
The tribunal deleted the interest disallowance of ?1,68,88,558, following judicial precedents that strategic interest-free advances to sister concerns are not disallowable if the assessee is assessed at the same rate.

9. Disallowance of Section 35(2AB) Deduction for Clinical Trial Expenditure:
The tribunal deleted the disallowance of ?4,59,11,880 for clinical trial expenditure, following the Gujarat High Court’s decision that such expenses qualify for weighted deduction under Section 35(2AB).

10. Disallowance of Foreign Currency Loss as Speculation Loss:
The tribunal deleted the disallowance of foreign currency loss of ?25,39,60,000, treating it as a business loss rather than speculation loss, aligning with judicial precedents that hedging transactions in the course of import-export activities are business losses.

11. Disallowance of Sales Promotion Expenditure Under Section 37(1):
The tribunal deleted the disallowance of sales promotion expenditure of ?10,89,29,928, following the tribunal’s decision in PHL Pharma Pvt. Ltd. that such expenses are allowable as business expenditure and not hit by Section 37(1) explanation.

12. Disallowance of Product Registration Expenditure as Capital in Nature:
The tribunal upheld the DRP’s decision treating product registration expenditure of ?3,65,93,107 as revenue expenditure, following the co-ordinate bench and Gujarat High Court’s decision in the assessee’s favor for assessment year 2006-07.

Conclusion:
The tribunal partly allowed the assessee’s appeals and dismissed the Revenue’s appeal, directing the Assessing Officer to re-compute certain claims and delete specific disallowances based on judicial precedents and factual findings.