2015 (10) TMI 814 - AT - Income Tax

Deduction U/s. 10B - extra ordinary income - AO only excluded the Sales Tax and Excise Duty for arriving at total turnover for the purpose of computing deduction U/s. 10B - AO also disallowed claim on employee stock options - CIT(A) allowed par relief - CIT(A) confirming the order of AO in excluding patent infringement income of ₹ 97,03,57,916/- received in convertible foreign exchange from the export turnover of the eligible 100% Export Oriented Undertaking for the purpose of computing deduction under section 10B - Held that - This issue was decided in AY 2008-09 2015 (10) TMI 790 - ITAT HYDERABAD against assessee stating the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two different segments in which assessee is operating and accordingly we agree with the DRP s stand that this income falls under the category of other income and not operating revenue. Not only that the income does not pertain to the relevant financial year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of extraordinary items. It was decided in number of cases by the Tribunal that incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while doing exercise of FAR analysis for comparability purpose. - Decided against assessee. Quantification of amount eligible for deduction under section 10B - common corporate overheads should be apportioned on the basis of ratio of turnover of the unit to the total turnover of the company and in this manner reducing the eligible profits under Sec. 10B as concluded by CIT(A) - Held that - This issue was decided in AY 2008-09 2015 (10) TMI 790 - ITAT HYDERABAD as held that even in the case where the unit starts production only at the fag end of the year cost of working on that unit throughout the year for establishing / starting production may not result in allocation of actual expenditure if turn over is considered. In view of this, since Assessing Officer has not given any rationale in adopting the turnover as the basis, ignoring the assessee s method, we are of the opinion that allocation of expenditure as was done by the assessee is more rationale and is in tune with the principles laid down by the Institute of Cost Accountants and also for the purpose of Company Law. Therefore, considering the detailed objections raised by the assessee as placed in the objections to the DRP, we are of the opinion that the allocation by the assessee is to be upheld. Assessing Officer is directed to accept the assessee s allocation of corporate overheads - Decided in favour of assessee. Amount debited towards Employee Stock Option Plan - not an expenditure incurred in connection with an existing liability and therefore to be disallowed for computing the taxable business profits as held by CIT(A) - Held that - The difference (discount) between the market price of the shares and their issue price is expenditure in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anything to its employees but incurs the obligation of issuing shares at a discounted price at a future date. This is nothing but expenditure u/s 37(1) -The liability cannot be regarded as being contingent in nature because the rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honor its commitment of allowing the vesting of 25% of the option. The liability is incurred at the end of the first year though it is discharged at the end of the fourth year when the options are exercised by the employees. The fact that some options may lapse due to non-exercise / resignation etc does not make the entire liability contingent - However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme - Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (2013 (8) TMI 629 - ITAT BANGALORE ) - Decided in favour of assessee for statistical purposes. Superannuation contribution in respect of a promoter Managing Director - disallowance of claim as contribution to superannuation fund is covered u/s 36(1)(iv) the same cannot be allowed u/s 37 - Held that - On going through the facts and materials on record, we are of the view that the expenditure incurred is allowable as deduction if not u/s 36(1)(iv) but u/s 37 of the Act as it is exclusively incurred for the purpose of business. Moreover, it is not disputed that assessee has deducted tax at the time of making contribution to the superannuation fund and has treated it as part of salary of the concerned directors. That being the case, the expenditure incurred should be allowed as a deduction. - Decided in favour of assessee

Summary

Issues Involved:
1. Exclusion of patent infringement income from export turnover for deduction under section 10B.
2. Allocation of common corporate overheads for computing eligible profits under section 10B.
3. Disallowance of Employee Stock Option Plan (ESOP) expenditure.
4. Disallowance of claims under sections 35(2AB), 35(1)(i), and 35(1)(iv) for R&D expenditure.
5. Disallowance of superannuation contribution under section 37.

Issue-wise Detailed Analysis:

1. Exclusion of Patent Infringement Income from Export Turnover:
The assessee included Rs. 97,03,57,916/- received as patent infringement income in the export turnover for deduction under section 10B. The Assessing Officer (AO) excluded this amount, and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld this exclusion. The Tribunal referenced its earlier decision in AY 2008-09, concluding that the income from settlement of patent infringement is not part of operational income and should be categorized as 'other income.' The Tribunal agreed with the AO and CIT(A), dismissing the ground.

2. Allocation of Common Corporate Overheads:
The AO allocated corporate overheads based on the turnover ratio, which reduced the eligible profits for deduction under section 10B. The assessee contended that the allocation should follow cost accounting principles. The Tribunal, referencing its earlier decision, found the assessee's method of allocation more rational and directed the AO to accept the assessee's allocation of corporate overheads. This ground was allowed.

3. Disallowance of ESOP Expenditure:
The AO disallowed Rs. 64,78,039/- claimed towards ESOP, considering it contingent and notional. The Tribunal referred to the Special Bench decision in the case of Biocon Ltd., which allowed ESOP discount as a deductible expenditure. The Tribunal remitted the issue to the AO to decide afresh in light of the Special Bench's decision. This ground was allowed for statistical purposes.

4. Disallowance of R&D Expenditure:
The assessee's claims under sections 35(2AB), 35(1)(i), and 35(1)(iv) were disallowed by the AO, which was upheld by the CIT(A). However, since relief was granted to the assessee by an order under section 154, these grounds were not pressed during the appeal.

5. Disallowance of Superannuation Contribution:
The AO disallowed Rs. 25,65,000/- claimed towards superannuation contribution for a director, stating it was covered under section 36(1)(iv) and not allowable under section 37. The CIT(A) upheld the disallowance. The Tribunal, referencing its earlier decision, found the expenditure allowable under section 37 since it was incurred for business purposes and tax was deducted at source. This ground was allowed.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions provided to the AO for re-evaluation of certain claims. The Tribunal's decisions were consistent with earlier rulings and adhered to established accounting and tax principles.