9911796707
TMI Blog2012 (12) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... f, the entire adjustment made by the TPO stands deleted. Deduction u/s 80IB / 80IC - AO was of the view that for the purpose of sections 80-IB & 80-IC, the profits derived from the industrial undertaking are to be worked out by reducing certain common expenses incurred at the head office and the central departments such as audit, legal, secretarial, shares department, selection and training, accounting, treasury which cannot be identified with any of the industrial undertakings of assessee. - Held that:- AO directed not to allocate the expenses of chairman, company secretaries and public relation department - salary, wages and staff welfare expenses relating to financial controller, chief medical officer cannot be allocated. - these four operations at the head office are in no way connected to the running of the units. It must be appreciated that each of the units has their own departmental head including financial controller and medical officer. These four operation centres at the head office are more concerned with the managerial issues, they are not connected either with production or sale of these units. With reference to the research expenses - held that:- the resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A.Y.2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever Expenditure versus Donation - deduction u/s 37(1) or 80G - held that:- In fact, the whole amount of Rs. 10,000 could have been claimed as deduction as an advertisement under section 37(1). However, assessee restricted the same to an amount of Rs. 5,000 being the donation under section 80G. We do not see any reason to disallow the amount as the amount has been paid by the assessee company by way of cheque and there is no dispute with reference to the eligibility under section 80G. Accordingly, AO is directed to allow the amount of Rs. 5,000 as claimed. Appeal decided partly in favor of assessee. - IT APPEAL NO. 7868 (MUM.) OF 2010 - - - Dated:- 10-12-2012 - B. RAMAKOTAIAH AND AMIT SHUKLA, JJ. P.J. Pardiwala for the Appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Training course fees reimbursement of other expenses made 3,69,21,201 CUP 14. Training course fees reimbursement of other expenses received 14,72,14,089 CUP Total 928,69,65,605 3. In order to examine the computation of Arm's Length Price (for short "ALP") in relation to the international transaction, a reference under section 92CA(1) was made by the Assessing Officer to the Transfer Pricing Officer (for short "TPO") on 8th October 2007 and copy of audit report in form 3CEB was forwarded. For the purpose of determining the average operating profit to the sales ratio, the assessee has taken the data of 12 FMCG companies which formed the BSE - FMGC index and the arithmetical mean of PLI of such companies worked out at 12.87% as against the assessee's operating profit on total sales at 12.28%. In the T.P. study report, the assessee has adopted Transactional Net Marginal Method (for short "TNMM") to bench mark the international transaction for determining the ALP. The assessee has taken following 12 companies as comparables with arithmetic mean of operating profit margin at 12.87%. S.No. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the TPO without satisfying the conditions laid down under section 92CA. The sum and substance of the assessee's objection before the TPO were (i) multiple year data should be accepted to work out the PLI, which has been dealt in Para-7.2 of the impugned TP order; (ii) only such data of comparables as was available in the public domain during the financial year of transactions can be used for comparability analysis; (iii) the TPO may determine the ALP on the basis of material and information available to him only if any of the four conditions stipulated in section 92C(3) are fulfilled and not otherwise; (iv) the assessee has given detail reason for use of operating profit upon sales as PLI to determine the arm's length price, looking to the nature of international transactions and that the company's business is driven more by sales volume rather than cost and accordingly, sale should be the appropriate factor to evaluate the profitability of the relevant segment; (v) besides aforesaid objections, the main objection of the assessee during the course of fresh TP proceedings was that instead of bench marking the profits with the entity level, segmental profit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e identification and allocation of head office expenses and over heads and has failed to provide classification of exports into A.E. and non-A.E. It has also failed to segregate the income and cost relating to various activities being undertaken by the assessee which have been aggregated, over all margin. He further pointed out anomalies and discrepancies in the figures of Profit Loss Account and the sales figure of A.E. as well as non-A.E. sales given in the segmental data and in the entity level data. He further noted that independent transaction-wise bench marking by TNNM will give the correct result only if authentic segment account for independent line of business is prepared by the assessee i.e., accurate data is available for each segment of the business. Grossing up of the data or apportioning the expenditure in the segmental analysis will throw up absurd results and will be inaccurate and unreliable. It was due to various anomalies and non-authentic segmental account, the assessee was compelled to use the entity level profit for bench marking and determining the ALP by way of TNNM at the entity level and not at the independent transaction level during the course of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO noted that the assessee has not carried out product comparability and FAR analysis. For example, the assessee has included companies like Bata India Ltd., Mc Dowel Co. Ltd., which are prima-facie engaged in manufacturing of entirely different products. The TPO thereafter issued a show cause notice after pointing out the discrepancies in the comparables included by the assessee and also the working of the PLI. The contents of the show cause notice has been reproduced in Pages-17 and 18 of the TPO's order and required the assessee to show cause as to why the adjustment of Rs. 343.95 crores may not be done after taking the following comparables:- Name of the Company Rs. (crores) Rs. (crores) Rs. (crores) March 2006 March 2006 March 2006 Sales PBIT (NOI, NNRT) TC OP/TC (%) OP/Sales (%) Britannia Industries Ltd. 1821.17 167.76 1653.41 10.15 9.21 Colgate Palmolive (I) Ltd. 1249.73 186.53 1063.20 17.54 14.93 Dabur India Ltd. 1372.39 217.66 1154.73 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.60 16. Tata Tea Ltd. 13.73 17. Colgate-Palmolive (I) Ltd. 14.71 18. Britannia Industries Ltd. 9.21 19. Dabur India Ltd. 17.27 20. Glaxosmithkline Consumer Health Care Ltd. 13.08 21. Godrej Consumer Products Ltd. 18.35 22. Radico Khaitan Ltd. 8.41 23. Mc dowell Co. Ltd. 4.97 24. Nirma Ltd. 14.10 Mean 12.87% We request you to consider the above data for the Company Level Benchmarking. Your goodself vide your above letter proposes to exclude Bata India and Mcdowell Co. Ltd. from the said list on the basis that these companies are engaged in product categories which are different from those dealt with by Hindustan Unilever Limited. In the matter we would like to state that we are unable to locate any single FMCG company which is engaged in all the activities in which we are engaged. However, for the purpose of a meaningful comparison of the operating margin at company level, we had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a result of the said business was incurring losses. It is therefore submitted that we should also be allowed to make suitable adjustments to the operating margin to reflect the margin in respect of the company by excluding the detergents business since our international transactions in respect of export of goods do not include export of detergents. Therefore, for the above reasons, we urge you to accept the list of comparable companies used by us for the purpose of determining the benchmark, as correct and proceed accordingly." 10. The assessee's submissions were rejected and finally the TPO made the adjustment in the following manner:- "9. The operating profit margins in case of 8 companies (after excluding the company I.T.C. Ltd. and Britannia Industries Ltd., for the reasons given earlier) as mentioned in the Annexure with the show cause notice dated 21.2.2008, reproduced on Pages-5 to 6 of this order, will have to be considered. The position is as under:- Name of the Company Rs. (crores) Rs. (crores) Rs. (crores) March 2006 March 2006 March 2006 Sales PB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y upto 5% as found through arithmetic mean. If the variation in price is more than 5%, the taxpayer has no option and Arm's Length Price shall be determined as per the first limb of the proviso. Circular No. 12 of CBDT dated 23.8.01 issued in the shape of press note by the Ministry of Finance (Depth Of Revenue), Government of India, makes its intention clear for not making any adjustment if the price adopted by the taxpayer was upto 5% less or upto 5% more than the Arm's Length Price determined by the AO. In effect, transfer pricing shown by the taxpayer was not disturbed if such price fell within the range of 5% of determined price. But if the variation in the disclosed price and the determined Arm's Length Price was more than the above limit, then the Circular provided that transfer price declared by the taxpayer was not to be accepted and adjustment for the variation was required to be made. This view has now further been clarified by the amendment to the proviso to Section 92C(4), by the Finance Act 2009 w.e.f. 1.10.2009." 12. Even after making the adjustment at the entity level, he made further adjustment on account of research innovation development related services. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 398.72 lakhs 5. Adjustment made on account of Royalty receivable from Nepal Liver Ltd. Rs. 20,29,222 6. Adjustment made on account of payment of royalty to Uniliver N.L. Rs. 1,63,649 7. Adjustment made on account of advertisement and sales promotion expenses Rs. 27.09 lakhs 8. Advertisement and sales promotion expenses Rs. 27.09 lakhs 15. However, he observed that these additions are not to be separately made as the same will get subsumed on account of adjustment of Rs. 356.44 crores. 16. Lastly, he made an adjustment of under-charging for common corporate audit service and intra-group service for a sum of Rs. 5,85,41,008. Thus, finally, the total adjustment was made at Rs. 3,68,79,26,000, comprising of the following:- (i) TP adjustment at the entity level - Rs. 356.44 crores; (ii) Research innovation and development related services - Rs. 6,49,85,000; (iii) Undercharging of common corporate audit services and intra group services - Rs. 5,85,41,000. 17. Aggrieved by the adjustment made by the TPO, the assessee filed its objection before DRP wherein detail objection with reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HUL Transactions with A.E. 689.89 Margin of HUL @ 12.28% (OP/Sales) 84.72 Total cost of HUL 605.17 Arm's length margin by TPO @ 17.48% (OP/cost) 105.78 Arm's length price of the export transaction as per TPO 710.96 Range @ 95% 675.41 Range @ 105% 746.50 HUL Transactions with AE at 689.89 crores is within the range of 675.41 crores and 746.50 crores. Therefore, the transactions are at arm;s length. Thus, under both the scenario, he submitted that at the very thresh hold, the entire adjustment of Rs. 356.44 crores gets deleted. In support of this contention that only A.E. transactions are to be looked into for the purpose of bench marking, he relied upon various Tribunal decisions. 19. He further submitted that if a comparison of operating margin at segmental level is taken into consideration vis-a-vis A.E. and non-A.E. transactions, then the assessee has earned more operating profit margin in relation to A.E. transaction as compared to non-A.E. transaction. In support of this, he submitted a detail statement of segmental level accounts analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OS 6.54% 3.04% 3.27% CRABSTICKS OTHERS Particulars A.E. Rs. INR Non-A.E. Rs. INR Total Rs. INR Others Rs. INR Sales 109,659 180,857 290,516 1,907,851 Add: DEPB/Export Licences Sales 109,659 180,857 290,516 1,907,851 Operating Cost 112,638 192,074 304,712 2,006,543 Operating Margin (2,979) (11,217) (14,196) (98,692) Operating Margin (%) on sales OP/OC -2.72% -6.20% -4.89% -5.17% Operating Margin (%) on cost OP/OS -2.64% -5.84% -4.66% -4.92% HUL Particulars A.E. Rs. INR Non-A.E. Rs. INR Total Rs. INR 56.01% 43.99% Sales 7,176,094 5,635,806 12,811,900 Add: DEPB/Export Licences (31,234) 620 (30,614) Sales 7,144,860 5,636,426 10,873,435 Operating Cost 6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The learned Sr. Counsel, after making these preliminary submissions also made a very elaborate submission not only with regard to each and every objections and conclusions drawn by the TPO but also with regard to various adjustments made on account of various royalty payments, royalties received, sales promotion and advertisement expenses, R D cess, etc., as discussed by the TPO, with reference to the material placed on record before the TPO as well as the DRP. These submissions are, however, not discussed by us. 23. The Bench required the learned Departmental Representative to make submissions on the preliminary submissions made by the learned Sr. Counsel which, in our opinion, goes to the very root of the issue involved. The learned Departmental Representative submitted that if the nature of international transactions taken by the assessee company is taken into consideration then it would be seen that the same are on income as well as expenditure side. The assessee itself has bench marked its international transactions at the entity level which shows that original approach of the assessee was to bench mark international transactions at the entity level by aggregating all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciated enterprises is to be computed following the provisions of the Act and the law does not require computing the arm's length price of the transactions with independent parties. There is an inherent presumption that the transactions with the independent parties shall always be at arm's length. So if the transactions with the independent parties are at arm's length then what is pulling the margin of the assessee company down? It is obvious that the margin of the assessee is down vis-a-vis the arm's length margin only because of the transactions with the associated enterprises. Thus, whatever is the shortfall that is attributed to the transactions with the associate enterprises. Since the margin from the independent transactions and international transactions cannot be computed separately, unless the margin is applied on the entity level, the arm's length price of the international transaction cannot be computed. In view of the above, he submitted that the adjustment made by the TPO is justified and ought to be confirmed. 26. After making the aforesaid submissions, he also submitted the statement for the ALP determination of the international transactions to counter assessee's s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an care segment products, the learned Sr. Counsel had provided the relevant details to clarify the said adjustments. He also referred to Annexure-N to letter dated 28th September 2009, giving segmental details and method of determining the cost and pointed out, that most of the expenses have been identified on factory actuals based on factory products and head office based sales value and bill of material. Thus, there was no basis for doubting the allocation of pro-rata expenses and the operating margin of the various segments. Regarding entity level adjustment, he submitted that what the assessee has been objecting is that the entire transactions should not be taken into account and thereby applying operating margin of 17.48%, otherwise it will lead to absurd results. The TPO should have taken only the A.E. transactions i.e., international transactions for the purpose of bench marking and not the entire turnover. Regarding the working of +/- 5% given by the learned Departmental Representative, he submitted that there is inherent contradiction while working out the cost as he has worked out the cost in proportion to the entire sales of the assessee. Even otherwise also, by whatever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and rejected all the assessee's contentions specifically with regard to bench marking the transactions on segmental basis, which has been discussed in detail in the foregoing paragraphs. The TPO has virtually repeated the same adjustment made by the earlier TPO in his order dated 7th March 2008, by taking the average operating profit of the comparables at 17.48% as compared to the assessee's operating profit/total cost at 14.16%. The TPO has bench marked the transactions at the entity level after taking the entire turnover i.e., transactions with A.E. as well as non- A.E. The main contention of the learned Sr. Counsel before us is that the TPO was required to bench mark the A.E. transactions only, which were at Rs. 689.89 crores and if the arm's length margin taken by the TPO at 17.48% is applied, then the same falls within the safe harbour range of +/- 5%. Even otherwise also, if the said markup of 17.48% is applied at the entity level, then also, the difference is 3.32% which also falls within the safe harbour range of +/- 5%. The said working submitted by the learned Sr. Counsel has already been reproduced in the foregoing paragraph no.18. We have to examine firstly, as to whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transaction and the most appropriate method should be applied for determining of ALP. The proviso to section 92C(2) provides that where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such price or at the option of the assessee a price which may vary from arithmetic mean by an amount not exceeding 5% of such arithmetical mean. The basic philosophy and concept behind the proviso is that in transfer pricing, there cannot be exact determination of ALP as there are lot of factors and variables in coming to a proper judgment. The use of range of 5% in the results reduces the effect of difference in the controlled and un-controlled transactions. The CBDT, vide Circular no.12/2001 dated 23rd August 2001, laying down the guidelines for applying the newly introduced transfer pricing regime stated as under:- "However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of arm's length price of an international transaction. While it would be necessary to protect our tax base, there is a need to ensu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's transactions with A.E. at Rs. 689.89 crores is within the range of Rs. 675.41 crores and Rs. 746.50 crores. Therefore, the transactions of the assessee with the A.Es are at arm's length, even as per the ALP taken by the TPO at Rs. 710.96. 33. In the present case, the TPO has applied mark-up of 17.48% at the entity level after taking into entire transactions. If the mark-up of 17.48% is applied, on the entire transactions, then, following results will emerge:- Figures in crores 1. Cost based as per TPO Rs. 10748.64 2. At mark-up of 17.48% Rs. 1878.86 3. ALP for the sales [Rs. 10748.64 (+) 1878.86] 12627.50 4. 95% Rs. 12627.50 Rs. 11996.13 5. Assessee's sales as per the TPO Rs. 12271.79 34. Thus, from this working also, at the entity level, the assessee's transactions falls within the range of +/- 5%. Therefore, in our conclusion, by whatever approach, bench marking is done, the entire adjustment made by the TPO falls within the safe harbour of +/- 5%. Insofar as the calculation furnished by the learned Departmental Representative is concerned, we do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 077,77,45,837 to various units claimed deduction under section 80-IB 80-IC and also to two units eligible for section 10A and section 10B in addition to direct expenses of Rs. 3070,36,18,599. It was the submission that assessee had already considered the direct expenses and indirect expenses relevant for the particular unit to an extent of Rs. 1077.77 crores, therefore, allocation of additional expenses to the extent of Rs. 107.75 crores was not warranted. It was further submitted that the allocation of research expenses to the tune of Rs. 51.59 crores and interest expenses to the tune of Rs. 16.77 crores were not made in earlier years and allocated for the first time in this year. 38. The learned Counsel submitted that assessee has allocated all the expenses including those of common expenses which are relevant to compute the profits derived from the concerned industrial undertaking such as marketing as well as distribution, purchase, export department etc. With reference to the head office expenses it was submitted that the expenses that were not allocated are those which in any case have to be incurred by assessee irrespective of the existence of new undertaking eligible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to profits derived from an industrial undertaking, then the expenses which are directly attributable to such units alone could be deducted while computing such profit. It will not be fair to apply two different principles one for working out the profit and another for allocation of expenses. Law as laid down by the apex court on this point has to be applied fairly and squarely, so that rational results can follow. Therefore, in our opinion, expenses of the head office which had a direct bearing on the activities of the units from which deduction under section 80HH and 80-I were claimed alone could be considered for allocation. At the same time, we find that for the impugned assessment year as well as for preceding year, learned CIT(A) had given certain directions to the Assessing Officer with regard to the method of allocation of expenses of the head office to such units, where claim for deduction under section 80HH and 80-I were made for the assessee. Learned counsel was unable to pinpoint what was wrong in such direction and how such directions went against the aforesaid principle regarding allocation of expenses. It is for this reason that for the assessment year 1985-86 in M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decision of the Tribunal in assessment year 1985-86, we direct that for the impugned year also, the expenses as mentioned in aforementioned para has to be excluded while making the allocation for the purpose of computing the deduction under section 80HH and 80-I of the Act. Except for this, directions of the CIT(A) as in the preceding year has to be followed. Ordered accordingly. Ground No. 9.1 of the assessee is allowed for statistical purposes". 40. Therefore, In the interest of justice we restore the issue to the AO who is directed to workout the common expenses accordingly. We were informed that orders of the ITAT in earlier years are yet to be given effect by AO and the intervening years appeals are pending at various stages including before the ITAT. In assessment year 1989-90 similarly the matter was restored to AO vide the order dated 21/09/2011. In view of the stay granted in this appeal the issues have come up for consideration. Keeping in mind the directions in earlier years, AO is directed to reworkout the common expenses accordingly. 41. With reference to the research expenses and the interest expenses which were allocated for the first time, allocation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efined, or cracked to produce the said products. This is not controverted. It seems to us to make no difference that the appellants buy the raw naphtha from others. The question is to be judged regardless of this, and the question is whether the intervention of the raw naphtha would justify the finding that the said products are not 'derived from refining of crude petroleum'. The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stage. The further refining or cracking, of raw naphtha results in the said products. The source of the said products is be held to have been derived from crude petroleum. 13. We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the same, we are of the opinion that the research expenditure cannot be allocated to the units claiming deduction unless it has a nexus. Therefore, AO is directed to exclude the same. 43. With reference to the interest expenses allocated the same also stands on the same footing. Assessee has not claimed any interest expenditure for the investment in the unit as assessee had substantial funds of its own. The interest expenditure claimed in the Profit Loss A/c pertains to the export activities being export credit facility as submitted by assessee in the details. Therefore, in the absence of any direct nexus of the interest claim to the units, it is very difficult to allocate the expenditure on common expense basis, as the claim of said expenditure has no relevance to the manufacturing activity of the Unit. As rightly held by the Hon'ble jurisdictional High Court in the case of Zandu Pharmaceuticals Works Ltd. (supra), the expenses attributable to any other unit or the head office expenses which have no relevance to the industrial undertaking cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking. Accordingly, we have no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e about the mercantile system of accounting followed by the assessee and the actuarial method of estimation of the liabilities. He heavily relied on the decision of the Hon'ble Delhi High Court in the case of Ranbaxy Laboratory Ltd. (supra). He also mentioned that while the issue was set aside to the file of the AO for AY 1991-92, and 1992-93 the AO himself allowed the claim of the assessee for AY 1993-94 and 1994-95. Therefore, this issue is no longer a disputed one for the assessment years 1993-94 and 1994-95. 46. We have heard the parties and perused the orders of the Revenue Authorities. It is noticed from paragraphs 43 to 45 of the order of the Tribunal for AY 1991-92 (supra) issue was discussed as under: "43. Ground No.11 regarding provision for retirement pension payable to the employees. 43.1 The Assessing Officer noted that during the year, the assessee company has made provision of Rs. 7,77,60,972/- which included Rs. 6.77 crores relating to the earlier years, as liability on account of retirement pension plan. The expenditure had been claimed as deduction during the previous year. Therefore, the Assessing Officer was of the view that the liability is towards the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1." 44.1 He has submitted that the claim of the assessee for provision of retirement pension payable to the employees is covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case Commissioner of Income-tax v. Ranbaxy Laboratories Ltd. reported in 334 ITR 341. He has also relied upon the decision of the Supreme Court in the case of Bharat Earth Movers v. Commissioner of Income-tax Bharat reported in 245 ITR 428. The ld. Sr. counsel also filed a copy of the rule of Pension Scheme. 44.2 The ld. DR. has relied upon the orders of the lower authorities and submitted that the assessee could not furnish the copy of the approved pension scheme before the Assessing Officer. 45. We have considered the rival submission as well the relevant material on record. It is an undisputed fact that the pension scheme of the assessee is not approved as per provision of IT Act. and as observed by the Assessing Officer and the CIT(A) the pension scheme as formulated by the assessee for meeting the extra payment over and above the amount payable under LIC scheme. The Hon'ble Supreme Court in the case of Bharat Earth Movers (supra) has taken into consideration the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual provision made and the actual amounts paid and the claim to be allowed. With these directions the ground is considered allowed for statistical purposes. Ground No.25 49. Ground No.25 pertains to the disallowance of amount under section 14A. Assessee had claimed exempt income of Rs. 63,55,91,552 as exempt on account of tax free bonds, dividends etc. AO applied Rule 8D and worked out the disallowance at Rs. 9,81,98,817. Assessee contended before the DRP that Rule 8D is not applicable for the impugned assessment year as held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co Ltd. v. DCIT 332 ITR 81 (Bom.). Now DRP while accepting assessee's objection that Rule 8D cannot be applied retrospectively, directed the AO to recalculate the disallowances in a proper and rationale manner. However the direction is such that Rule 8D is applied indirectly. Therefore, AO worked out the disallowances of the same amount of Rs. 9,81,98,817 while completing the assessment in pursuance of the DRP directions. The learned Counsel referred to the submissions made before AO and the DRP placed in the paper book to submit that assessee has not incurred any expenditure in earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are enclosed in Annexure -1. It may be relevant to note that the Foods business of the Company has not been discontinued. Further, had the company continued marketing of sugar candies, it would have made huge losses. Your Honour will notice that out of the total expenditure of RS.30.44 crs. a sum of RS.22.44 crs. relates to stocks which were written off in financial year 2004-05 and the same was allowed to us as a genuine business expense. The balance amount i.e. Rs. 8 crores represented a provision made by the company in respect of additional expenditure in the form of compensation, etc payable to suppliers. However, since the terms of settlement with the suppliers were not finalized, the company had not claimed the provision of Rs.8 crs. as a tax deductible expenditure in financial year 2004-05. In financial year 2005-06, out of the provision of Rs. 8 crores mentioned above, the company has paid an amount of Rs.4.6 crores to Makson Nutrition Food Private Ltd. (MNFPL) towards final settlement to cancel rescind the sourcing arrangement that the company had with them for conversion of sugar confectionary products. A copy of the termination agreement between the company and MNFP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-3 and agreement between the company and MUL Dentpro Pvt. Ltd. for compensation of Rs. 4.75 crore is enclosed as Annexure-4. It is submitted that the amount of RS.9.5 crores paid to Prime Healthcare Products and Rs.4.75 crore to MUL Dentpro Pvt. Ltd. towards restructuring is a genuine business expense justified by commercial expediency and that the same is fully allowable under sec. 37(1) of the Act." 51. The DRP considered the above issue vide objection Nos. 18 19 and decided as under: "Objection No.l8 19 The assessee has objected to treatment of RsA.60 crores as capital expenditure which was paid by the assessee for termination of arrangements for conversion of sugar candies. The assessee contended that the business of sugar candy was resulting into heavy losses, and hence, the arrangement with M/s. Max Sugar Candies was cancelled and a compensation of RsA.60 crores was paid to M/s. Max Sugar Candies on account of settlement for the loss of business to M/s. Max Sugar and that the same was allowable u] s.30(7)(i) of the Income-tax Act. Similarly, claim is made by the assessee in objection No.19 relating to payment of Rs.14.25 crores for termination of manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduring benefit has come to the assessee, the expenditure has to be allowed as Revenue expenditure. 53. We have considered the issue and rival submission and examined the record. As far as the payment to Max Sugar Candies is concerned, assessee had an agreement dated 10.01.2003 and supplementary agreement dated 02.02.2004 for conversion of finished products of candies. The said Makson Nutritional Food (P) Ltd. (MNFPL) had carried out conversion of about 5780 tonnes of finished products during the period June 2002 to September, 2004. Assessee on finding that the said activity was incurring losses discontinued the business of Max w.e.f. September, 2004. The said company raised invoices in the next 5 months from October 2004 to Feb 2005 demanding an amount of Rs. 29 crores. Subsequently vide agreement dated 10.05.2005 a termination agreement was made by which assessee agreed to pay Rs. 46 crores for cancellation of all arrangements w.e.f. 10.05.2005. Assessee has provided an amount of Rs. 30.44 crores in the books of account in the assessment year 2005-06 out of which AO allowed an amount of Rs. 22.44 crores in that year. The provision made of Rs. 8 crores was not claimed in that ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same agreement by which the contract was terminated and the principles laid down by the Special Bench of ITAT in the case of Tecumseh India Private Limited v. Additional CIT in ITA No.3759/Del/2003 will apply. Special Bench of the Tribunal (supra) held that non-compete fees is to be considered as capital in nature. However, since AO and the DRP did not examine the agreement and did not consider the nature of the payment in its correct perspective, we are of the opinion that the claim of Rs. 5 crores has to be reexamined by AO by giving an opportunity to assessee. Even before us, even though the agreements are placed in the paper book, the contention that was made was that the payment was same as that of Rs. 4.6 crores made company MFNL Ltd. discussed in the above para. Since, we noticed that there is a non-compete fee involved in the payment, in the interest of justice, we restore this part of the claim to the file of AO. 55. Coming to the next payment of Rs. 4.75 crores paid to M/s MUL Dentpro (P) Ltd, here also clause-1 states that an amount of Rs. 0.25 crores was for compensation towards sharing the cost pertains to the said company. This amount is similar to the payment ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .29 pertains to the addition of Rs. 2,15,45,233 (wrongly stated as Rs. 24,02,27,143 in ground). AO made this adjustment stated to be under section 145A on the modvat credit available unutilised. It was the submission by assessee that no such adjustment is required under the provisions of Sec.145A. DRP vide objection No.12 decided as under: "Assessee has objected to the adjustment of closing stock on account of CENVAT. Keeping in view the ratio of decision of various Courts, the DRP directs AO to adjust the opening stock, purchases and the closing stock by considering all taxes/duties and shares and in case there is any difference, the addition should be made under section 145A". 59. Inspite of clear directions from the DRP, AO on the pretext that assessee has not furnished any details except making general submissions repeated the addition in the assessment order without complying with the directions of DRP. Before us a detailed note was submitted how the adjustment need not be made under the provisions, which is as under: "We give below an illustration explaining why the valuation of closing stock followed by the appellants should not be disturbed: Take a case where there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod. The case of the revenue that the entry that should be passed is in a sum of Rs. 200/- because according to the revenue the entire 100 units which the assessee purchases are eligible for a modvat credit of Rs.2/- per unit i.e. Rs. 2001- in the aggregate and the assessee's excise duty liability of Rs. 210/- is discharged partly by availing of the credit of Rs. 200/-. It is this entry that represents the area of difference. According to the revenue as the assessee has utilized the modvat credit that is available to it on its purchases in its entirety a credit for the entire amount has to be taken whilst according to the assessee credit can only be taken for the units actually consumed. The correctness of this aspect of the matter is not the subject matter of an adjustment as contemplated under section 145A but is in fact an adjustment which was considered by the Supreme Court in the case of Indo Nippon Chemicals Ltd. (261 ITR 275) and the Supreme Court specifically held that merely because the mod vat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw materials it would not the amount to income which is liable to tax under the Act". 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not disputed that the entire amount paid for 18 consultants is only an amount of Rs.26,75,535, which indicates that they are in employment and not professional consultants. It is also not the case that assessee has not deducted any amount. Assessee has indeed deducted tax under section 192 and so we are of the opinion that provisions of section 40(a)(ia) also do not apply as the said provision can be invoked only in the event of non-deduction of tax but not for lesser deduction of tax. In view of this, we are of the opinion that there is no merit in Revenue's contention that the amount paid to the employees should be disallowed as provisions of section 194J would attract. On the facts of the case, there is no merit in Revenue's appeal. Accordingly the order of the CIT(A) is confirmed". 63. In the case of M/s S.K. Tekriwal in ITA No.1135/Kol/2010 the Coordinate Bench at Kolkata has examined this issue and decided as under: "6. In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, we confirm the order of CIT(A) allowing the claim of assessee and this issue of revenue's appeal is dismissed". 64. In view of the above, respectfully following the same, we direct AO to delete the said addition made, by invoking the provisions of section 40(a)(ia). Ground31 is allowed. Ground No.32 65. Ground No.32 pertains to taxing of interest granted under section 244A of the Act vide intimation under section 143(1) for the assessment year 2005-06. Ground Nos. 32 to 32.3 is as under: "32. The learned AO erred in holding that the amount of interest received by assessee under section 244A of the Act vide intimation under section 143(1) for assessment year 2005-06 in April 2006 was liable to be taxed as assessee's income in assessment year 2006-07. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such refund calculated in the manner provided in clauses (a) and (b ) of such provisions. Therefore, the moment the refund is granted, an enforceable debt is created in favour of the assessee in respect of interest due on such refund. Consequently, income can be said to accrue on the date of refund itself. Therefore, when such interest is actually granted along with the refund, then the requirements of sections 4 and 5 are fully satisfied and the same can be taxed in the year of receipt. There was no merit in the contention of the assessee that such right was contingent as the interest so received could be varied or withdrawn after the assessment under section 143(3). According to the dictionary meaning, a right or an obligation can be said to be contingent when such right or obligation is dependent on something not yet certain. According to section 244A, the only condition for grant of interest is that there must be a refund due to the assessee under any provision of the Act. There is no other condition in the said provision affecting such right. Therefore, the moment a refund becomes due to the assessee, an enforceable debt is created in favour of the assessee and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of assessment under section 143(3), the interest granted in earlier year gets substituted and it is the reduced amount of interest that would form part of income of that year. Thus, it would amount to mistake rectifiable under section 154. If the basis on which income was assessed is varied or ceases to exist, then such assessment would become erroneous and can be rectified. Similarly, any income assessed may become non-taxable by virtue of retrospective amendment and, consequently, erroneous assessment can be rectified. Therefore, if the interest granted under section 244A(1) is varied under sub-section (3) of such section, then the interest originally granted would be substituted by the reduced/increased amount, as the case may be. Thus, income on account of interest if assessed can be rectified under section 154. Therefore, interest on refund under section 244A(1) granted to the assessee in the proceedings under section 143(1)(a) would be assessable in the year in which it is granted and not in the year in which proceedings under section 143(1)(a) attain finality. 68. Therefore, while upholding in principle that the amount is to be taxed in the year of granting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had explained how this balance provision was written back, we are of the opinion that both AO and the DRP did not examine the facts correctly. We are of the opinion that there is no need to bring to tax this amount. However, since AO did not give proper opportunity to assessee to make submissions on this amount, the objection of which was there before the DRP, we remit the issue to the file of AO to examine the facts and delete the additions so made after satisfying with the reconciliation of amounts involved. Ground is considered allowed for statistical purposes. Ground No.34 71. Ground No.34 pertains to the issue of brought forward depreciation of amalgamating company being set off. Briefly stated as per the details furnished in schedule 7 of the Tax Audit Report in relation to clause 25 of the report, assessee claimed set off of unabsorbed depreciation of amalgamating company Vashisti Detergents Ltd. (VDL) for the assessment year 1996-97 and assessment year 1997-98 of Rs. 5,63,66,551 and Rs. 8,97,30,340 respectively (although the unabsorbed depreciation as per assessment order under section 143(3) dt. 29.01.99 for the assessment year 1996-97 was mentioned as Rs. 5,33,10,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of allowance for the year under section 32(1), can be set off against income under any head within the same year. (ii) Amount of such current depreciation which cannot be so set off within the same year as per (i) above shall be deemed as depreciation under section 32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation. B. In the second period (i.e., assessment years 1997-98 to 2001-02) (i) Brought forward unadjusted depreciation allowance for and up to assessment year 1996-97 (hereinafter called the 'First unadjusted depreciation allowance'), which could not be set off up to assessment year 1996-97, shall be carried forward for set off against income under any head for a maximum period of eight assessment years starting from assessment year 1997-98. (ii) Current depreciation for the year under section 32(1) (for each year separately starting from assessment year 1997-98 up to 2001-02) can be set off firstly against business income and then against income under any other head. (iii) Amount of current depreciation for assessment years 1997-98 to 2001-02 which cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under Section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the A.Y. 1997-98, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set off of unabsorbed depreciation pertaining to assessment year 1996-97 and 1997-98 as per the records. This ground is allowed. Ground No. 35 77. The issue in Ground No.35 is with reference to disallowance of an amount of Rs. 5,000 paid to Fort Convent Parent Teachers Association, Mumbai on 28.10.2005 by way of Cheque No.041624 dated 24.08.2005 drawn on Duetsch Bank, HS Marg, Mumbai by assessee. The deduction at 50% was disallowed on the reason that instead of assessee's name the receipt contains name as "Rin Advance". It was the submission of assessee that the said Parent Teachers Association instead of giving receipt in the name of assessee company, however, issued the receipt on the product name as they have given advertisement in the cover page of the souvenir bring brought out, at Rs. 10,000. AO and the DRP did not accept the contentions of assessee. 78. After considering the submissions and examining the details, we are of the opinion that there is no need for disallowing the claim under section 80G made by assessee. There is evidence on record that assessee paid by way of cheque an amount of Rs. 10,000 to the said Parent Teachers Association for cover page in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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