9911796707
TMI Blog2012 (12) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... company is export and import of home and personal care products, beverages, export of rice and marine products, export and import of soap and toiletries. The assessee has also been paying royalty to Uniliver PLC on domestic and export sales. During the year, the assessee had made following international transactions with the Associate Enterprises (for short "A.Es"). S. No. Name of Transaction A.Y. 06-07 (Rs.) Method Used 1. Purchase of raw materials 41,73,50,931 TNMM 2. Import of finished goods 2,86,74,892 TNMM 3. Sale of raw material 128,23,81,580 TNMM 4. Export of rice & marine products 23,37,76,216 TNMM 5. Export of manufactured home and personal care products 267,38,18,733 TNMM 6. Export of manufactured beverages 270,91,33,327 TNMM 7. Import of machineries 218,165 TNMM 8. Export of machineries 65,730 TNMM 9. Royalty paid to Unilever 66,72,53,896 TNMM 10. Recovery of expenses for common corporate resources (corporate audit) 67,20,96,855 TNMM 11. Recovery of expenses for common corporate resources (intra group services) 2,92,68,445 TNMM 12. Recovery of expenses for common corporate resources (intra group services) 38,87,91,905 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otion expenses, etc., the TPO held that the same would get subsumed by the adjustment of Rs. 356.44 crores. Against the said order of the TPO, the assessee filed a Writ Petition before the Jurisdictional High Court, being WP no.2244 of 2008, inter alia, on the ground that the same has been passed in violation of natural justice as proper opportunity of filing the document before the TPO was not given and additional reply and submissions were to be filed. The Jurisdictional High Court set aside the TPO's order dated 7th March 2008, with a direction that opportunity of placing of the documents and hearing be given to the assessee and the fresh order should be passed following the cannon of natural justice after considering the assessee's fresh statements. 5. In the fresh transfer pricing proceedings, the assessee raised various objections which included preliminary objection of making the 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 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's argument that only such data of comparables as was available in public domain during the financial year of the transaction can be used for comparability analysis, he held that the assessee has nowhere taken a stand that transfer pricing were fixed on the basis of profitability of comparable cases. Further, Indian transfer pricing regulation nowhere refers to the requirement of availability of data in public domain, the assessee being in particular business activity is expected to know profitability of that business at different point; (iii) Regarding compliance of conditions laid down under section 92C(3) of the Act, he held that the assessee does not satisfy these conditions laid down as the transfer pricing has not been determined by the assessee in accordance with the TNMM; (iv) Regarding bench marking at segmental level, he held that the assessee has not substantiated the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.10 Mean 12.87 In comparison to that the assessee company's operating results were as under:- Particulars Amount (Rs. in lakhs) for the year ended 31.3.2006 Sales 12,27,106 Add: Other income from services rendered 12,667 Total Operating Income (A) 12,39,773 Less: Operating Expenses (10,74,649) Less: Depreciation (12,882) Operating Profit (B) 152,242 Add: Other income 20,022 Less: Interest (1,678) Profit for the year 1,70,586 OM (B/A) 12.28% 8. The TPO 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 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 short listed 12 companies forming part of Bombay Stock Exchange (BSE) FMCG Index for that year. We also enclose herewith in Annexure 2 the list of companies which have been included/excluded from the FMCG Index from the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 PBIT (NOI,NNRT) TC OP/TC (%) Colgate Palmolive (I) Ltd. 1249.73 186.53 1063.20 17.54 Dabur India Ltd. 1372.39 217.66 1154.73 18.85 Glaxomithkline Consumer Healthcare Ltd. 1117.09 146.10 970.99 15.05 Britannia Industries Ltd. 692.26 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The assessee has rendered research innovation development related services group companies and has shown the mark up of 15.5% in the operating cost and the assessee has selected seven comparable companies for working out arithmetic mean of 18.47% in the following manner:- S.No. Company's Name Average adjusted OP/TC (%) 1. Alphageo (I) Ltd. 24.74 2. Dolphin Medical Services Ltd. 11.46 3. N.G. Industries Ltd. 29.60 4. Vimta Labs Ltd. 69.49 5. Neeman Medical International (Asia) Ltd. -0.89 6. A D S Diagnostic Ltd. - seg. -9.20 7. Pfizer Ltd. - service seg. 4.07 Arithmetic mean 18.47 13. The TPO rejected the comparables like Neeman Manner International Asia Ltd., ADS Dia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were submitted. The DRP rejected the entire contentions of the assessee and upheld the entire findings of the TPO as it is. The assessee, being aggrieved, is in further appeal before the Tribunal. 18. Before us, the learned Sr. Advocate, Mr. P.J. Pardiwala, after referring to the entire facts as discussed by the TPO vis-a-vis the contentions and objections raised by the assessee before the TPO as well as before the DRP with reference to the voluminous paper book filed before us, raised a very preliminary objection/submissions, that the TPO has ultimately carried out the bench marking at the entity level after taking the entire sales of the assessee company i.e., A.E. transactions as well as non-A.E. transactions and has made the adjustment of Rs. 356.44 crores, which has been worked out after taking the percentage of operating profit on total cost at 17.48% of the eight comparable companies short listed by him, as against the 14.16% of the operating profit upon total cost of the assessee. Even if such an adjustment is accepted at the entity level, then the same falls in a safe harbour range of +/- 5%. This was demonstrated in the following manner:- (Rs. in crores) Cost b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. transactions are much higher than non-A.E. transactions and, therefore, if one goes by internal comparables, then the assessee's profit margin on A.E. transactions are at arm's length. The summary of segmental operating margin as submitted by the learned Sr. Counsel are as under:- H.P.C. Particulars A.E. Rs. INR Non-A.E. Rs. INR Total Rs. INR Sales 3,138,252 727,673 3,865,925 Add: DEPB/Export Licences Sales 3,138,252 727,673 3,865,925 Operating Cost 2,722,538 652,778 3,499,818 Operating Margin 415,714 74,895 366,107 Operating Margin (%) on sales OP/OS 13.25% 10.29% 9.47% Operating Margin (%) on cost OP/OC 15.27% 11.47% 10.46% BEVERAGES Particulars A.E. Rs. INR Non-A.E. Rs. INR Total Rs. INR Sales 33,804,065 1,076,219 4,880,284 Add: DEPB/Export Licences (31,234) 620 (30,614) Sales 3,772,831 1,076,839 4,849,670 Operating Cost 3,587,559 1,084,452 4,672,011 Operating Margin 216,506 (8,233) 208,273 Operating Margin (%) on sales OP/OS 5.74% -0.76% 4.29% Operating Margin (%) on cost OP/OF THE CASE 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel submitted that various objections and the conclusions drawn by the TPO with regard to the authenticity of segmental accounts, he submitted that the assessee had submitted audited segmental accounts before the DRP which was confronted to the TPO and no adverse remarks were given on such audited accounts. He submitted that most of the direct expenses have been apportioned to the respective segments based on actual expenditure incurred and other over heads expenses which were allocated in proportion to sales. Regarding the discrepancies pointed out by the TPO in his order, he clarified each and every point and also the so called discrepancies and drew our attention to Annexure-N to letter dated 28th September 2009, given before the TPO giving the segmental details and method of determining the cost. Thus, the allocation of the expenses were perfectly correct and, therefore, going by the results of A.E. transactions at the segmental level, no adjustment is required to be made in the ALP. Accordingly, the entire adjustment made by the TPO should be deleted at the very thresh hold level without going into the merits of inclusion and exclusion of comparable companies and other adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure in different segment is allocated based on some keys; (iv) There are some exceptional adjustments in the operating margin for human and personal care segment; (v) Thus, the report prepared by M/s. M.L. Puri & Co., cannot be said to be reliable; 24. Insofar as reliance of Third Member decision of the Tribunal in Technimont (supra) is concerned, the same can only be relied if reliable data is available for the internal comparable. 25. On the issue of bench marking at the entity level and application of safe harbour range of +/- 5%, the learned Departmental Representative submitted that the assessee has bench marked its margin at the entity level and has computed margin on operating profit upon operating revenue at 12.28%, whereas the mean margin of 12 comparable companies taken by the assessee was computed @ 12.87%. Thus, the original approach of the assessee was to bench mark the international transaction on the entity level by aggregating all the international transactions. Therefore, the plea taken by the learned Sr. Counsel that only A.E. transaction should be taken into account, now cannot be entertained. He further submitted that the arm's length price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the TPO and no such adverse remarks have been given by any of the authorities. Even before the TPO, the assessee, vide letter dated 5th March 2009, a copy of which is placed at Paper book at Pages-433, has submitted the basis of allocation of expenses for segmental accounts in the following manner:- In relation to the keys of allocation of expenditure between the segments, please note the following:- "Direct expenditure like raw material and packing cost, power and fuel, etc., incurred for manufacturing activities are apportioned to the respective segment based on actual expenditure incurred. Overhead expenditures are allocated in proportion to sales." From this, he submitted that the basis for allocation of expenditure which was the main reason for rejecting the rejection of segmental account by the TPO becomes baseless. Moreover, once an audited segment accounts have been furnished and no fault has been found, the same cannot be rejected on the reasoning given by the learned Departmental Representative and, hence, it should be accepted. Regarding exceptional adjustments in the Human care segment products, the learned Sr. Counsel had provided the relevant details to clarify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions and has taken 12 comparable companies on the basis of BSE- FMCG Index. The arithmetic mean of such comparables worked out at 12.87%, as per the details given in the foregoing paragraph no.3. Thus, it was claimed that the assessee's international transactions were at arm's length. The TPO, in his original order dated 7.3.2008, passed u/s 92CA(3), made an adjustment of Rs. 356.44 crores, after taking assessee's profit margin at 14.16% (OP/TC) and comparing the same with the comparable short listed by him wherein the arithmetic mean worked out at 17.48% (OP/TC). Further, addition of Rs. 5.85 crores was also made on account of undercharing of certain services. This order was set aside by the High Court in a Writ Petition filed by the assessee, mainly on the ground that no proper opportunity was given to the assessee to corroborate the facts and various other arguments specifically with regard to segmental accounts which have not been taken into consideration. In compliance with the directions of the High Court, the TPO carried out fresh transfer pricing proceedings and rejected all the assessee's contentions specifically with regard to bench marking the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties are always at arm's length price, however, it is with regard to related parties i.e., A.Es, only one has to see whether such a transaction is at arm's length. The profit margin from the international transaction with the A.E. has to be seen in relation to the uncontrolled transaction with the independent parties. What is to be compared is the international transactions of the assessee with its related parties and not for its entire transaction with non-related parties also. Therefore, ALP has to be seen only with regard to international transaction with A.Es and not on the entire turnover/sales. We, thus, agree with the contentions of the learned Sr. Counsel that bench marking should be done only on A.E. transactions and not for the entire turnover. 31. Now we have to basically examine whether the adjustment in ALP falls within safe harbour of +/- 5% or not. Section 92C provides that the assessee's ALP along with price in relation to international transactions shall be determined by following any of the methods, being the most appropriate method having regard to the nature of transaction and the most appropriate method should be applied for determining of ALP. The proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 117.48 6. Thus, the difference in transactions price and ALP would be Rs. 117.48 (- ) Rs. 114.16 Rs. 3.32 7. Range of A.E. sales considering 5% variation from ALP +5% of Rs. 117.48 -5% of Rs. 117.48 Rs. 123.35 Rs. 111.61 Thus, +/- 5% range falls between Rs. 111.61 crores and Rs. 123.35 crores. Hence, the assessee's profit at 114.16% is within the range. Now, let us examine the assessee's A.E. transactions. Figures in crores 1. Actual transaction with A.E. Rs. 689.89 2. Margin of actual @ 14.16% and OP/OC cost taken by the TPO Rs. 97.69 3. Total cost of actual Rs. 592.20 4. Arm's length margin by the TPO @ 17.48% Rs. 105.78 5. ALP of the A.E. transactions as per TPO will work out to Rs. 710.96 6. Range @ 95% Rs. 675.41 7. Range @ 105% Rs. 746.50 Thus, the 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 17.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40,961 under section 80-IB and Rs. 748,56,22,895 under section 80-IC. 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. Accordingly, he identified additional allocation of expenses to the tune of Rs. 107,75,44,354 which were allotted to various units. It was the contention that assessee has already allocated indirect expenses at Rs. 1077,77,45,837 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 allocat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e findings of the ITAT are as under: "12.4 We have heard the rival contentions and also perused the record. We find that there is considerable strength in the submission of the assessee that term 'derived from' used in section 80HH and 80I were not as wide as 'attributable to'. This view is already upheld by the Hon'ble Apex Court vide its decision in CIT v. Sterling Foods Ltd. (237 ITR 579) and there is no debatable point here. Now the question is whether for allocation the expenses of a Head Office the same strict yardstick as applicable for ascertaining the profits derived from an undertaking is to be applied. In our opinion, since the benefits under section 80HH and 80-I are limited 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses as directed to be done by the CIT(A) is approved. The order of the CIT(A) on this issue is modified to the extent stated herein." It is clear from the above that the aspect relating to the expenditure which needed to be allocated was considered by this tribunal. Hence, we find no force in the contention of the assessee that the issue regarding which items of expenditure could be considered as allocable in view of the terminology used in section 80HH and 80I of the Act was not considered. As aforesaid, the learned counsel for the assessee was also unable to point out how the directions of the CIT(A) were not in accordance with law on the matter. Therefore, respectfully following 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said undertaking while computing the profits and gains of the undertaking. 10. In CIT v. Sterling Foods, [1999] 4 SCC 98 = [1999] 237 ITR 579, the following question was considered by the Supreme Court:- "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the receipt from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under Section 80-HH of the Income Tax Act, 1961?" The question therefore, was converse to the one before us. The Supreme Court held as under :- "12. Crude petroleum is refined to produce raw naphtha. Raw naphtha is further refined, 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 cra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeds on the hypothetical basis that the said products would be manufactured by each of the units or any one of them. 15. The fallacy also arises on account of an erroneous presumption that the benefit of any R & D activity can only be exploited by an enterprise utilizing the same in its manufacturing activities. That is not so. An enterprise can always assign the benefit thereof to a third party. It can always grant a licence in respect of any patent or design to a third party. In that event, the other units would not derive any benefit in respect thereof. The presumption of a nexus between the R & D activities and the units is not well founded". Respectfully following 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 cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT (245 ITR 428) (SC); (b) Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen (73 ITR 53); (c) order of Hyderabad ITAT in the case of DCIT v. Park Devis India Ltd. in ITA No.652/Hyd/97 and CO No.4/Hyd/97; (d) Orders of Mumbai ITAT in M/s. Siemens India Ltd. v. ITO in ITA No.1835 (Bom.), M/s. Siemens India Ltd. v. ITO in ITA No.1632 (Bom.) & CIT v. Siemens India Ltd. in ITA No.1325 (Bom.) and (e) the judgment of the Hon'ble Delhi High Court in the case of CIT v. Ranbaxy Laboratory Ltd. 334 ITR 341. Further he mentioned that there is no dispute 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 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on salary and number of years service by individual employees. This amount was claimed as deductible u/s 37(1). This provision which was based on actuarial valuation of the appellant's liability as on 31.12.90 included Rs. 6.77 crores in respect of earlier years. The amounts payable by the assessee under this supplementary pension scheme were in addition to the pension receivable by the employees from approved superannuation Fund. The supplementary Retirement Pension payments hitherto were at the discretion of the employer. This liability under the pension plant was formally committed by the assessee during previous year as recorded in assessee's Board Resolution dated 22.3.91." 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 Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to decide the same afresh after considering the Pension Scheme and as per law." 47. From the above, we find that provision pertaining to earlier years as well as the provision for current year liabilities was referred to the file of the AO by the Tribunal in AY 1991-92. For uniform approach by the AO, we are of the opinion that this issue should also be remanded with identical directions. Accordingly, ground no 24 is allowed for statistical purpose. 48. In case AO has allowed the actual pension paid during the year while disallowing the provision so made, he is free to withdraw the amount as it may result in double deduction, after reconciling the actual 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f marketing of sugar candies under the brand name "Max". During the financial year 2004-05, the Company decided to discontinue the activity of marketing of sugar candies under the brand name "Max". The company had incurred significant expenditure in supporting this product. However, given the price sensitive nature of candies whereby the individual candy is required to be priced at certain price points, for e.g. 50 paise and due to the increase in input cost, the company incurred losses on the product. Consequently, during the financial year 2004-05, the company had to incur one-time losses aggregating RS.30.44 crs. The particulars of the expenditure incurred 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur own manufacturing facilities in Assam and Uttaranchal. Consequent to the creation of these manufacturing facilities at Assam and Uttaranchal the sourcing of toothpaste and shampoos from PHP and MOPL substantially reduced. Due to reduction in demand from the company PHP and MOPL had to restructure their operations and incurred costs, losses and damages on reduction of its surplus workers/employees at the factory. The Company agreed to compensate Rs.9.5 crore to Prime Healthcare Products and Rs.4.75 crore to MUL Dentpro Pvt. Ltd. A copy of the agreement between the company and Prime Healthcare Products for compensation of RS.9.5 crore is enclosed as Annexure-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght but only paid the compensation for termination of the business arrangement for conversion of sugar candies on behalf of assessee for distributing under 'Max' brand and further termination of purchase agreement with the two companies. Therefore, these expenditures are business expenditures and relied on the following cases for the principles therein: (1) Empire Jute Co. Ltd. v. Commissioner of Income-tax. 124 ITR 1 (SC) (2) CIT v. Rajaram Bandekar [1994] 121 CTR 233 (Bom.) (3) Commissioner of Income-tax v. Madras Auto Service (P.) Ltd. 233 ITR 468 (SC) (4) Bikaner Gypsums v. CIT [1991] 187 ITR 39 It was his submission that since no enduring 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 Sept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to M/s MNFPL discussed above and comes in the nature of revenue expenditure. To that extent assessee's claim can be allowed. However, the amount of Rs. 5 crores was further agreed to be paid as compensation to the said company towards covenants of non-competing. The said company has agreed to abide by for a period of two years so that the interest of the company are duly safeguarded during the non- compete covenant period for which both parties accepted as reasonable and fair period. Therefore, an amount of Rs. 5 crores out of Rs. 9.50 crores involved pertain to non-compete fee. This non-compete fee cannot be considered as revenue expenditure as it is paid in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in earlier years the issue was with reference to the disallowance of entrance fees only. For the first time the club services and facilities were also disallowed by AO. This issue is covered by the jurisdictional High Court in the case of Sayaji Iron & Engg. Co. v. Commissioner of Income-tax, 253 ITR 749. In view of this, AO is directed to allow the expenditure as claimed. Further when assessee is a company, there cannot be any expenditure for personal use. The expenditure can only be disallowed as non-business expenditure, if any. On this reason also the disallowance cannot be supported. Ground 28 is considered allowed. Ground No.29 58. Ground No.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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s one would have to pass an entry to make suitable adjustment for the modvat utilized. According to the Institute of Chartered Accountants 'of India the entry that is to be passed is In a sum of Rs. 1401- which represent the mod vat credit that is utilized on the units which arc consumed. In the aforesaid example 70 units are consumed and as the modvat credit is Rs. 2/- per unit a credit of Rs. 1401- is taken. This would result in the profits being determined at Rs.490 which is the same as per the net method. 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d about 18 consultants with whom it entered into agreements for a period of two years renewable further at the option of either parties and they were paid fixed amounts without any share in the profit. These consultants are prohibited from taking any private assignments and worked full time with the assessee firm. There is no dispute with reference to the deduction of tax under section 192 and also the fact that in their individual assessments these payments were accepted as salary payments. It is 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 fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139'. This section 40(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). Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court rendered in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27, wherein it has been held that income accrues when right to receive is acquired and such right can be said to have been acquired when an enforceable debt is created in favour of the assessee. A bare look at the provisions of sub-section (1) of section 244A reveals that as soon as any refund becomes due under any provisions of the Act, the assessee becomes entitled to receive the interest in respect of 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 meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITR 54 clearly shows that once a right accrues under an agreement, then such accrual is not affected by dispute between the parties. Further, in case of dispute, the final outcome would ultimately relate back to the year of accrual. It was also contended by the assessee that it would be without remedy if the interest was reduced by virtue of assessment under section 143(3). That apprehension was unfounded. If interest is reduced by virtue of sub-section (3) of section 244A on 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/in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons was not required. Since the amount was offered to tax in the respective years when the provisions was made the write back of the same should not be taxed in the year of write back. 70. After considering the rival submissions, we are of the opinion that assessee's contention is correct on facts. Since the provision was not allowed as deduction in the year of creation, the write back of the amount cannot be brought to tax in the year of write back. Even though assessee 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the issue. It is true that this issue was held against assessee and in favour of the Revenue by the ITAT Special Bench in the case of DCIT v. Times Guaranty Ltd. (supra) wherein it has considered vide Para 38 as under: "38. The legal position of current and brought forward unadjusted/unabsorbed depreciation allowance in the three periods, is summarized as under:- A. In the first period (i.e. up to assessment year 1996-97) (i) Current depreciation, that is 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 ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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". 76. Since this decision is in favour of assessee and from higher judicial authority, we are bound by the decision of the Gujarat High Court in preference to the Special Bench decision of the ITAT. There is no contrary judgment to the above. Therefore, respectfully following the decision of Hon'ble Gujarat High Court on the issue, we direct AO to allow the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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