9911796707
TMI Blog2013 (8) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 14-A of the Income Tax Act, 1961 (the Act) on account of expenses incurred in relation to the earning of exempt dividend income. 4. The assessee in the present case is a company which is engaged in the business of manufacturing and trading of agrochemical products and seeds. The return of income for the year under consideration was filed by it on 31-10-2002 declaring total income of Rs. 29,64,91,568/-. In the said return, dividend income of Rs. 1,02,86,569/- was claimed to be exempt from tax by the assessee. No disallowance on account of expenses incurred in relation to the earning of the said exempt income, however, was made by the assessee as per section 14A of the Act on the ground that the investment in the corresponding mutual fund was made out of its own funds and there were no other expenses incurred for earning the dividend income on mutual fund. The A.O. did not accept this stand of the assessee. According to him, some of the expenses directly attributable to the earning of the dividend exempt income such as stamp duty, bank commission etc. must have been incurred by the assessee. He also observed that even the portion of indirect expenses such as salary and other ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity was the substantial activity of the assessee and since fresh investment in mutual fund was made by the assessee in the year under consideration, it cannot be claimed that no expenditure was incurred in relation to dividend income on mutual funds. He contended that even to continue with the existing investment involves decision making and since the portion of the common expenses on salaries and other administrative accounts was partly attributable to the earning of exempt dividend income, the disallowance u/s 14A of the Act was rightly made in the case of the assessee on proportionate basis. He contended that even the disallowance so made @ 5% of exempt dividend income is quite fair and reasonable in the facts and circumstances of the case. 8. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the investment in units of mutual funds made by the assessee stood at Rs. 6.03 crores as on 31-03-2001 which was increased to Rs. 18.32 crores as on 03-03-2002 which clearly shows that the investment activity was substantial activity of the assessee and sizeable new investment was made in the units of mutual funds by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units for the purpose of claiming deduction u/s 80IB of the Act were such that the same could not be said to be derived from the eligible undertakings. He, therefore, excluded the amount of such items of other income from the profits eligible for deduction u/s 80IB of the Act and restricted the claim of the assessee for the said deduction to that extent. On appeal, the ld. CIT(A) allowed part relief to the assessee on this issue upholding the action of the A.O. in excluding five items of other income for the purpose of computing profits eligible for deduction u/s 80IB of the Act which are the subject matter of appeal before us. The main reason given by the ld. CIT(A) in support of his conclusion on this issue was that the said five items of other income did not originate from the eligible undertaking of the assessee inasmuch as their immediate source was not the said undertaking. 10. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards the sale of raw materials and packing materials, it is observed that income from sale of scrap has been held to be eligible for deduction u/s 80IB of the Act by the ld. CIT(A) vide his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A) in confirming the disallowance made by the A.O. on account of assessee's claim for deduction of Rs. 8,59,555/- on account of expenses disallowed in A.Y. 2003-04 being related to A.Y. 2002-03. 12. In the tax audit report for A.Y. 2003-04, royalty to Hoechst on sale of cotton dhaval variety debited to the P&L account was stated to be the expenditure of earlier year. During the course of assessment proceedings for A.Y. 2002-03, the assessee therefore claimed deduction on account of the said expenses stating that the same were pertained to A.Y. 2002-03. Since the provision for the said expenses was not made by the assessee in its books of account in A.Y. 2002-03, the A.O. disallowed the deduction claimed by the assessee in A.Y. 2002-03. On appeal, the ld. CIT(A) confirmed the disallowance made by the A.O. on this issue observing that there was nothing in the tax audit report for A.Y. 2003-04 to show that the expenditure on royalty was related to A.Y. 2002-03. 13. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the royalty amount in question was claimed by the assessee in A.Y. 2003-04 and the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of operational income of the assessee and relying on the decision of Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Company [2003] 260 ITR 371), he held that the said six items of other income were liable to be excluded from the profits of the business for computing deduction u/s 80HHC of the Act as per Explanation ("baa"). As regards the remaining amount of miscellaneous income of Rs. 12,91,163/-, the ld. CIT(A) found that no details were furnished by the assessee of such miscellaneous income and he therefore upheld the exclusion of 90% of the said amount from the profits of the business for computing deduction u/s 80HHC of the Act. 16. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the exclusion of miscellaneous income from the profits of the business for the purpose of computing deduction u/s 80HHC of the Act to the extent of Rs. 12,91,163/- was upheld by the ld. CIT(A) in the absence of any details furnished by the assessee in respect of the said income. Even before us, the ld. counsel for the assessee has not furnished any such details and in the absence of the same, we con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is that the judgment in Bangalore Clothing must be regarded as being impliedly approved by the Supreme Court in Baby Marine Exports [2007] 290 ITR 323. The issue before the Supreme Court in Baby Marine Exports [2007] 290 ITR 323 was whether an export house premium received by the assessee is includible in the profits of the business of the assessee while computing the deduction under section 80HHC. The assessee was engaged in the business of selling marine products both in the domestic and international markets in pursuance of a contract which it had entered into with export houses. The assessee received the entire FOB value of the exports together with a payment which was described as an export house premium of 2.25 per cent. of the FOB value. The Tribunal in that case held that the export house premium received by the assessee was includible in the profits of the business under section 80HHC. The contention of the Revenue before the Supreme Court was that as a supporting manufacturer, the assessee was entitled to a deduction only on the sale price of its goods and the premium received could not be held to be derived from the business of export. Before the Supreme Court reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of goods to an export house. The Supreme Court has, as a matter of fact, in the course of the discussion not affirmed the judgment of this court in Bangalore Clothing [2003] 260 ITR 371. The decision undoubtedly was cited on behalf of the assessee but that in itself is not a ground for this court to hold that it was impliedly approved. There is nothing in the judgment of the Supreme Court to suggest that the judgment in Bangalore Clothing [2003] 260 ITR 371 was either expressly or impliedly approved. The submission which has been urged on behalf of the assessee cannot, therefore, be accepted. The ambit of Explanation (baa) has been considered by the judgment of the Supreme Court in Ravindranathan Nair's case [2007] 295 ITR 228. The legislative policy underlying the provision is that items which are unrelatable to the export activity must be excluded in the computation of business profits in order to prevent a distortion in the computation of the deduction under section 80HHC. What provision should be made consistent with the legislative policy underlying section 80HHC is evidently a matter for Parliament to determine. The duty of the court is to interpret the language of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich must be borne in mind is whether the receipt is of a similar nature and is included in the profits of business. To be susceptible to a reduction the receipt must be of a nature similar to brokerage, commission, interest, rent or charges." The Hon'ble Bombay High Court thus has laid down the guidelines in the decisions rendered in the case of Dresser Rand India (P) Ltd (supra) & Pfizer Ltd. (supra) and the issue as to whether a particular item of income is liable to be excluded from the profits of the business for the purpose of computing deduction u/s 80HHC of the Act is required to be considered and decided in the light of the said guidelines. Since the benefit of the said two decisions of the Hon'ble Bombay High Court rendered subsequently was not available either to the A.O. or to the ld. CIT(A), we consider it just and proper to restore the issue relating to the exclusion of the remaining four items of other income from the profits of the business for computing the deduction u/s 80HHC of the Act to the file of the A.O. for deciding the same afresh in the light of the said two decisions of the Hon'ble Bombay High Court. 20. As regards the alternative contention of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration, the assessee had entered into various international transactions with its AEs. In this regard, a reference was made by the A.O. u/s 92CA(2) of the Act to the TPO for determining the ALP of the said transaction. The said transactions, inter alia, were comprised of royalty of Rs. 2.84 crores paid by the assessee to its holding company M/s Syngenta, Switzerland. All the international transactions with its AEs were bench marked by the assessee by applying TNMM. For this purpose, the profit of its crop protection business was compared by the assessee with profits earned by other entity engaged in the similar business. In its transfer pricing report, the assessee had taken 21 comparable companies whose average operating margin was worked out at 5.21% and since the operating profit margin of the assessee in this segment was 6.21%, the international transactions entered into in its crop protection business were claimed to be at arm's length price. Similarly, the operating profit margin of its seeds business was compared by the assessee with operating profit margin of other entities engaged in the same line of business and since the average operating profit margin in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on export sales. According to her, the Government policy referred to by the assessee was relating to the Foreign Exchange Regulation and the same was framed from time to time considering the foreign exchange situation. She held that such regulation or permission to remit the Foreign currency does not imply that the relevant transactions were in accordance with the transfer pricing provisions. She also did not find merit in the other contention raised by the assessee that the overseas entity having invested substantial amount on the R&D of the product manufactured by the assessee, it was required to be compensated by paying the royalty. She held that the pesticide industry was a generic industry as stated in the TP study report furnished by the assessee with most of the molecules off the patent and there was nothing to show that any of the products on which royalty was paid is a patented product. 27. Having rejected the contentions of the assessee justifying the payment of royalty, the TPO proceeded to examine the profit margin of its product separately on which royalty was paid and recorded her findings in respect of each such products as under:- "9.1 Pretilachlor: Total export s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired @ Rs. 9.79 per kg which is more than the Royalty paid @Rs. 5.20. 9.3 Lava : Total sales (export) of this product to Associate Enterprise is Rs.4,11,516/-. Royalty paid is @ 7% on export sales of Rs.28,806/. The assessee has provided the profit margin on this product. Assessee has earned a profit margin on cost @ 1.2%. As against the same, the average margin on local sales of the assessee is 6.23%. Thus, it is seen that even on this product, the margin is less after payment of Royalty. 9.4 Actara Export sales of this is Rs.1,50,49,6021-. Royalty @ 3% is Rs.4,51,488/-. Assessee's margin on export sales of 46.93% on costs is less than local margin of 53.07% (in the local sales, the assessee has in fact paid 5% Royalty) Hence, this clearly shows that the assessee has lower margins on export sales to the associated enterprise on which Royalty is paid. If the Royalty paid on local sales is excluded, the export margins would be still lesser in comparison. On the basis of the above findings, the TPO came to the conclusion that although the royalty was claimed to be paid by the assessee for commercial exploitation of the technology, the assessee in fact was earning lesser margin on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Appellant has relied on LIC vs. Escorts Ltd. & Others, (1986) 1 SCC 264 which was a case in which the* provisions of the Foreign Exchange Regulation Act were so structured as to make it clear that it is for the Reserve Bank of India alone to consider whether the requirements of the provisions of the Foreign Exchange Regulation Act and the Rules, directions and orders issued from time to time have been1iIfihIed and whether permission should be granted or not. The Hon'ble Supreme Court further observed that there is no provision of the Act [FERA] which enables an individual or authority functioning outside the Act [FERA] to determine for his own or its own purpose whether the Reserve Bank of India was right or wrong in granting permission uls.29(l) of the Act [FERA] and that it is certainly not open to a company whose shares have been purchased by a non-resident company to refuse to register the shares even after permission is obtained from the Reserve Bank of India on the ground that permission ought not to have been granted under the FERA. The facts of the present case are distinguishable, since as pointed out above, the Exchange control regulations only stipulates the maximu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er rejecting the main contentions of the assessee raised on the issue of transfer of pricing adjustment, the ld. CIT(A) proceeded to verify the produce-wise adjustment worked out by the TPO and recorded his findings in respect of royalty paid for each item separately as under:- "3. As regards Rifit, the appellant's contention is that the quantity sold in the local market 42,000 litres] is significantly lower than the quantity sold in the export market [1,6 1,200 litres], volume discount is required to be considered along with differences which cannot be quantified with reasonable accuracy relating to differential functions and risks, geographical markets, size of the markets, contractual terms, and level of market. Taking into account the appellant's submissions, it is felt that the provisions of Rule 10B(1)(e)(iii) are applicable and the comparable margin of 4.7 1% computed by the TPO is required to be adjusted to the extent of 0.5% i.e., the AO is directed to compute the arm's length price for export sales of Rifit to AE by applying comparable margin of 4.21% on costs of Rs.145.82 as against 4.71% on costs of Rs.145.82 applied by the TPO. Since the adjustment still remains more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant's contention regarding application of proviso to Section 92C(2) are not being accepted since more than one price is not being determined by the most appropriate method [refer discussion supra]. However, the appellant is justified in stating that the net margin on local sales of non-royalty bearing products of 5.41% would serve as a better comparable. The AO is therefore, directed to compute the arm's length price for export sales of LAPA by applying comparable margin of 5.41% and make adjustment for royalty on export sales of LAPA accordingly. 37. For Actara, the TPO has observed that the export sa1e is Rs.1,50,49,6021-, royalty at 3% is Rs4,51,488/- and assessee's margin on export sales of 46.93% on cost is less than local margin of 53.07% [on which royalty of 5% was paid]. The assessee's explanation is that sale of Actara to AE and non-AE cannot be compared due to differences in pack size; smaller packs tend to have higher material and overhead cost[sale to AE are of 10 gram pack whereas the sale to non-AE are of 40 gram pack]. It is further stated that the product-wise comparability analysis provided in the submission to the TPO did not cover the entire basket of Acta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the royalty, on the other hand, was paid by the assessee at the rate lower than the rates approved by the RBI under FERA and since the objective of the FERA was to regulate the foreign exchange resources, the RBI looked at the rate of royalty from reasonableness perspective. He contended that although the RBI approval is not conclusive for determining of arm's length price of international transactions as held inter alia by the Hon'ble Delhi High Court in the case of Nestle India reported in 337 ITR 103, the same has to be given consideration while determining the arm's length price of the transaction as held by the Delhi Tribunal of ITAT in the case of Reebok India Company (ITA No. 5857/Del/2012). He contended that the TPO has neither disputed the benefit derived by the assessee from the licensing of crop technology nor has placed any material on record to show that the royalty rate charged to the assessee by its AEs was unreasonable or excessive. He submitted that even the TPO has not rebutted the comparable royalty rates from the broader chemical industry submitted by the assessee during the assessment proceedings. He contended that the quantum of royalty in any case canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved in the additional aground is purely a legal issue and all the relevant facts for adjudication thereof are available on record. It is further submitted that this issue was not raised before the ld. CIT(A) in view of string of adverse rulings available at the relevant time but the same is now being raised in view of the decision of Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT reported in [2011] 332 ITR 42 (Bom) which is in favour of the assessee. Keeping in view of the submissions made by the assessee and since there was no objection raised by the ld. D.R., we have admitted the additional ground raised by the assessee and now, we proceed to decide the same on merit. 35. As agreed by the ld. Representatives of both the sides, the issue raised by the assessee in the additional ground is squarely covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT (supra) wherein it was held that when the assessee is entitled to deduction u/s 80IA and 80HHC of the Act, profits of business for computation of deduction u/s 80HHC of the Act are not to be reduced by the profits of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Topik Multipurpose Formulator Unit (Rs) Total (i) Repacking charges 6,49,496/- 5,59,509/- 12,09,005/- (ii) Credit for duty drawback 59,814/- 4,04,903/- 4,64,717/- (iii) Interested on employee loans 2,39,330/- 1,28,691/- 3,68,021/- Total 9,48,640/- 10,93,103/- 20,41,743/- 40. We have heard the arguments of both the sides and also perused the relevant material available on record. As already held by us while deciding a similar issue involved in assessee's own case for A.Y. 2002-03, there has to be a direct or first degree connection of the income and the business of the eligible undertaking in order to be eligible for deduction u/s 80IB of the Act. In the year under consideration i.e. A.Y. 2003-04, all the three items of other income are such that the immediate source thereof cannot be said to be the business of eligible undertaking and this being so, we are of the view that all these items of income cannot be said to be eligible for deduction u/s 80IB of the Act. As regards the alternative claim of the assessee that only the net amount of other income should be excluded while computing the profits eligible for deduction u/s 80IB of the Act, we direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee of having incurred the expenses for earning the other income. Ground No. 2 of assessee's appeal is accordingly treated as partly allowed. 46. As regards ground No. 3, it is observed that the issue raised therein relating to the assessee's claim for not reducing the amount eligible for deduction u/s 80IB of the Act while computing profits of the business for the purposes of deduction u/s 80HHC of the Act is squarely covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT (supra) wherein it was held that when the assessee is entitled to deduction u/s 80IA and 80HHC of the Act, profits of business for computation of deduction u/s 80HHC of the Act are not to be reduced by the profits of business allowed u/s 80IA of the Act. It was held that restriction in section 80IA of the Act relates to disallowance of deduction and not to computation of deduction. Since the relevant provisions of section 80IA of the Act are similar to section 80IB of the Act, we respectfully follow the decision of the Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. (supra) and direct the A.O. to reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has kept alive the claim for royalty in A.Y.2002-03 by filing an appeal before the Tribunal. The said appeal of the assessee has already been disposed of by us confirming the disallowance made on account of royalty in A.Y. 2002-03. The ld. D.R. has also fairly agreed that the expenditure on account of royalty being genuine business expenditure is to be allowed in either of the years. Accordingly, we uphold the impugned order of the ld. CIT(A) allowing the claim of the assessee for royalty in A.Y. 2003-04 and dismiss ground No. 1 of Revenue's appeal. 51. As regards ground No. 2 of the Revenue's appeal for A.Y. 2003-04, it is observed that the issue raised therein relating to assessee's claim for deduction u/s 80HHC of the Act in respect of DEPB benefit now stands squarely covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of Topman Exports (supra). We, therefore, find no infirmity in the impugned order of the ld. CIT(A) to allowing the claim of the assessee for deduction u/s 80HHC of the Act in respect of DEPB benefit following the decision of Special Bench of the ITAT in the case of Topman Exports reported in 124 ITD 1 which has now b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 84,51,548/-, the ld. Counsel for the assessee has relied on the decision of Hon'ble Madras High Court in the case of CIT vs. Taj Fire Works Industries [2007] 288 ITR 92 (Mad.). In the said case, the assessee was engaged in the business of fire works on job work basis with material supplied by its customers. The A.O. disallowed the claim made by the assessee for deduction u/s 80HH of the Act and 80-I of the Act on the ground that the assessee was only a labour contractor and not an industrial undertaking. The ld. CIT(A) and the Tribunal, however, held that assessee was entitled for the said deduction and the Hon'ble Madras High Court upheld the said decision holding that the assessee had only been supplied with the raw materials by the customer and since it had engaged with its own labourers to produce the end product i.e crackers, it satisfied the test of manufacture making it entitled to special deductions u/s 80HH and 80I of the Act. In the present case, the assessee is engaged in the business of manufacturing of agro chemical products and seeds and the nature of processing charges received by the assessee is not very clear as neither the A.O. nor the ld. CIT(A) has given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er required consisting of write back of superannuation provision etc. 36,69,000/- 61. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards item No. 1 & 3 of other income, the ld. Counsel for the assessee has submitted that the decision of the Tribunal in the case of Sandoz India P. Ltd. (supra) fully supports the case of the assessee on this issue wherein it was held that the amount written back by the assessee u/s 41(1) of the Act constitutes business profits and the same therefore has to be considered while working out deduction u/s 80HHC of the Act as business income. Respectfully following the said decision of the co-ordinate Bench of the Tribunal, we direct the A.O. to not to exclude these two items while computing the profits of the business for the purpose of deduction u/s 80HHC of the Act. 62. As regards the second item of other income i.e. miscellaneous income amounting to Rs. 2,85,31,000/-, it is observed that a similar issue has been restored by us to the file of the A.O. in the earlier year with a direction to decide the same afresh keeping in view the decision of the Hon'ble Bombay High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t interest u/s 244A of the Act keeping in view the decision of Hon'ble Bombay High Court in the case of Sri Jagannath Steel Corporation (supra) after verifying the relevant facts from record. Ground No. 5 of assessee's appeal is accordingly treated as allowed. 66. As regards ground No. 6, it is observed that the issue involved therein relating to the addition made by the A.O. and confirmed by the ld. CIT(A) by way of transfer pricing adjustment on account of royalty paid by the assessee to its AEs is similar to the one involved in the earlier years which has been decided by us in the foregoing portion of this order. Following our decision rendered in the earlier year, we restore this issue to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2002-03. Ground No. 6 of the assessee's appeal for A.Y. 2004-05 is accordingly treated as allowed. 67. The next issue involved in the additional ground filed by the assessee, which has been admitted by us and ground No. 1 of Revenue's appeal relates to the disallowance u/s 14A of the Act made by the A.O. at Rs. 1,13,30,791/- and sustained by the ld. CIT(A) to the extent of Rs.19,69,550/-. As agreed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee has submitted that the said expenditure was incurred by the assessee on Green House installation and not on purchase of land. Keeping in view the submissions made by both the parties, we consider it fair and proper to restore this issue to the file of the A.O. with a direction to decide the same afresh after verifying the relevant certificate furnished by the assessee for the first time before the ld. CIT(A) as well as the exact nature of capital expenditure incurred on Green House Land. Needless to observe that the A.O. shall afford sufficient opportunity of being heard to the assessee. Ground No. 2 of Revenue's appeal for A.Y. 2004-05 is accordingly treated as allowed for statistical purpose. 71. As regards ground No. 3 of the Revenue's appeal for A.Y. 2004-05, it is observed that the issue involved therein relating to addition on account of disallowance made u/s 14A of the Act while computing the book profit u/s 115JB of the Act is consequential to the issue of disallowance u/s 14A of the Act while computing the total income of the assessee under the normal provisions of the Act. Following our decision on the main issue, we direct the A.O. to restrict the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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