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TMI Blog2015 (10) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... l year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of: extraordinary items. It was decided in number of cases by the Tribunal that incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while doing exercise of FAR analysis for comparability purpose. - Decided against assessee. Quantification of amount eligible for deduction under section 10B - common corporate overheads should be apportioned on the basis of ratio of turnover of the unit to the ‘total turnover’ of the company and in this manner reducing the eligible profits under Sec. 10B as concluded by CIT(A) - Held that:- This issue was decided in AY 2008-09 [2015 (10) TMI 790 - ITAT HYDERABAD] as held that even in the case where the unit starts production only at the fag end of the year cost of working on that unit throughout the year for establishing / starting production may not result in allocation of actual expenditure if turn over is considered. In view of this, since Assessing Officer has not given any rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptions are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme - Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon’ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (2013 (8) TMI 629 - ITAT BANGALORE ) - Decided in favour of assessee for statistical purposes. Superannuation contribution in respect of a promoter Managing Director - disallowance of claim as contribution to superannuation fund is covered u/s 36(1)(iv) the same cannot be allowed u/s 37 - Held that:- On going through the facts and materials on record, we are of the view that the expenditure incurred is allowable as deduction if not u/s 36(1)(iv) but u/s 37 of the Act as it is exclusively incurred for the purpose of business. Moreover, it is not disputed that assessee has deducted tax at the time of making contribution to the superannuation fund and has treated it as part of salary of the concerned directors. That being the case, the expenditure incurred should be allowed as a deduction. - Decided in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee splitting the said amount under three different heads, had adopted different criteria for apportioning the said amounts under each head. However, the AO held that the entire common expenditure has to be apportioned on the basis of turnover of each unit. Accordingly, he computed the apportionable amount to EOU unit at Jeedimetla at ₹ 1,65,34,323/- and thus, the profit for the purpose of 10B of that unit at ₹ 55,67,51,745/-. He recomputed the apportionable amount of the common expenditure for the other EOU unit i.e., Pashamylaram unit at ₹ 2,80,53,019/- and thereby the profit arrived for the purpose of Section 10B in respect of this unit was at ₹ 1,14,60,06,989/-. For the purpose of deduction U/s. 10B of the act, assessee has excluded Sales Tax, Excise Duty and consideration not received in respect of export from total turnover . However, referring to the provisions of Section 154(11A) of the Act, the AO only excluded the Sales Tax and Excise Duty for arriving at total turnover for the purpose of computing deduction U/s. 10B. He computed the allowable deduction U/s. 10B in respect of both the above EOU units at ₹ 34,17,81,933/- and at ₹ 47,62 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2005-2006 based on receipt basis. As can be seen the amount of ₹ 26.91 crores credited to the P L account this year is only a notional deferred income whereas the actual income was received much earlier. As can be seen from the facts on record, the corresponding expenditure pertaining to development of Perindopril was spent much earlier i.e., much prior to assessment year 2005-2006. Therefore, there is no corresponding expenditure in the relevant assessment year. Even if there are costs/ liabilities for developing the product on which the assessee received patent infringement compensation, the costs and liabilities does not pertain to the year under consideration. 16. Assessee relied on the decision of Hon ble Delhi High Court in the case of CIT vs. Desiccant Rotors s International Pvt. Ltd. (2012) 347 ITR 32 (Del.) (H.C.) wherein the issue was with reference to the claim of expenditure under section 37(1). In that context, the Hon ble Delhi High Court has analyzed the principles relating to patent infringement rights and held that they are purely compensatory in nature and confirmed the liability of amount under section 37(1) of the Act and the ITAT order wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of: extraordinary items. It was decided in number of cases by the Tribunal that incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while doing exercise of FAR analysis for comparability purpose. For the reasons stated above, we agree with the Assessing Officer/DRP that this income from settlement of patent infringement cannot be considered as operational income while working out the segmental profits or as total profits of the assessee for the purpose of comparison. At best, it can be considered as another segment of income for which no expenditure was charged, but the same cannot be included in either of the segmental operations of the assessee. This ground is accordingly rejected. 6.2 Even though the issue was decided in the context of Transfer pricing principles, the same is applicable to the present issue. Consequently, we uphold the order of Ld. CIT(A) on this issue. Ground is accordingly dismissed. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that issue can be decided independently in this year. After considering the facts as stated in the objections before the DRP and also before us, we are of the opinion that assessee has allocated the corporate overheads on a rational basis based on the material cost of purchase and number of people worked for the unit and also on the basis of head account which is reasonable. Adopting sales turnover as the basis may result in skewed allocation. For example, if a particular unit is producing only high cost/ high price product, the effort and service cost for that unit will be less whereas, the profit margin will be more. If the unit is not producing much in the year and has lesser sales, allocation of amount on the basis of turnover may result in under allocation of service cost. Even in the case where the unit starts production only at the fag end of the year cost of working on that unit throughout the year for establishing / starting production may not result in allocation of actual expenditure if turn over is considered. In view of this, since Assessing Officer has not given any rationale in adopting the turnover as the basis, ignoring the assessee s method, we are of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restoring the issue to the file of the Assessing Officer to examine in the light of the findings and decision of the Special Bench of the ITAT. In the case of Dr Reddy Laboratories the issue was decided as under: 9.3 After hearing the case, the Special Bench of the Income-tax Appellate Tribunal Bangalore in the case of Boicon Ltd Vs DCIT held that ESOP discount (difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made if the market price is different at the time of exercise of the option. In that case also assessee framed an Employee Stock Option Plan (ESOP) pursuant to which it granted options to its employees to subscribe for shares at the face value of ₹ 10. As the market price of each share was ₹ 919, the assessee claimed that it had given a discount of ₹ 909 which was allowable as a deduction as 'employee compensation. Though the options vested equally over four years, the assessee claimed a larger amount in the first year than was available under the SEBI guidelines. The AO CIT(A) rejected the claim on the ground that there was no expenditure . On appeal to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act. (v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal installments on a straight line basis. The decision in the case of Ranbaxy Laboratories 124 TTJ 771 (Delhi) was reversed and S.S.I. Ltd. v. DCIT 85 TTJ 1049 (Chennai) approved, PVP Ventures 211 Taxman 554 referred. The decision of Spray Engineering Devices Ltd 53 SOT 70 (Chd) was also approved. The above decisions referred by Special Bench was relied upon by assessee, therefore there is no need to refer them again. AO is directed to work out the deduction keeping in mind the principle laid down by the Special bench in the above referred case, after giving an opportunity to assessee. Ground is allowed for statistical purposes. Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (supra). Ground No. 13 is allowed for statistical purposes . 8.2 We order accordingly. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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