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TMI Blog2016 (1) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in disallowing the deduction was that no agreement has been entered as contemplated by section 35(2AB). In this regard also we have noted that the assessee has made requisite compliance as has been required by the prescribed competent authority and compliance of all the procedural requirements has been examined by the competent authority while granting approval. In our considered view, we should look substantive compliance of the provisions. Documentation in any particular format and its approval in a particular manner is not object of this action. - Decided in favour of assessee Disallowance of interest expenditure u/s 14A - Held that:- It is noted from the perusal of the schedule that there is no fresh investment towards investment of domestic companies. Only one entry is appearing in the name of addition of shares of BDH Industries Ltd.. It has been brought to our notice that during the year, the assessee has acquired shares of this company at book value on account of amalgamation of Bombay Drugs Pharma Ltd. into itself. It is further brought to our notice that no cash outflow was required for acquiring these shares. Thus, in fact no amount has been invested for making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough orders of the lower authorities and showing and find that a sum of ₹ 2,17,810/- marked as foreign exchange fluctuation has been put under the head miscellaneous income. Thus in all fairness, we send this issue back to the file of Ld. CIT(A) to re-adjudicate the same after giving adequate opportunity hearing to the assessee.- Decided in favour of assessee for statistical purposes. Scrap sales - treated as part of total turnover for the purpose of claiming deduction u/s 80HHC - Held that:- Hon'ble Supreme Court has decided this issue in favour of the assessee in CIT vs. Punjab Stainless Steel Industries (2014 (5) TMI 238 - SUPREME COURT) wherein it has been clearly held that sale proceeds generated from sale of scrap would not be included in total turnover. Thus, respectfully following the judgment of Hon'ble Supreme Court, we direct the AO to exclude the amount of sale proceeds of scrap sales, from amount of total turnover for the purpose of computing deduction u/s 80HHC. - Decided in favour of assessee Interest allowable u/s 57 - Held that:- Assessee would be satisfied if claim is allowed u/s 57(iii). We find force in the alternative submissions of the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of Ld. Commissioner of Income Tax (Appeals) -X, Mumbai {In short, 'CIT(A)'}, both for the assessment year 2002-03 dated 10.01.2006, passed against the assessment order passed by the Assessing Officer (in short 'AO') u/s 143(3) of the Act. 2. During the course of hearing, arguments were made by Shri Nitesh Joshi (Ld. Counsel) on behalf of the Assessee and by Shri N.K. Chand, Departmental Representative (Ld. CITDR), on behalf of the Revenue. First we take up assessee's appeal in ITA No.1727/M/2006: 3. Ground No.1: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the disallowance of ₹ 1,86,63,256/- made by the Assessing Officer as excess deduction claimed u/s 35(2AB) of the IT Act. 3.1. The issue involved here is that in this case deduction was denied by the AO as well as Ld. CIT(A) on the ground that recognition u/s 35(2AB) from the DSIR ( Department of Scientific and Industrial Research) has been received after end of the assessment year, and that agreement as contemplated by section 35(2AB) has not been entered into. 3.2. In this regard, it was submitted by the Ld. Counsel that the position of law is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the approval has been granted by the competent authority after taking the application of the assessee as a base. In our considered view, under these circumstances, the approval would relate back to the date of the application. In other words, under these circumstances, it can be taken as if the approval was granted on 28.03.2001 i.e. the date of application made by the assessee. Thus, in our view, the grievance raised by the Revenue on this issue is not sustainable. It is further noted by us that this issue is no more res-integra. We can take help of judgment of Hon'ble Delhi High Court in the case of CIT vs. Sandan Vikas (India), (supra) wherein their lordships have held, following the judgments of Hon'ble Gujarat High Court in the case of CIT vs. Claris Lifesciences Ltd. (supra), that assessee would be eligible for deduction even if the approval is granted by the competent authority subsequent to the expiry of the previous year. The relevant portion of the judgment is reproduced below: The Assessing Officer, however, refused to accord the benefit of the aforesaid provisions of weighted deduction to the assessee on the ground that recognition and approval was given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered Rule 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R D facility has to be allowed for weighted deduction as provided by Section 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he action of Ld. CIT(A) in making the disallowance of interest expenditure u/s 14A of the Act. 4.1. During the hearing, it has been submitted by the Ld. Counsel of the assessee that only interest has been disallowed. In A.Y.2001-02 also, similar issue came up before the Hon'ble Tribunal wherein it has been held that no disallowance of interest is called for. It has been further submitted that no fresh investment has been made during the year and therefore this issue stands covered with the judgment of Hon'ble Tribunal of earlier year. On the other hand, Ld. CIT, DR has placed reliance on the order of the AO on this issue. 4.2. We have gone through the orders of the lower authorities and submissions made before us by both the sides. The brief facts are that during the assessment proceedings it was pointed out by the AO that the assessee has invested into shares of India Company aggregating to ₹ 10,77,58,817/-. In response, the assessee tried to explain that no borrowed capital was used for purpose of investment in such shares but AO was not satisfied and he disallowed the proportionate interest amounting to ₹ 1,46,87,526/-. 4.3. Being aggrieved, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the end of such financial year. The Hon'ble jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [(2009) 313 ITR 340 (Bom.)] has held that if there be interest free funds available to the assessee sufficient to meet its investments and at the same time loan has been raised, it can be presumed that the investments were made from interest free funds. While reaching this conclusion the Hon'ble jurisdictional High Court considered the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT [(1997) 224 ITR 627 (SC)] In view of the aforesaid precedent of the Hon'ble jurisdictional High Court, it is apparent that no interest bearing funds can be said to have been deployed by the assessee for the purposes of making investment in the shares of these three companies, from which exempt dividend income was earned. It is axiomatic that where investment is made out of assessee's own funds and not out of borrowed funds, there can be no disallowance u/s 14A. Our view is fortified by the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. K. Raheja Corporation Pvt. Ltd., a copy of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar issue came up before the Tribunal in A.Y. 2001-02, wherein disallowance has been deleted. 5.1. On the other hand, Ld. CIT-DR has relied upon the judgment in the case of Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100 (Gujarat-HC) and contended that with regard to employees' share, this judgment is against the assessee. 5.2. We have gone through the facts of the case. The undisputed facts are that the entire payment has been made before the due date of filing the return. Similar issue came before the Tribunal in assessee's own case for A.Y. 2001-02, wherein Hon'ble Tribunal has allowed relief to the assessee, relevant para of the Tribunal's order is reproduced below: 6. After considering the rival submissions and perusing the relevant material on record we find that the Hon'ble Supreme Court in the case of CIT v. Alom Extrusions Ltd. [(2009) 319 ITR 306 (SC)] has held that the amendment to first proviso and the omission of the second proviso to section 43B by the Finance Act, 2003 is retrospective. In that view of the matter any amount referred to in section 43B, being the sum payable by the employer shall be allowed as deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up before the Tribunal in A.Y. 2001- 02, wherein the stand of the revenue was rejected by making following jobservations: 10. Having heard the rival submissions and perused the relevant material on record we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. v. DCIT Anr. 332 ITR 42 (Bom) in which it has been held that restriction u/s 80-IA(9) is not applicable at the stage of computing deduction u/s 80HHC but only at the stage of allowing deduction u/s 80HHC. In view of the above judgment of the Hon'ble High Court, it becomes apparent that the action of the Assessing Officer in entirety cannot be sustained. The impugned order to the extent it is against the assessee is vacated and to the extent it is against the Revenue is upheld. The assessee's ground is allowed and Revenue's ground is dismissed. 6.3. We are bound by the judgment of the jurisdictional High Court as well as coordinate bench of the Tribunal passed in assessee's own case, and therefore, we allow ground no. 4 of assessee's appeal. 7. Ground No.5: In this ground, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities and showing and find that a sum of ₹ 2,17,810/- marked as foreign exchange fluctuation has been put under the head miscellaneous income. Thus in all fairness, we send this issue back to the file of Ld. CIT(A) to re-adjudicate the same after giving adequate opportunity hearing to the assessee. This ground is allowed for statistical purposes. 9. Ground No.7: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the action of AO in considering the scrap sales as part of total turnover for the purpose of claiming deduction u/s 80HHC of the Act. 9.1. During the course of hearing it has been submitted by the Ld. Counsel that scrap sales ought to have been reduced from the cost of production and should not have been included in the total turnover for the purpose of computing deduction u/s 80HHC. It has been further stated by him fairly that it was held by the Tribunal in A.Y.2001-02 that scrape sales would form part of total turnover. However, subsequently, Hon'ble Supreme Court in CIT vs. Punjab Stainless Steel Industries 364 ITR 144 has held that scrap sales cannot be regarded as part of total turnover. It was submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue's Appeal) 11. Ground Nos. 1 2: In these grounds, the Revenue has challenged the action of Ld. CIT(A) in directing the AO to allow the interest amounting to ₹ 9,58,28,163/- u/s 57(iii) of the Act. 11.2. In this regard, Ld. Counsel for the assessee has submitted that the assessee company had made investment in its subsidiary companies and therefore, deduction of interest for funds borrowed for making such investment should be allowed u/s 36(1)(iii) of the Act. He relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs. Phil Corporation Limited 244 CTR 226 (Bom) and CIT vs. Srishti Securities (Private) Limited 321 ITR 498 (Bom). It was further submitted that the assessee company has business transactions also, with its subsidiaries as could be seen from page 35 of the paper book and also evident from the Form 3CEB. Alternatively, it is an undisputed fact that dividend received by the assessee from the foreign companies would be chargeable to tax under the Act. Therefore, interest on funds used for the purposes of making investment in shares of foreign companies should be allowed as deduction and reliance was placed in this regard on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Ld. CIT(A) are reproduced hereunder: I have gone through the contention of the appellant as well as that of the AO. I have also perused the working submitted by the appellant as well as that of AO appearing in para 4 of the order. As regard the appellant's claim is concerned it is seen that the appellant has merely submitted the gross summary of funds flow in its support to show that the appellant company had sufficient interest free funds to invest however at no stage the appellant has refuted the findings of the AO as referred to in para 4 that the appellant had in fact used the borrowed capital for the purpose of investment in such shares of overseas companies. Thus when the AO has categorically found that the amount of borrowed capital was used in such investments which is not refuted by the appellant I am unable to accept the argument of the appellant that the interest free funds were used for such investment and on this grounds the appellant's arguments are rejected. As regard reliance placed by the appellant on various judgments it is seen that the same does not support the appellant's claim as in all those judgment it has held that the appellant should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's appeal. Thus, ground no. 4 is dismissed. 14. Ground No.5: This ground deals with deduction of profit eligible for deduction u/s.80HHC by 30% of the export profits of unit eligible for deduction u/s 80-IB. It is noted that this issue is connected with ground no.4 of assessee's appeal and therefore, we direct the AO to follow our order on this issue as has been decided us in ground no.4 of assessee's appeal. Thus, ground no.5 is dismissed. 15. Ground No.6: In this ground, the Revenue has challenged the action of Ld. CIT(A) in directing the AO to make netting off of interest receipts of ₹ 1,31,6,636/- against interest payment of ₹ 24.22 crores and apply the explanation (baa) of section 80HHC only in respect of net amount of interest. 15.1. It has been argued by the Ld. Counsel of the assessee that this issue is covered in its favour by the decision given by the Tribunal in assessee's own case for A.Y. 2001-02 following the decision of Hon'ble Supreme Court in Associated Capsules Pvt. Ltd. vs. CIT 343 ITR 89, holding that benefit of the netting off would be available. 15.2. We have gone through the order of earlier year and submissions m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. After considering the rival submissions and perusing the relevant material on record we find that this issue has also been settled by the Hon'ble Supreme Court in the case of CIT v. Laxmi Machine Works [(2007) 290 ITR 667 (SC)] holding that the excise duty is not includible in the 'total turnover' in the formula contained in section 80HHC. The impugned order on this issue, being in conformity with the view taken by the Hon'ble Supreme Court, does not warrant any interference. This ground is not allowed. 16.2. No contrary judgment has been placed before us, and therefore, respectfully following judgment of Tribunal and that of Hon'ble Supreme Court, we decide this issue in favour of the assessee and therefore Ground no. 7 of the Revenue's appeal is dismissed. 17. Ground No.8: In this ground, the Revenue has challenged the action of Ld. CIT(A) in holding that price charged by the assessee company to its AE was reasonable and did not require any upward revision and further challenged his action in deleting the addition made by the AO of ₹ 51,97,891/- and determination of Arm's Length Price. 17.1. Brief facts are that the assessee exporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , ALP has to be determined and that there was no requirement of proving shifting of profits or evasion of tax etc., before invoking provisions of chapter X. He summed up his arguments by suggesting that the approach followed by the Ld. CIT(A) in deciding this issue was not permissible under the law. 17.4. On the other hand, Ld. Counsel of the assessee has submitted that incorrect analyses were made by the TPO. It was submitted that TPO's order was erroneous for the following reasons: a. Assessee sold nutritional products to Strides Inc. USA while it sold pharmaceuticals products to Cellopharm in Brazil. Since the product category is different, the transactions and consequently the margins to be earned are not comparable. b. USA was a developed market in so far as nutritional products are concerned with several players. Therefore, it was incumbent on the Assessee to charge Strides Inc. competitive rates. On the other hand, Brazil was a developing market where the Assessee was able to earn comparatively higher margins. c. While the Assessee/ its AE had to establish its presence in the USA and sates/ operations in USA were very much in start-up stage, the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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