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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 ..... ) 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 now clear. The aforesaid deduction cannot be denied merely because approval is granted by the competent authority at a later date. Reliance was placed in this regard on the following judgments:- CIT vs. Claris Lifesciences Ltd. 326 ITR 251(Guj) CIT vs. Sandan Vikas(India) Ltd. 335 ITR 117(Del) CIT vs. Wheels India Ltd. 336 ITR 513(Mad.) It was further submitted that deduction u/s 35(2AB) should be allowed in a case where approval is received though no agreement is entered into, as was held in ACIT v. Meco Instruments ITA No.4246/M/2009 dated 20.08.2010 and Sri Biotech Laboratories India Ltd. v. ACIT 36 ITR 88 (Hyd.)(Tri.). 3.3. On the other hand, Ld. CIT-DR has submitted that conditions prescribed in the section, as also referred to by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 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 by the DSIR in February/September 2006, i.e., in the next assessment year and, therefore, the assessee was not entitled to the benefit. The CIT(Appeal) accepted this view of the Assessing Officer and dismissed the appeal, however, the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") has come to the conclusion that the assessee would be entitled to weighted deductions of the aforesaid expenditure incurred by the assessee in terms of the Section 35(2AB) of the Act and in coming to this conclusion, the Tribunal has relied upon the judgment of Gujarat High Court in Commissioner of Income Tax v. Claris Lifesciences Ltd., 326 ITR 251(Guj). We have gone through the aforesaid judgment of the Gujarat High Court and find that Gujarat High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. 10. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under Section 35(2AB) of the Act by the assessee." 3. We are in full agreement with the aforesaid approach of the Gujarat High Court. No substantial question of law, therefore, arises. The appeal is dismissed." 3.5. It is noted by us that similar view has been taken by Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings it was pointed out by the AO that the assessee has invested into shares of India Company aggregating to Rs. 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 Rs. 1,46,87,526/-. 4.3. Being aggrieved, the assessee contested the matter before the Ld. CIT(A), wherein relying upon his earlier order for A.Y. 2001-02, the Ld. CIT(A) confirmed part disallowance of the proportionate interest as per the working given in the order for A.Y.2001-02. 4.4. Being aggrieved, the assessee has contested appeal before the Tribunal on this issue. It is noted by us that similar issue has been decided by the Tribunal in A.Y. 2001-02, in ITA No.6487/04 dated 03.08.2012. The relevant para of the Tribunal's order is reproduced hereunder for the sake of ready reference: "4. Coming to the assessee's objection about the sustainability of part of disallowance u/s 14A, we observe from page 3 of the impugned order that total investments made in the shares of domestic company is to the tune of Rs. 2.84 crore. It is palpable tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree 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 this judgment dated 8th October, 2011, has been placed on record. In view of the foregoing discussion, we are of the considered opinion that the learned CIT(A) was not justified in sustaining the disallowance at Rs. 17.65 lakh u/s 14A in respect of the investments made by the assessee in the shares of three domestic companies. The ground raised by the assessee is allowed and that of the Revenue is dismissed." From the above, it is noted that it has been held by the Hon'ble Tribunal that the investment has been made by the assessee out of his own funds and not out of borrowed funds. 4.5. It has been submitted that in this year no fresh investment has been made. Our attention has been drawn on investment schedule of the balance sheet available at pages 22 to 23 of the paper book. It is noted from the perusal of the said schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 deduction if it is paid before the due date of filing of the return. The Hon'ble Delhi High Court in the case of CIT v. Aimil Ltd. [(2010) 321 ITR 508 (Del.)] has held that if employees' share is deposited before the due date then no disallowance is called for. In reaching this conclusion, the Hon'ble Delhi High Court relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Vinay Cement Ltd. [(2007) 213 CTR (SC) 268] in which it was held that the amount of employees contribution etc. deposited before the filing of return, cannot be disallowed u/s 43B. In view of the above discussion, the grievance of the assessee is accepted and objection of the Revenue is overruled." 5.3. It is noted from the above, the Tribunal has relied upon the judgment of Hon'ble Supreme Court in the case of Alom Extrusions Ltd. and Vinay Cement Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 challenged the action of Ld. CIT(A) in rejecting the prayer of the assessee for reduction of indirect costs by 10% of export incentives for the purpose of computing profits from trading exports u/s 80HHC of the Act. 7.1. It is noted by us that similar issue came up before the Tribunal in A.Y.2001-02, wherein the Tribunal has upheld the claim of the assessee by relying upon the decision of Hon'ble Supreme Court in the case of Hero Exports vs CIT 295 ITR 454, by making following observations: "16. Ground no.9 is against the direction of the learned CIT(A) to reduce 10% export incentives from the gross indirect cost by considering the same as indirect expenditure incurred in earning such incidence. Having heard the rival submissions it is noted that this ground is also covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 AO has included the same in its turnover. The AO's action is contrary to the judgment of Hon'ble Supreme Court, and therefore, action should be reversed and claim of the assessee should be allowed, in view of the judgment of Hon'ble Supreme Court. On the other hand, Ld. CIT-DR submitted that only profits should be reduced while granting benefit of deduction u/s 80HHC. 9.2. We have gone through the facts of the case as well as judgment of Hon'ble Supreme Court. It is noted that the Tribunal had decided this issue against the assessee by observing as under: "20. After considering the rival submissions and perusing the relevant material on record we find that the learned CIT(A) sustained the inclusion of 'scrap sale' within the 'total turnover'. The assessee's contention that the amount of realization from sale of scrap should be reduced from the direct cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived 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 judgment of Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 (SC). 11.3. On the other hand, Ld. CIT-DR placed reliance on the judgment of Hon'ble Bombay High Court in the case of CIT vs. Amritaben R. Shah reported 238 ITR 777 for the proposition that investment is not allowable u/s 57(iii). 11.4. We have considered the submissions made by both the sides as well as order of the lower authorities. The brief facts are that during the assessment proceedings it was observed by AO that assessee company has invested into shares of subsidiary companies/joint venture companies and overseas companies out of borrowed funds, as per details given in the assessment order in para 4.1 to 4.16. It was explained by the assessee that investment was made for the purposes of the business of the assessee, and it was made out of capital and free reserves of the assessee, and that part of such inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 have used the borrowed capital for the purpose of business where as in the instant case the appellant company had used borrowed funds not for the purpose of the business but for the purpose of investments abroad in shares of subsidiary companies. Further appellant has though claimed that investments in subsidiaries were made to further the business of the appellant company it has not demonstrated by evidence as to how such investments in subsidiaries were furthering the business of the appellant company. Merely because the appellant had made some activities with the subsidiaries would not mean that the investments made in subsidiary had an effect of furthering the business of the appellant company. Thus considering the facts of the case I am in agreement with the AO that the appellant company had not used the borrowed capital for the purpose of the business and accordingly disallowance made by him is confirmed However it is equally tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made before us. This issue came up before Tribunal in A.Y. 2001-02 wherein claim of the assessee was allowed by making following observations: "11. Ground no.6 of the Revenue's appeal is against netting of interest receipts for the purpose of deduction u/s 80HHC. The Assessing Officer, while computing deduction u/s 80HHC considered the gross amount of interest. The learned CIT(A), however, overturned this finding by holding that only the net amount of interest was to be considered. Having heard the rival submissions it is noticed that this issue has been settled by the Hon'ble Supreme Court in Associated Capsules Pvt. Ltd. v. CIT [(2012) 343 ITR 89 (SC)] by holding that netting of interest is permissible. The reliance of the ld. DR on the judgment in the case of CIT vs Asian Star Co. Ltd. (2010) 326 ITR 56 (Bom) is misconceived as the same has been reversed by the Hon'ble Supreme Court in the afore-noted case. As such no fault can be found with the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and further challenged his action in deleting the addition made by the AO of Rs. 51,97,891/- and determination of Arm's Length Price. 17.1. Brief facts are that the assessee exported pharmaceutical products manufactured by it to its AE i.e. M/s Strides Inc., USA, and compared it with sales made by it to unrelated party i.e. Cellopharm, Brazil, to demonstrate that transactions with AE was at Arm's Length Price. The difference pertaining to profit margin earned form sales made to AE and Cellopharm was explained based on certain factors which were narrated in details in the transfer pricing documentation. However the TPO used the same comparable for making an upward adjustment in respect of exports sales made by it to its AE. 17.2. Being aggrieved, the assessee carried the matter before the Ld. CIT(A) wherein detailed submissions were made by the assessee showing that the adjustment was uncalled for as per law and facts and detailed analysis were made to counter action of the AO/TPO. The Ld. CIT(A) considered detailed submissions of the assessee and without following the mechanism provided under the provisions relating to transfer pricing, it was held by him that price ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessee had its presence in Brazil for quite some time, besides Brazil had limited pharmaceutical players. d. Further, sales to Strides Inc. were in bulk which required further packing/re-packing into smaller packs before selling it to the ultimate customer in USA. This entailed packaging costs being incurred by the AE in USA. On the other hand, sales to the Non-AE in Brazil were in small packs (specifically blister packing) which could be readily marketed/sold to the customer. Price that could be realised for small packs is comparatively higher than price realized for sales made in bulk." 17.5. In addition to the above, it was submitted by the Ld. Counsel that the assessee had urged that TNMM must be regarded as most appropriate method (MAM). But without looking into submissions, the TPO made unreasonable additions. In view of these facts, it was requested that in case, this issue is to be sent back, then it should be sent back to the TPO with a direction to follow TNMM method. 17.6. We have gone through the submissions m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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