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TMI Blog2020 (10) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... cern are less than interest free funds in form of share capital and reserves and surplus available with assessee, interest disallowance u/s 36 (1) (iii) of The Act cannot be made. Hence, in view of above facts, we reverse finding of lower authorities in disallowing interest expenditure. Addition to the job charges recovered at a lesser rate from sister concern M/s Dharampal Premchand Ltd then prevailing market rate - HELD THAT:- As decided in own case [ 2019 (4) TMI 1382 - ITAT DELHI] addition of higher rate of job charges is on hypothetical basis and against concept of real income. Further, it is not open to assessing officer to sit in armchair of assessee and to make business decisions on arbitrary basis. Further, there is no provision in Income tax The Act, 1961 that warrants such adjustment and as such, action of assessing officer in increasing rate of job work charged from sister concern M/s. Dharampal Premchand Ltd. is not sustainable under law. Decided against revenue. Disallowance u/s 14A - assessee has received dividend during the year which is claimed as exempt u/s 10 (34) - assessee itself made voluntary disallowance of 915,256/ in the computation of total income u/s 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either increase the above rate neither AR demonstrated that the addition confirmed by coordinate bench in this year is unjustified, therefore, respectfully following the order of the coordinate bench in assessee s own case for that year, we also direct the learned assessing officer to recompute the deduction following the order of the coordinate bench for that year. Disallowance of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) in respect of transfer from silver foil division - HELD THAT:- In assessee s own case for immediately preceding year at most processing cost of silver is service that has been transferred by noneligible unit to eligible unit, which should have been done at market rate. At present assessee has considered process cost on actual cost basis and has loaded on price of silver - we direct assessing officer to adopt a margin of 2% over process cost of processed silver transferred from non-eligible unit to eligible unit and to sustain disallowance of deduction to that extent only. - we direct the learned assessing officer to recompute the eligible profit following the order of the coordinate bench in earlier years with similar directions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services allocated to eligible industrial undertaking. Disallowance of deduction u/s 80 IB/80 IC on allocation of depreciation on fixed assets installed at head office and manufacturing units to eligible units - HELD THAT:- As in assessee s own case for earlier years, we direct the learned assessing officer to delete the disallowance on account of allocation of depreciation. Calculation of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) for use of brand Rajnigandha - HELD THAT:- In the present case it is apparent that brand is owned by the assessee company and no royalties paid by the assessee to any outsider or third party. The learned assessing officer has made the addition/reduce the deduction of the assessee u/s 80 I B/80 IC by comparing the brand Rajanigandha with the brand Tulsi Mix . DR could not show us any deviation in the facts or any brand royalty paid by the assessee with respect to the products manufactured in eligible unit. In view of this, respectfully following the decision of the coordinate bench, we direct the learned assessing officer to delete the disallowance of deduction claimed by the assessee. Disallowance of deduction u/s 80 IB/80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of JYOTI CNC AUTOMATION PVT LTD. [ 2018 (8) TMI 757 - GUJARAT HIGH COURT] deleted the above addition. Therefore respectfully following the decision of the coordinate bench in assessee s own case for earlier year, we direct the learned transfer pricing officer/learned AO to delete the addition on account of the arm s-length price of the interest income from its associated enterprise in Switzerland. Ground of the appeal is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of ₹ 5,74,71,113/- on account of sale of commodities on commodity exchange on an illegal and arbitrary basis without appreciating the law and facts of the case. (ii) That the transaction being carried out at recognized stock exchange, the loss is not in the nature speculative loss as per the provisions of section 43(5)(d) and as such the disallowance is based on erroneous interpretation of law. 7(i) That on facts and circumstances of the case, the Ld. Assessing officer has erred in disallowing claim of statutory deduction under section 80IB/80IC by an amount of ₹ 32,49,27,532/-, on account of re-computation of profits of the eligible undertaking by increasing the value of goods procured by the eligible unit from manufacturing units at Noida, on the ground that aforesaid inter-unit transfer should have been at actual cost plus markup^ (attributed at 10%), alleged as arm's length price, as per the provisions of section 80IA(8) read with section 80IB(13)/80IC(7) of the Act. (ii) That the assessing officer erred on facts and in law in attributing direct and indirect manufacturing costs @ 11.27% to the cost of goods procured and transferred by non-eligible unit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... located to such units in an appropriate ratio, with profit margin of 19.67% thereon. (ii) That the assessing officer was not justified in holding that various corporate services were rendered by corporate office, depots, branches, etc. to the eligible undertakings, which should have been allocated to eligible units at fair market price/cost plus appropriate mark-up, for the purposes of computing deduction under section 80IB/IC read with section 80IA(8) of the Act. (iii) That the assessing officer has failed to appreciate that no services were rendered by other divisions, viz., corporate office, depots, branches, etc., to the eligible undertakings, but expenses were incurred by such divisions on behalf of the eligible undertakings, which was subsequently allocated to such eligible units. (iv) That adjustment of cost and consequential claim of deduction u/s 80IB/80IC is illegal, arbitrary and based on conjectures and surmises. 11(i) That on facts and circumstances of the case, the Ld. Assessing officer has erred in disallowing claim of statutory deduction under section 80IB/IC, to the extent of ₹ 1,99,44,908/-, by applying provisions of section 80IA(8) read with 80IB(13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the same to be bogus on an illegal and arbitrary basis. (ii) That the assessing officer erred on facts and in law in alleging that cash was received by the appellant from the above concern, that too, on the basis of erroneous inferences/ assumptions on the basis of certain seized documents. (ii). That the allegation of assessing officer that bogus bills were obtained by the appellant from M/s.Surva Vinayak Industries Limited (in short 'SVIL') in order to inflate purchase of sandalwood oil is unsubstantiated and without any basis. (iii) That the assessing officer erred on facts and in law relying upon statements/Materials collected behind the back of the appellant, without allowing cross-examination and/ or confronting the same to the appellant, in gross violation of principles of natural justice. (iv) That the assessing officer erred on facts and in law in making huge disallowance, de-hors any material/ evidence found during the course of search. 14(i). That on facts and circumstances of the case, the Ld. Assessing offcer was not justified in making transfer pricing adjustment of ₹ 7,80,19,356/- to the arm's length price of interest received from loan advanced t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Assessee is maintaining separate books of accounts in respect of all these branches however the profit and loss accounts are not being drawn an entire cost is transferred to various units including the units eligible for deduction u/s 80 IB/80 IC of the act based upon the sales ratio of all manufacturing units. 4. During assessment year 2005 - 06 to 2011 - 12 assessment orders were passed under the provisions of Section 153A/143 (3) of the act based upon search and seizure operations carried out under the provisions of Section 132 of the act on 21/1/2011. A special audit u/s 142 (2A) was also conducted for assessment year 2004 - 05 to 2011 - 12. The assessment for the assessment year 2004 - 05 to 2011 - 12 was passed considering the findings of search of action and report of special audit. Various disallowances under provisions of the income tax act and adjustment to deduction claimed u/s 80 IB/80 IC of the act was made in those orders. The assessee is continuing the same line of business during the year under consideration. Therefore the finding of the special audit and such actions are also applicable to the facts of the present proceedings also as stated by the learned asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, 13 grounds are covered in favour of the assessee vide order of Hon'ble ITAT in assessee's own case for AY 2010-11 and 2011-12 dated 18/04/2019 (ITA No. 3738-39/D/16 & 3882-83/D/16). The relevant chart containing issues alongwith relevant page referencing is enclosed PB Pg 1-8. To support his contentions he submitted the following chart:- Ground No. Particulars Disallowance/Additions considered by Assessing Officer (Rs.) Assessment order/DRP order ITAT Order for AY 2010-11 & 11-12 dated 18/04/2019 Remarks 1 Addition on account of reduction in value of opening work in progress 44,49,536/- AO : Page 4 Para 13.1 DRP : Page 11 Para 5.3 Page 16-18 Para 15-19 Addition deleted by ITAT 2 Common Ground challenging validity of various additions/disallowance s. - - - General ground 3 Disallowance u/s 36(1)(iii) 3,33,157/- AO : Page 5 Para 13.2 DRP : Page 13 Para 6.3 Page 22-24 Para 25 & 26 Disallowance deleted on the ground that interest funds available are substantially higher than advances made to group concerns. 4 Addition in respect of Job charges recovered at lesser late from sister concern M/s. Dharampal Premchand Ltd. 2,46,100/- AO : Page 6 Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relief allowed by the Hon'ble Tribunal. 8 Disallowance of deduction u/s 80IB/IC by applying provisions of sec.80IA(8) in respect of transferred from Silverfoil Division ₹ 26,53,575/- AO : Page 15 Para 13.7 DRP: Page 31 Para 11.3 Page 125-128 Para 114-117 Adjustment on the basis of average rate rejected. AO directed to apply profit mark-up of 2% on processing charges incurred by the assessee. Substantial relief to the assessee. 9 Disallowance of deduction under section 80IB/80IC - allocation of interest by head office to eligible units 55,03,526/- AO : Page 16 Para 13.8 DRP : Page 33 Para 12.2 NA (Fresh Issue) There is no case of any short allocation of interest cost as claimed in the Profit & Loss a/c. The appellant has allocated the full interest cost to respective units which is duly supported from reconciliation chart. 10 Disallowance of deduction u/s 80IB/IC on account of upward adjustment in cost of services allocated to eligible undertakings by head office in terms of provisions of section 80IA(8) 11,34,91,501/- AO : Page 18 Para 13.9 DRP: Page 35 Para 13.3 Page 47-69 Para 62-63 Adjustment Deleted. The Hon'ble Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly deleted. 7. The learned authorised representative also submitted the copy of the order of the coordinate bench in assessee's own case for assessment year 2010 - 11 and 2011 - 12 in ITA number 3738 - 39/Del/2016 and 3882 - 83/Del/2016 to show that the issues are covered in favour of the assessee. He also submitted a paper book of the relevant documents on which he relies upon to support his contentions. 8. He submitted that ground number 6 & 9 are the only fresh grounds arising in this year only. 9. The learned departmental representative on these issues stated that the issues are covered by the order of the coordinate bench in assessee's own case however he relies on the order of the learned assessing officer as well as the direction of the learned that DRP. 10. Ground number 2 of the appeal alleging the validity of various additions/disallowances is general in nature, no specific arguments were advanced, therefore, same is dismissed. 11. Ground number 1 is addition on account of the reduction in value of the opening work in progress by ₹ 4,449,536/- based on the assessment order for last year where in from the closing stock above sum were reduced and therefore to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that certain indirect expenditure is also considered by special auditor cannot form part of valuation of inventory as per accounting standard two of ICAI. Therefore, it was stated that no adjustment because of valuation of closing stock should be made. Assessee further stated that issue is decided in favour of assessee on this aspect for assessment year 2004 - 05. Learned AO rejected explanation of assessee and relied upon audit report of special auditor. He therefore made addition of ₹ 2872806/-. It was confirmed by learned CIT - A. 16. Learned authorised representative submitted that it is relevant to mention that appellant assessee has valued closing stock in accordance with guidelines laid down by AS-2 and it has been consistently followed in all years. Same system has been followed for valuation of opening stock and fact that closing stock of year under reference has been carried forward as opening stock of next year; there is even otherwise no adverse revenue implication. Further, observations of Special auditor are arbitrary and seek to include other indirect costs in valuation of closing stock, which is illogical and contrary to accounting standard. He further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned departmental representative relied upon orders of lower authorities. However, he did not controvert that there is no change in method of valuation of closing stock employed by assessee in impugned assessment year as compared to assessment year 2013 - 14 and subsequently assessing officer has accepted method of valuation adopted by assessee in subsequent years. 19. We have carefully considered rival contentions and perused orders of lower authorities. It is apparent that method of valuation and its cost components have been disputed by revenue in present year. However subsequently from assessment year 2013 - 14 onwards method of valuation and cost included in cost of inventory has not been disputed by revenue and is accepted as correct. That be fact that in subsequent year has cost component of valuation of closing stock has been accepted, which is on identical basis as in impugned AY, it shows that revenue has accepted same as correct in that year but has disputed it for this year. Only basis is he audit report u/s 142 (2A) of the Act. Learned departmental representative could not show us any reason to show that how method of valuation of closing stock as well as cost compo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of interest paid by it on funds borrowed. Therefore, special auditor noted that business expediency to borrow funds at higher rate of interest paid to its other group concerns on funds borrowed from them is not demonstrated. Hence it was reported that total interest claimed by assessee company as business expenditure of INR 20214239/- is not allowable. Reason being difference between higher interest rate borrowing of funds by applying rate of interest paid on funds borrowed and interest charged from group concerns at a lower rate, which is not allowable as an expenditure to assessee under provisions of section 36 (1) (iii) of The Act. On questioned by ld AO, assessee explained that assessee has given above funds to group companies out of retained earnings of assessee company and borrowed funds have not been utilized. It was further stated that borrowed funds have been utilized only for expansion of business. It was further stated that rate of interest specified by special auditor is also not correct. However, learned assessing officer rejected contention of assessee and disallowed interest expenditure of INR 2 0214239/- holding that it has not been incurred wholly, necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be presumed that business advances to sister concerns amounting to ₹ 43 Cr was out of own funds. Details of non-interest bearing funds submitted were as under : Share Capital ₹ 21,51,43,090/- Reserves and Surplus ₹ 571,60,32,751/- Total ₹ 593,11,75,841/- 22. He therefore submitted that position has to be examined in totality and it is not open to consider entries in bank account in a distorted and isolated manner. He further relied up on several judicial precedents as under : i. CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC) ii. CIT Vs. Bharti Televenture Ltd. 51 DTR 98 (Del.) iii. CIT Vs. Tin Box Co. 260 ITR 637 (Del.) iv. CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) 23. He submitted that in light of factual and legal position clarified above, there is no case of any disallowance of interest u/s 36(1)(iii) of Income Tax The Act, 1961. 24. Learned departmental representative vehemently supported order of learned assessing officer and learned CIT - A. He submitted that when assessee has borrowed interest bearing funds at higher rate of interest and has diverted same towards lower interest earning advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has utilized borrowed funds. Even otherwise assessee has huge excess funds available which are non-interestbearing in form of share capital and reserves and surplus compared to advances given to sister concern at lower rate of interest or without charging interest, honourable Supreme Court in 410 ITR 466 in para number 33 has held as under:- "33. We do not see how when Assessing Officer's views are that in cases of interest-free loans and interest given by assessee to its subsidiary companies are in above sums, still, principle laid down by this court that if there are funds available to them interest-free and overdraft or loans taken, would not apply. This view of Assessing Officer is ex facie contrary to settled principle that a presumption would arise that investment would be out of interest-free funds generated or available with company. Then, borrowed capital in hand in that case and interest expenditure was deductible under section 36(1) (iii) of Income tax The Act, 1961. Tribunal held that interest-free fund available to assessee is sufficient to meet its investment. It can be presumed that investments were made from interest-free funds available with assessee. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition in respect of difference of rates was made. Ld CIT (A) has deleted addition on ground that impugned addition is purely on notional basis and not sustainable under law. 99. We have heard rival contentions whole addition has been made by learned assessing officer on presumption that Assessee Company has charge of charges at rate of INR 3000 per KG to its group concern for doing job work for them and silver file division as against INR 4100 per KG charged to other parties and other units of company. This was remark of special auditor and it was stated that if it were done for eligible units of group concern then group concerns would be entitled for higher deduction by INR 377876. It is evident that addition of higher rate of job charges is on hypothetical basis and against concept of real income. Further, it is not open to assessing officer to sit in armchair of assessee and to make business decisions on arbitrary basis. Further, there is no provision in Income tax The Act, 1961 that warrants such adjustment and as such, action of assessing officer in increasing rate of job work charged from sister concern M/s. Dharampal Premchand Ltd. is not sustainable under law. Order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 256/-. The recording of satisfaction about the correctness of claim of the assessee with respect to the accounts is a mandatory requirement of Section 14 A (2) of the act. The facts of this case are similar to the facts of the case of the assessee for immediately preceding year were also no satisfaction was recorded and coordinate bench deleted the disallowance. The coordinate bench held that :- "27. Ground number 6 of appeal of assessee is against disallowance u/s 14 A of The Act of INR 437504/-. Assessing officer has made disallowance on basis of working of Special Auditor. Special auditor has simply applied Rule 8D for purpose of computation of disallowance u/s 14A of Income tax The Act, 1961. Learned assessing officer noted that assessee has earned dividend income of INR 1576500/- and has investment in only on subsidiary or exempt interest-bearing investment amounting to INR 2458403027/-. Learned AO further noted that Assessee Company has borrowed funds during year, which have also been used for making investment. He further noted that Assessee Company has not apportioned any interest, which has been incurred to earning exempt income. Therefore auditor has worked out disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) in which it was held as under : "Having regard to language of section 14A(2), read with rule 8D of Rules, it is also made clear that before applying theory of apportionment, Assessing Officer needs to record satisfaction that having regard to kind of assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where assessee in his return has himself apportioned but Assessing Officer was not accepting said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by assessee for purchasing shares/making investment in shares is to be examined by Assessing Officer.[Para 41] ." 29. In light of above, disallowance u/s 14A read with rule 8D is not sustainable in absence of recording of satisfaction in terms of provisions of section 14A(2) of The Act. Further, it is relevant to note that appellant assessee has earned total exempt income of ₹ 15,96,000/- only from four investments amounting to ₹ 4,54,16,313/-, details of which are as under : Particulars Dividend Income Opening valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court. We, therefore, set aside impugned order and direct computation of correct amount of disallowance under clause (iii) of Rule 8D(2) accordingly." 32. It is made clear that if disallowance under clause (iii) of Rule 8D(2) exceeds amount of exempt income, then, disallowance should be restricted to such income alone. If, however, this exercise results in some further relief to assessee, same should be granted. 33. He also submitted detailed working of disallowance as per Rule 8D(2)(iii) in context of investments yielding exempt income as placed at Page 22 of Supplementary Paper book-2 as per which disallowance is worked out at ₹ 2,43,590/- only, which is less that disallowance already made by assessee in return of income i.e. ₹ 4,37,504/- and as such impugned disallowance of ₹ 4,98,31,329/- is not sustainable on law and facts and same may kindly be deleted. He further submitted without prejudice to above submission, in case any disallowance u/s 14A is called for, same should be restricted to extent of exempt income of ₹ 15,96,000/- only. legal position to this effect is well supported from decision of Hon'ble Supreme Court in case of Pr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by learned assessing officer be sustained. 36. We have carefully considered rival contention and perused orders of lower authorities as well as audit report of special auditor. Undisputedly assessee has earned during year exempt income of INR 1 596000/-. Assessee has offered a sum of INR 437504/- as disallowable expenditure u/s 14 A of the Act. As per para number 36 of assessment order it is apparent that special auditor has worked out disallowance under rule 8D of income tax rules applying formula contained therein and disallowance was computed at INR 50268833/-. Assessee explained to ld AO that it has made a disallowance of INR 437504/- and stated that it has not incurred any interest expenditure as borrowed funds were not utilized for investment in shares. However, it were utilized for purposes of business. Learned assessing officer without recording any satisfaction about correctness of claim of assessee of computing disallowance of INR 437504/- or examining contention of non utilization of borrowed funds for making investment in shares, applied provisions of rule 8D and made a disallowance of INR 50268833/- and reduced it from already disallowed sum of INR 437504/- by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance u/s 14A was not correct. In present case, such satisfaction by assessing officer is missing. He has merely proceeded on basis of finding of special auditor under section 142 (2A) of the Act. Therefore, disallowance made by learned assessing officer is not sustainable. Accordingly, we direct learned assessing officer to delete disallowance in excess of disallowance offered by assessee of INR 437504/- u/s 14 A of The Act. Accordingly order of learned CIT - A is reversed and ground number 6 of appeal is allowed." 20. In the present case also the learned departmental representative could not show that what is the satisfaction recorded by the learned assessing officer about the correctness or otherwise of the disallowance offered by the assessee on its own, therefore, respectfully following the decision of the coordinate bench in assessee's own case for immediately preceding year, we direct the learned assessing officer to delete the disallowance of ₹ 276,28,704/- u/s 14 A of the income tax act applying the provisions of rule 8D. Accordingly ground number 5 of the appeal is allowed. 21. Ground number 6 of the appeal is against the addition of ₹ 57,471,113/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emently contested the orders of the lower authority. He vehemently explained the provisions of Section 43 (5) (d) of the act. He further submitted the detailed contract notes of the various members of recogniosed exchange having the date and time stamp of the transactions entered into. Therefore he submitted that assessee has complied with the provisions of the exceptions provided from a speculative transaction. In this connection, he also submitted that the CBDT vide notification no. 46/2009, dated 22-05-2009 has notified stock exchange to be a recognized stock exchange. The relevant extract of the notification was also pressed upon. It is submitted that the commodity transactions under dispute have been undertaken on recognized exchange based on relevant contract notes enclosed at PB Pg 160-183 and as such the case of the appellant is squarely covered by sub clause (d) of section 43(5) of the Act. It may also be clarified that during the relevant assessment year, there was no requirement of any Commodity Transaction Tax (CTT). He vehemently relied on following case laws : i. CIT v. Sri Vasavi Gold & Bullion (P.) Ltd [2018] 92 taxmann.com 290 (Madras) [PB Pg 185-191] Section 73, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that recognition by the Central Govt. of the Stock Exchange from a later date will not debar the transaction as non-speculation, especially after 1st April 2006. Therefore, in our opinion, the assessee's derivative trading through MCX Stock Exchange in the assessment year 2007-08 is non-speculation transaction and, therefore, the loss incurred in such transactions is to be treated as normal business loss and, accordingly, the findings of the Commissioner (Appeals), to this extent, is upheld. Accordingly, the ground raised by the Revenue is dismissed. Therefore he submitted that the loss suffered by the assessee in commodity transaction is non speculative in nature and as such the impugned disallowance is based on wrong interpretation of law and same is unsustainable under law. 25. The learned departmental representative vehemently supported the orders of the lower authorities. He referred to paragraph number 13.5 of the order of the learned assessing officer and submitted that the transactions in ccommodity exchange were made nons peculative only by The Finance Act 2013 with effect from 1/4/ 2014 and therefore for assessment year 2012 - 13 the transaction is speculative. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision quoted before us, the learned assessing officer is directed to decide this issue afresh in light of our observation as above. Accordingly ground number 6 of the appeal is allowed as directed above. 27. Ground number 7 of the appeal is with respect to the disallowance of deduction u/s 80 IB/IC by applying the provisions of Section 80 IA (8) in respect of the transfer of Kathha and Supari from Noida Division II the eligible industrial undertaking on which deduction is allowable. The learned assessing officer noted that during the year, units located at Noida processing Kathha and another unit at Noida processing supari has transferred processed raw material/semi finished goods to the undertaking which is eligible for deduction amounting to ₹ 658,619,082/- and ₹ 792,144,556/- respectively. The learned assessing officer, as per last year, adopted the manufacturing cost of 11.27% and further profit margin of ₹ 10 percent on the goods so transferred, held that the transfer value of the goods worth ₹ 1,450,763,638/- comes to ₹ 1,775,691,170, therefore he reduced the profit of eligible unit by 32,49,27,532/-. The learned assessing officer categorically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin of 10% on cost provided for transfer of excise able goods for captive consumption and followed by assessee company for transfer of excisable goods to these eligible units was considered to workout fair market value of this transfer. Therefore auditors suggested that profit margin of 10% on of cost and therefore there is an understatement of taxable profit of unit by INR 1 01734012/- learned assessing officer questioned assessee on this aspect. Assessee submitted that most of goods are transferred as it is after buying from market without any value addition and even otherwise value addition is negligible, however, it was contested that there is no basis for any margin, much less margin of 10%. It was further contested by assessee that identical issue has been decided by The Commissioner of Income Tax Appeals in assessee's own case for assessment year 2004 - 05 partly deleting addition. Learned assessing officer rejected explanation of assessee. He held that 10% profit margin is normal profit margin also prescribed under Central Excise rules for valuation of goods of captive consumption. He further stated that special auditor has given detailed working of fair market value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing and freight charges and as such there is no ground or basis for any notional mark up of 14.73%. v. Further, assessing officer has loaded mark up of 14.73% on basis of observation of special auditor and has failed to carry out any independent investigation to justify relevance and applicability of same. It may be appreciated that assessing officer has not given any basis for estimating manufacturing and processing charges to extent of 14.73% and as such adjustment is highly arbitrary and without any basis. vi. In addition, there is absolutely no justification for loading additional 10% mark up because of profit as goods are transferred without any substantial value addition. Further, assessing officer has not brought on record any comparable case to justify such huge profit as present case involves simple transfer of goods wherein non-eligible unit is merely acting as a procurement agent on behalf of eligible units in order to ensure economy of cost and regular supply to eligible units. vii. It may be clarified that these products have been purchased for captive consumption and same is not tradable commodity. There has been no sale to any outside party and as such presump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing. 45. Learned authorised representative vehemently stated that finding of learned CIT - A for assessment year 2004 - 05 was not at all relevant now as same A.Y. assessment was passed u/s 147/153A of The Act and same has been quashed which has been upheld by honourable High Court and therefore such findings now no more exist. 46. We have carefully considered rival contention and perused orders of lower authorities as well as audit report u/s 142 (2A) of income tax The Act of special auditor. Allegation on assessee is that it has made Inter transfer of goods however same has not been taken at market rate and therefore auditor has suggested applicability of rule 8 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000 which provides as under:- [8. Where whole or part of excisable goods are not sold by assessee but are used for consumption by him or on his behalf in production or manufacture of other articles, value of such goods that are consumed shall be one hundred and ten per cent of cost of production or manufacture of such goods. ] 47. Provisions of section 80 IA (8) provides that (8) Where any goods 39[or services] held for purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by assessee of goods transferred as market rate. Learned CIT - A has held that on goods, which are not processed at all and sent to eligible unit directly, then he has imputed profit margin at rate of 2% on value of goods transferred instead of 10%. With respect to goods, which are processed through job work, learned CIT - A has upheld loading of average manufacturing expenses of 37.85% and further, charging of profit at rate of 10% as per rule 8 of Central Excise rules. With respect to goods such as cardamom, which is purchased, processed, and then transferred to eligible units, he has further upheld cost loading of 37.58% and further profit at rate of 10% as a market price of goods. However in above prices there is no finding that in open market such semi finished goods are sellable or not. Explanation which defines market price provides that market price means price such goods would fetch ordinarily in open market. Therefore, there has to be a clear-cut finding that such goods are marketable, they have a sale price, and such sale prices determination is in open market. Therefore, it is apparent that market price can be more than cost and less than cost of goods. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit, is recorded in books of accounts. With respect to goods, which are processed through job work and transferred to eligible unit, learned AO is directed to impute 2% profit over job work charges i.e. cost incurred by assessee for determination of profit u/s 80 IA of income tax The Act. Accordingly, ground number 8 of appeal of assessee is allowed with above direction." 28. In that particular year the addition was partly upheld by the coordinate bench based on the order of the learned CIT - A with respect to the profit margin of the goods which are not processed and sent to eligible unit directly. The learned departmental representative could not show us any reason to either increase the above rate neither the learned authorised representative demonstrated that the addition confirmed by coordinate bench in this year is unjustified, therefore, respectfully following the order of the coordinate bench in assessee's own case for that year, we also direct the learned assessing officer to recompute the deduction following the order of the coordinate bench for that year. Accordingly ground number 7 of the appeal is partly allowed. 29. The ground number 8 of the appeal is with respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred to eligible units at actual cost comprising of procurement cost, processing cost, freight expenses on FIFO [ 1st in 1st out] basis. Therefore, it was stated that assessee has transferred goods at total cost comprising all these cost components. Merely because silver for is also sold by appellant to third-party customers at a price higher than cost at which same product was transferred to eligible unit whole addition has been made. It was further stated that both lower authorities made addition considering average rate of sale price to third party during relevant AR to arrive at market value of goods transferred by non-eligible unit to eligible unit. He further stated that transfer value adopted by appellant was full cost price of silver for which is procured from third party. It was further stated that only value addition that has been made by assessee is with respect to processing charges on silver foil. He therefore submitted that above addition made by learned assessing officer and confirmed by learned CIT - capital is devoid of any merit and therefore should be deleted. 116. Learned departmental representative vehemently supported orders of lower authorities and submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned assessing officer to recompute the eligible profit following the order of the coordinate bench in earlier years with similar directions. Accordingly ground number 8 of the appeal is partly allowed. 31. Ground number 9 of the appeal is against the order of the learned assessing officer wherein he has allocated ₹ 5,503,526 on account of interest two the eligible unit and thereby reducing the deduction claimed by the assessee by the above sum applying the provisions of Section 80 IA (8) read with Section 80 IB (13) and 80 IC (7) of the act. The learned AO has noted that assessee company had interest expenditure of ₹ 521,851,866/-. Assessee has out of that allocated interest expenditure of ₹ 48,28,98,472 to all the manufacturing units. The assessee has allocated other corporate t expenses to the different units therefore the assessee was asked to submit the basis of allocation of interest expenditure to different manufacturing units. The assessee submitted a details of such expenditure. Assessee also stated that the basis of allocation of the said expenses were made consistently during the earlier years by the assessee company and said allocation was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 521,851,866/- out of that assessee has already allocated various financial cost to the various eligible units and non eligible units amounting to ₹ 482,898,472/-. This resulted into unallocated interest cost of ₹ 38,953,394/-. The assessee has submitted that out of the total cost a sum of ₹ 23,151,836 relates to the food and beverages divisions and is not at all related to any of the manufacturing units which are eligible for deduction. It is therefore stated that above expenditure does not relate to any of the manufacturing units which eligible for deduction. The view of the assessee is found to be proper that only the interest expenditure which is related to a particular unit should be allocated to that unit and if the balance expenditure is not at all allocated to or specifically related to any other activity, then such expenditure cannot be the reduced from the eligible profit of the industrial undertaking. The object is to derive at the correct profit derived from the industrial undertaking. The object is not to reduce the eligible profit of an industrial undertaking by all the expenditure which are not allocated to eligible unit even if they relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporate adjustment in cost of services allocated to the eligible industrial undertaking by head office invoking the provisions of Section 80 IA (8) of the act. On this because the learned assessing officer has made the addition of ₹ 113,491,501/-. Both the parties confirm that this issue has been considered by the coordinate bench in assessee's own case for earlier year wherein it has been held as Under:- "58. Ground number 11 of appeal of assessee is against order of learned CIT - A with a direction to apply a profit margin of 10% against 26.14% applied by learned assessing officer over and above allocating value of common cost incurred at corporate office, depot, branches et cetera and allocated to such units and an appropriate ratio. Therefore, direction of learned CIT - A is to allocate appropriate cost of corporate office etc. then add that to a profit margin of 10% for purpose of working out deduction of eligible unit u/s 80 IB/IC/IA of The Act. Ld AO has made adjustment on basis of observation of Special Auditor as per which, common cost incurred in respect of eligible units must be allocated after loading mark up @ 26.14% being rate of operating profit after appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king eligible for deduction is. He rejected argument of learned authorised representative that no services have been provided for services were not acceptable as these expenditure include even advertisement expenses, sales expenses etc. He further held that even if reimbursement of expenses for purchase of raw material and finished goods which goes for eligible undertaking some services have been provided by head office and branch office. He further held that learned CIT A has upheld that any independent persons would have charged trading profit margin on such transfer of goods. Accordingly, he applied estimated profit of 10% of such cost as profit of an office/branches/depot for such services. He therefore submitted that findings given by learned CIT - A are incontrovertible. 62. We have carefully considered rival contentions and perused orders of lower authorities as well as report of special auditor. Fact shows that AO has stated that though assessee has allocated all applicable cost to respective units however AO said that it should further be loaded by markup of 26.14% being operating profit after applying provisions of section 80 IA (8) read with subsection 13 of section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 80 IA (8) of The Act. It is not dispute that that products manufactured by these industrial units are sold by selling and distribution arm of assessee and cost incurred is allocated to these respective units on basis of appropriate allocation key of 'sales'. Ld. AR of appellant relying on decision of coordinate bench of Cadila Healthcare Ltd. (supra) has submitted that there cannot be any specific demarcation between manufacturing and selling activities of assessee and profit accrues only at time of sales of goods only. Therefore, contention of revenue that selling and distribution function of assessee is a separate profit center is required to be rejected at threshold. We have carefully considered argument of ld. AR and of revenue on this point as well as ld. AO and Ld. DRP. We are of view that this argument is almost similar to argument raised by revenue in case of Cadila Healthcare Ltd. (supra) Coordinate bench has dealt with these arguments from all angles of controversy and has held as under :- '9.4 Ld. Counsel has asserted that undisputedly, it was an "inter-division transfer", hence it was expected to record same at arm's length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit were determined and recorded. Because of brand value sale price must have been determined by management as if profit is earned by assessee-company on sale of products of Baddi Unit. It was recorded on presumption that sales were executed by Head Office by charging brand value, name of product and goodwill of Company. In any case, according to Ld. DR, a reasonable expenditure should have been provided, so that such an abnormal profit @ 58.66% could be checked. 9.6 In support of above submissions, Mr. Srivastava has placed on strong reliance on decision of Hon'ble Supreme Court in case of CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 for legal proposition that, quote " profits received relate firstly to his business as a manufacturer, secondly to his trading operations, and thirdly to his business of import and export. Profit or loss has to be apportioned between these businesses in a business like manner and according to well established principles or accountancy." Unquote. He has also placed reliance on Liberty India (supra) . 10. We have heard both side at length. controversy as raised by Addl. CIT Mr. Mahesh Kumar, officiating as AO, has serious repercus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interval of a year. Thus fundamentally meaning is that amount of gain made by business during year. This can be ascertained by a comparison of assets of business at two dates. To determine "profit" of a manufacturing Unit accounting standard has given certain guidelines, enumerated in short. In accounting "profit" is difference between purchase price and cost of bringing product to market. A "gross profit" is equal to sales revenue minus cost of goods sold or expenses that can be traced directly to production of goods. Rather, "operating profit" is also defined as equal to sales revenue minus cost of goods plus all expenses, except interest and taxes. Most of manufacturing companies have 'Total Cost' based pricing method. Total Cost has, broadly speaking, two components; i.e. raw-material plus value addition (it includes all overheads). Therefore, profit margin is price minus total cost. In manufacturing Unit, thus cost of conversion is production overheads, such as, direct labour cost and inextricably linked expenditure of production. In general, every manufacturing concern has fixed manufacturing capacity. So objective of such conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible unit was substantially higher than overall rate of profit of other Units of assessee, more so when separate books were maintained by assessee in respect of said eligible Unit. In present case as well AO has proceeded to disturb profit of Baddi Unit and held that only 6% profit is eligible for deduction u/s.80IC. While doing so, identically, AO has not pinpointed any defect in working of "profit" of Baddi Unit. In such a situation, we can say that legal proposition as laid down by Delhi Bench can also be applied in present appeal as well. 10.4 AO has also concluded that only incremental profit, representing difference between profits earned earlier when products were procured on P2P basis and profits earned by Baddi Unit, should be treated as a manufacturing profit. AO has then said that earlier assessee was procuring products on P2P basis and showing average profit at 80%, however, on basis of average selling rate of produces manufactured by Baddi Unit average profit was gone up to 86%. AO has therefore restricted deduction only at 6%. He has placed reliance on Rolls Royce Plc (supra). In that case, assessee was a UK based company carrying on marketing and sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out a case that book profit percentage of Baddi Unit was 58.67%, whereas profit of assesseecompany as a whole was 11.88%. If we further elaborate this aspect, then AO has also given a working through which average selling rate was 86.36% of Baddi Unit. Meaning thereby if we presume for example that assessee has gross profit of 86%, then net profit was disclosed at 58%. A question thus arises that what beneficial purpose could be served for reduction of gross profit to a lower percentage of net profit, specially when allegation of A.O. was that there was an attempt to declare higher profit of Baddi unit to get more advantage of deduction. On perusal of P&L account, it is an admitted factual position that assessee has in fact debited certain expenses which have included head office expenses, such as, marketing expenses and corporate expenses. Meaning thereby net profit of Baddi Unit was not merely production cost minus sale price, but difference of sale price minus all general expenses which were attributable to sales. Therefore, it is not reasonable to say that unreasonably profit was escalated. difference between two percentages of profit, i.e. about 28% ( G.P. - N.P.) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; has a wider expression than 'profit'. Likewise, 'business' has also a wider meaning than word 'income'. In present case, manufacturing of pharmaceutical products is declared as "eligible business". Then question is that what is profit of such an eligible business? On careful reading of this sub-section, it transpires that said eligible profit should be only source of income. If we examine separate profit & loss account of Baddi Unit, then it is apparent that only source of income was sales of qualified products. In said P&L A/c there was no component of any other sources of income except sale price and otherwise also assessee has confined claim only in respect of eligible profit which was derived from sales of pharmaceutical products. This section do not suggest that eligible profit should be computed first by transferring product at an imaginary sale price to head office and then head office should sale product in open market. There is no such concept of segregation of profit. Rather, we have seen that profit of an undertaking is always computed as a whole by taking into account sale price of product in market. 10.7 Ld. AO has suggested that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains on such reasonable basis as he may deem fit. Explanation : For purposes of this sub-section, "market value", in relation to any goods or services, means price that such goods or services would ordinarily fetch in open market. Where any goods held for purpose of eligible business are transferred to any other business carried on by assessee, then if consideration for such transfer as recorded in accounts of eligible business do not correspond to market value of such goods, then for purposes of deduction profits and gains of such eligible business shall be computed as if transfer has been made at market value of such goods as on that date. Though section has its own importance but area under which this section operates is that where one eligible business is transferred to any other business. We again want to emphasis that word used in this section is "business" and not word "profit". We can hence draw an inference by describing these two words and thus have precisely noted that 'eligible business' has a different connotation which is not at par or identical with "eligible profit". matter we are dealing is not case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a matter of hypothesis and not a matter of realty. Logically it is not realistic to set apart a value of a self generated brand which had grown in number of years. 10.10 segment reporting of profit is although in practice but purpose of such reporting is altogether different. Such segment information is particularly useful for financial analysis, so that management may keep a close watch on performance of diversified business lines. areas of demarcation are business segment, geographical segment, etc. But as far as Revenue of an enterprise is concerned while segmentation is required, then Revenue from sales to external customers are reported in segmented statement of profit and loss. In an accounting system, an intra-company sale between divisions or units is not regarded as Revenue for purpose of such financial reporting. As per Accounting Standards an Enterprise Revenue ignores in house-sales that represent Revenue to one segment and Expense to another. In this connection, AO has discussed Hon'ble Supreme Court decision pronounced in case of Liberty India (supra). AO wanted to justify his attempt of segmentation on basis of theory that only profits derived due to manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are an essential part of their business and that such profit must be excluded from assessment under EPT The Act. It was narrated that in other words, The Act brings within its ambit all income in case of a person resident in British India which accrues or arises or which is deemed to accrue or arise to him in British India during accounting year. If Sec. 5 of The Act stopped short at that stage, it was undoubted that in case of respondent who is a resident in British India all his income, no matter where it arose, within British India or without British India, would be chargeable to excess profits tax just in same way as it chargeable to income-tax under Indian IT The Act. whole of his income arising in Raichur has legitimately been taxed under that The Act. In that decision also, word "business" was defined, i.e. business includes any trade, commerce or manufacture. It has also been said that all businesses, to which said law applied, carried on by same person shall be treated as one business for purpose of said The Act. question was about manufacturing activity and it was contended that if a man is a manufacturer as well as a seller of goods, then in his case term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsporting and selling them, and receiving proceeds of such sales. essence of its profitmaking business is a series of operations as a whole. 10.12 We have carefully perused this decision of Hon'ble Supreme Court as cited by Special Counsel Mr. Srivastava. At outset, we want to place on record that entire issue before Hon'ble Supreme Court was in respect of third proviso to section 5 of EPT The Act. said proviso was duly a reproduced in para-40 of order and for ready reference typed below:- "Provided further that this The Act shall not apply to any business whole of profits of which accrue or arise in an Indian State, and where profits of a part of a business accrue or arise in an Indian State, such part shall, for purposes of this provision, be deemed to be a separate business whole of profits of which accrue or arise in an Indian State, and other part of business shall, for all purposes of this The Act, be deemed to be a separate business." point for consideration was that whether on those facts third proviso to section 5 could be invoked. manufacturing activity of making ground-nut oil was carried out at Raichur (Hyderabad) which was treated as a separate bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee. That all operations of Raichur business are not carried on in Bombay. Therefore, profits that would be deemed under this section to accrue or arise in Bombay will only be profits which may reasonably be attributed to that part of operations carried on in Bombay, that is to say, to sale of part of its oil in Bombay. In this context, an observation was made that a trade is completed at a place where a business transaction is closed. Profits of a business are undoubtedly not "received" till commodity are sold and they are ascertained only when sale take place. This aspect has not been doubted or challenged even in said order. But in said order question was that if a part of a business consisted of manufacturing activity and that activity can be segregated so as to compute yield profit, then whether such profit accrue only at place where manufacture are sold. To answer this question, Hon'ble Court has commented in para- 49 that there was no express direction as to apportionment in third proviso to section-5 of EPT The Act. opinion expressed was very specific that a profit can accrue in respect to that part of a business only when apportionment is possible. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis through which only source of income/profit was manufacturing of specified products. We therefore hold that AO's action of segregation was merely based upon a hypothesis, hence hereby rejected. These two grounds Nos.6 & 7 are allowed." 88. We have carefully perused this decision and note that controversy in this ground of appeal with respect to applicability of section 80 IA (8) of The Act, on marketing and other selling distribution as well as research and development services provided by undertaking as a whole to eligible industrial undertaking at cost or market rate for working out eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to decision cited by Ld. AR. Therefore, we respectfully following above decision of coordinate bench hold that provisions of section 80IA(8) of The Act does not apply to assessee on transfer of services of marketing division of company to eligible industrial undertaking whose profits are claimed as deductible." 63. Therefore in absence of any finding that head office, branches or depot are providing any services and are considered as a profit centre by assessee or any finding by le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecorded in the books of noneligible units. The coordinate bench decided this issue in earlier year in assessee's own case holding that:- "81. Ground number 3 of appeal of learned assessing officer is with respect to reduction of claim u/s 80 IB of INR 3 2704671 made by learned assessing officer taking into account expenditure such as depreciation of fixed assets of corporate office and expenses of depot of INR 32704671/- incurred by business of assessee for providing services to eligible undertaking which is not been allocated to eligible undertaking and by reducing deduction u/s 80 IB and I 80 IC of The Act to that extent. 82. We have heard both parties. Learned CIT DR vehemently supported order of learned assessing officer and submitted that depreciation is required to be allocated to total expenditure incurred by eligible unit for purpose of working out right amount of eligible deduction. Learned authorised representative vehemently supported order of learned CIT - A. 83. We have carefully considered rival contention and perused order of lower authorities. Learned assessing officer has made adjustment of claim of deduction u/s 80IB/IC on basis of observation of Special A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definitely there are units of appellant which are not claiming deduction u/s 80IB/80IC and headquarter assets can be said to be used for such units also. Further, I agree with arguments of Ld AR that depreciation cannot be bifurcated on proportionate basis. Accordingly, reduction on quantum of deduction u/s 80IB/80IC on account of depreciation cannot be confirmed. These grounds of appeal for various AYs are allowed." 84. On perusal of order of learned CIT (A), we find that issue has been decided after considering facts and submissions of appellant. He has rightly held that depreciation on assets of one particular unit/division cannot be allocated to some other unit/division and as such, finding recorded by CIT (A) is well reasoned and based on sound legal principles. Further issue is also supported by decision of coordinate bench in case of ACIT v. Secure Meters Ltd. (ITA No. 542/Ju/2007 & 349/JU/2009) (28.08.2012) wherein Hon'ble Tribunal upheld order of ld CIT (A) deleting adjustment of deduction u/s 80IB/IC on account of allocation of depreciation of assets in Head Office. relevant finding is as under : "2.8 above findings of ld. CIT (A) in our considered view are in conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect to the deletion of brand expenses amounting to ₹ 52,968,064/- while calculating the deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) for use of brand 'Rajnigandha". This issue has been considered by the coordinate bench in assessee's own case for earlier year as Under:- "64. Ground number 12 of appeal of assessee is with respect to deduction of claim of deduction u/s 80 IB/80 IC to extent of INR 39571939/- in respect of royalty on use of brand name ' Rajinigandha' by eligible units in terms of provisions of section 80 IA (8) read with section 80 IB (13) and 80 IC (7) of The Act. Learned assessing officer has noted that eligible undertaking is are manufacturing and selling their products under brand name Ranjnigandha is owned by corporate office of Assessee Company. Above brand as noted by him is a well-established brand, which has been used by eligible undertaking, is without making any provision for payment of royalty etc. in its books of accounts. These facts were also pointed out by special auditor and therefore as suggested by special auditor fair market value of transfer of Rajinigandha brand by corporate office to eligible units should al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such impugned adjustment is inconsistent. He further stated that factual position to this effect is supported from order of learned transfer pricing officer for assessment year 2013 - 14 and 2014 - 15. He extensively referred to page number 38 - 69 of paper book number 2. He further submitted that royalty being an intangible is not covered under provisions of section 80 IA (8) of The Act as above provision only apply in case of goods and services. Therefore he submitted that AO is not justified in reducing claim of deduction by adjusting notional royalty in respect of brand ' RajaniGandha ' payable by eligible units to head office. 66. Learned departmental representative vehemently supported order of learned assessing officer and learned CIT - A. He submitted that royalty is payable for use of brand owned by another unit of assessee for being used by eligible unit for manufacturing. He therefore submitted that user of above brand by eligible unit is a service and therefore provisions of section 80 IA (8) of The Act are applicable. 67. We have carefully considered rival contention and perused orders of lower authorities. Undisputedly brand originally is owned by assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue decided by the coordinate bench in assessee's own case in earlier year as Under:- "87. Ground number 5 of appeal of learned AO is against order of learned CIT - A in deleting reduction of claim u/s 80 IB/80 IC of INR 6 9085390/- thus ignoring fact that royalty payment at rate of 3% which was made to sister concern taken by AO was rate approved by regional Dir. Ld Assessing officer has made impugned adjustment of claim of deduction u/s 80IB/IC on ground that royalty @ 1% of net sales paid to M/s. Dharampal Satyapal & Sons P. Ltd. (Third party) is less than rate approved by Regional Director of Central Government which is 3% and as such profit of eligible units and consequential claim of deduction 80IB/IC is inflated due to less royalty payment. Accordingly, claim of deduction was reduced by increasing royalty payment by eligible units by 2% of net sales in terms of provisions of 80IA(10) r.w.s. 80IB(13) & 80IC(7) of Income Tax The Act, 1961. CIT(A) deleted adjustment on ground that rate fixed by Regional Director was maximum ceiling limit and same cannot be considered as fair value for adjustment in terms of provisions of section 80IA(10) r.w.s. 80IB(13) & 80IC(7) of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 14 is with respect to the ad hoc disallowance is on purchase of sandalwood oil amounting to ₹ 505,920,379/-. During the year the learned assessing officer noted that assessee has purchased sandalwood oil based fragrance from M/s Surya Vinayak industries Ltd amounting to ₹ 1,490,760,754/- which consisted of 17,410 kg of sandalwood oil compounds. In the preceding financial year 2010 - 11 the purchases was 16,702.80 kg and in financial year 2009 - 10 purchases was 12,760 kg. AO noted that in earlier years the supplier did not have capacity to produce the goods which were sold to the assessee. Therefore the learned AO held that this was a camouflaged device of bogus sale of product at a very high rate and the proceeds were returned back to the assessee company. Therefore for the reasons discussed by the assessing officer in orders of the assessment for assessment year 2005 - 06 to 2011 - 12 (which were also reproduced in the current assessment order), as the assessee has also purchased goods from that party during the year, he made the addition by reducing the deduction u/s 80 IC of the income tax act of ₹ 505,920,379/-. The fate of the above addition in earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in appeal in this ground. 69. Learned authorised representative submitted that identical issue has been considered by Hon'ble ITAT in order for AY 2005-06 to 09-10 in favour of appellant wherein Hon'ble court has held that alleged seized documents relied upon by AO are neither incriminating in nature nor credible evidence to justify allegation of inflation of purchase price. It has been held by Hon'ble ITAT that entire story of inflated purchases is merely on basis of conjectures and there is no real evidence to establish any sort of case against appellant. It was submitted that whole basis of disallowance is based on Page No. 52 of Annexure A/1 seized during course of search on 21.01.2011 and same is year specific and it is not known as to how such document is relevant for AY 2010-11 i.e. year under consideration. In light of finding of Tribunal, alleged annexure A-1/ Page 52 is not relevant to AY 2010-11 and same could not be considered as basis for any addition in AY 2010-11. Further, AO and CIT(A) has not disputed fact that entire purchases of Sandalwood Oil is fully supported from invoices issued by parties and use of same for manufacturing of final product. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fumers Pvt. Ltd. are related parties or provisions of section 80IA(8) or 80IA(10) are applicable and as such there is no ground or basis for any disallowance of purchases of Sandalwood Oil from M/s. Surya Vinayak Industries Ltd. and M/s Allied Perfumers Pvt. Ltd. keeping in view documentary evidences placed on record in form of bills, vouchers, documents showing actual receipt of material, documents in support of actual movement of goods and actual consumption in manufacture of final products, viz., Pan Masala, Tobacco and Gutka products. Even otherwise, CIT (A) has erred in applying third party minimum rate while computing value of purchase in case of SVIL and APPL. It is relevant to mention that no investigation has been carried out to demonstrate comparability of cases. There are several factors which affect price of a commodity and without making any objective comparison with regard to quality, brand, nature and type of product, there could be no ground or basis for applying data of a third party transaction. While applying minimum rate of other party, CIT (A) has ignored fact that other parties have also supplied Sandalwood Oil at different rates as per details given at page 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not supplied goods namely Sandalwood oil to assessee and I have merely issued bogus bill to assessee and received cheques from assessee and paid back to assessee in cash after some adjustment in rate and apportioning excise duty. After giving this finding, he further held that Sandalwood oil is an excisable product and entered in excise registrar of perfumery compound division of assessee. He further noted that on date of such there was no discrepancy in stock of sandalwood oil found which is apparent from assessment order where assessing officer himself as mentioned that during course of search proceedings conducted sandalwood oil was found in production for being hundred KG and in managing director room wearing 208.74 KG. He further considered consumption of sandalwood oil after reducing purchases from two companies and also after incorporating quantity purchased from these two companies and compared them. He noted that if quantity purchased from these two entities are disallowed and not taken into consideration than revised yield ranges from 102.57% to 112.62 percentage of entire consumption of raw material, which gives an absurd result of finished goods production, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y years. He has given a finding for Ay 2011-12 however, he did not show that how this issue is related to AY 2010-11. The coordinate bench in its order in case of the assessee for the above paper has held that it pertains to Ay 2011-12. Therefore cognizance of the same can be taken only for the year Ay 201-12. There is no evidence found during the course of search that these are the transactions related to this year. The order of the coordinate bench in assessee's own case is clear on this issue with respect to which year the cognizance of these seized material would be taken. " 28. The main seized paper on which heavy reliance is placed up on by revenue is Page No. 52 of annexure A-1 which is a statement dated 30.11.2010 where in the details of three bills dated 19.11.2010 and 26.11.2010 are given. The details of the bill show quantity, rate, and the amount. The total quantity purchased by the assessee is 650 kgs and corresponding amount is ₹ 4.64 crores. There is account statement below which gives the details of payment made up to 31.10.2010 of ₹ 6.70 crores as excess and there is two entry of rate difference and further there is an adjustment on account of excis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and not otherwise. It was further held as under in para no 13 that :- "13. From the above, it is evident that the where nothing assessment year and assessee specific incriminating "money, jewellery or other valuable article or thing or books of account or documents", the assessments for assessment years cannot be disturbed. Further, the concluded assessments should not be disturbed merely for making routine additions, which could have been otherwise done in the regular assessment and of course, the pending assessments fall under exceptions. As stated by the learned counsel point No. 9 of his note reproduced above, "nothing is seized pertaining to asst. y₹ 2000-01 to 2003-04 obviously there is no question of recording satisfaction note". On this reasoning itself, we find that the assessee has to succeed. Therefore, we do not examine the other arguments of the counsel. Otherwise, the counsel argued that the reopening of the assessment for the asst. y₹ 2000- 01 to 2001-02 is impermissible in view of the judgment of Ahmedabad Bench in the case of Vijay M. Vimawal (supra). Further, he also argued that the assessment of asst. yr. 2003-04 was actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeals, qua the aforesaid four Assessment Years, the assessment is quashed by the ITAT (which order is upheld by the High Court) on the sole ground that notice under Section 153C of the Act was legally unsustainable. The events recorded above further disclose that the issue pertaining to validity of notice under Section 153C of the Act was raised for the first time before the Tribunal and the Tribunal permitted the assessee to raise this additional ground and while dealing with the same on merits, accepted the contention of the assessee. 17. First objection of the learned Solicitor General was that it was improper on the part of the ITAT to allow this ground to be raised, when the assessee had not objected to the jurisdiction under Section 153C of the Act before the AO. Therefore, in the first instance, it needs to be determined as to whether ITAT was right in permitting the assessee to raise this ground for the first time before it, as an additional ground. 18. The ITAT permitted this additional ground by giving a reason that it was a jurisdictional issue taken up on the basis of facts already on the record and, therefore, could be raised. In this behalf, it was noted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue when it was found on facts that the documents seized, in fact, pertain to third party, i.e. the assessee, and, therefore, the said condition precedent for taking action under Section 153C of the Act had been satisfied. 21. Likewise, the Delhi High Court also decided the case on altogether different facts which will have no bearing once the matter is examined in the aforesaid hue on the facts of this case. The Bombay High Court has rightly distinguished the said judgment as not applicable giving the following reasons: "8. Reliance on the judgment of the Division Bench of the High Court of Delhi reported in case of SSP Aviation Ltd. v. Deputy Commissioner of Income Tax [2012] 346 ITR 177 is misplaced. There, search was carried out in the case of "P" group of companies. It was found that the assessee before the Hon'ble Delhi High Court had acquired certain development rights from "P" group of companies. Based thereon, the satisfaction was recorded by the Assessing Officer and he issued notice in terms of Section 153C. Thereupon the proceedings were initiated under section 153A and the assessee was directed to file returns for the six a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , ITA No. 3877, 3878, 3879, 3880, 3881/Del/2016 (Revenue) ITA No. 3310, 3717, 3718, 3719, 3737/Del/2016(Assessee) (Assessment Year: 2005- 06 to 2009-10) Page | 56 by the assessee from this party is not at the market rate prevailing on those days. Mere assertion that assessee has purchased material from this party in these years and therefore there has to be over invoicing of the purchases is a mere assertion without any material. Therefore, we do not have any hesitation to hold that In the present case the impugned seized paper does not belong to the Assessment Years involved in the impugned appeals. 31. Furthermore, with respect to the same paper it is also important to note that it is evident from that paper that Surya Vinayak Industries have over paid the assessee than what it should have allegedly paid for over invoicing. This evident facts also runs contrary to the other finding that Surya Vinayak industries is company of not having capacity to supply so much material in para no 145 of the order. If it is so then how it could have paid the assessee over and above what is required to be paid if the goods are over invoiced. The sum over paid by that company to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and every item has been classified and named separately and it contains various compounds. But nowhere in this chart there is any mention of Sandalwood oil [C] and Sandalwood Oil [SU]. At S. No. 121, there is mention of 'SANDALWOOD OIL' as 'raw material'. Their suppliers are mentioned in the next column with party name and yearly quantity purchased from them. In this column there is no classification of any sandalwood oil [C] or sandalwood oil [SU]. Just one item is mentioned and that is sandal wood oil. SVIL and Kamakhya Oil Co and other concerns are shown as their suppliers. This proves that only sandalwood oil is being supplied by SVIL. Page No.7 to 12 of Annexure A-16 of Perfumery Division is the statement of raw materials taken from the I.A.S. software which is used in the perfumery division. This statement shows the opening balance, total receipts, total consumption, closing balances, physical balance along with short/excess for the period 1.4.09 to 31.03.10. This statement is showing the date in respect of more than 150 raw materials being purchased by Perfumery Division. In this statement there is mention of only sandalwood oil and not any [C] or [SU]. In the same way page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. Finished goods are 39 in number and value there of is declared at ₹ 142^92,20,822/-. It is surprising to see that out of Rs.l 42.00 crores of sale, the most expensive ingredient is sandalwood oil and value thereof is ₹ 118.00 crores" 34. On reading of the above paragraph the main contention of the ld Assessing Officer is that there is no product by the name of sandalwood oil (C) or Sandalwood Oil (U) being supplied by Surya Vinayak Industries ltd to M/s. Dharampal Stayapal Ltd (assessee). The page NO. 226 of Annexure 11, which is also the statement of physical stock as on 23.03.2011, does not fall into the assessment years in the above appeal. Further page NO. 72 of Annexure A-14 also pertain financial year 01.04.2010 to 31.12.2010. The central Excise Return Filed in Form NO. ER-1 cannot be said to be incriminating material, as it does not show any escapement of income involved in those papers. Hon'ble Supreme Court Sinhgad Technical & Education society ( supra) in the para No. 18 has endorsed the reasoning given by the coordinate bench stating it to be logical and valid that incriminating material, which was seized, had to pertain to the Assessment Years in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment in respect of benchmarking of interest received on foreign currency loan and the learned transfer pricing officer has made an upward adjustment of ₹ 78,019,356/-. This issue is identical to the issue decided by the coordinate bench in assessee's own case for earlier years as under:- "73. Now we come to ground number 14 of appeal of assessee which is against transfer pricing adjustment of INR 59551686/-. Identical addition has been made for AY 2012-13, the ld CIT (A) has considered the figures and facts for AY 2012-13, and therefore in this order for sake of simplicity, facts for that year are considered. For AY 2012-13 , In form number 3CEB filed by assessee and international transaction as reported International transaction of interest on loan with its associated enterprise DNS business AG to ₹ 22163283/-, same was referred by learned assessing officer to The Additional Commissioner Of Income Tax, Transfer Pricing Officer - I (1), New Delhi for determination of arm's-length price. International transaction is that assessee has advanced foreign currency loan to its subsidiary in Switzerland of INR 176420000/- where rate of interest charged is only 3%. Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of The Act and passed an order on 23/12/2013. For AY 2010-11 the addition was made of RS INR 59551686/- . 74. The learned CIT - (A) in para number 32.3 of his order has decided whole issue. He rejected contention of assessee that it is a shareholder activity rejecting that advancement of loan cannot be characterized as a shareholder activity and it is a financial transaction and required to be benchmarked. He further noted that his view is also supported by term loan advanced which was later on to be converted into a share capital. Further with respect to argument of learned authorised representative that issue is squarely covered by decision of honourable jurisdictional High Court in case of cotton natural India private limited, he considered loan agreement and stated that as specifically currency of loan is not mentioned in loan agreement and ceiling of loan is fixed in Indian rupees and that currency of loan is in Indian rupees only and therefore foreign currency fluctuation in Indian rupee loan will not effect and therefore primary LIBOR rate or interest rate prevailing in foreign country will not apply on this loan. Accordingly, he upheld action of learned transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate comparable rate of interest on foreign currency dominated loan interest rate should be market determine interest rate applicable to currency concerned in which loan has to be repaid. He further stated that in impugned case assessee has advance loan to its wholly owned subsidiary in Switzerland in foreign currency and same is repayable in that foreign currency only and therefore issue squarely covered by decision of honourable jurisdictional High Court. He further referred to decision of coordinate bench in ITA number 06/07/2002/del/2015 dated 8/10/2018 wherein DCIT vs Seigwerk India private limited similar view was upheld. He further referred to decision of coordinate bench in ITA number 5816/del/2012 wherein it was held that in a case where loan was advanced in foreign currency interest rate on foreign currency loan being qualitatively different, even if one has to see interest, that assessee should have earned one has to see interest that assessee would have earned on foreign currency loans and not rupee dominated loans. He further referred to decision of honourable Bombay High Court in CIT vs. Tata auto comp systems Ltd [374 ITR 516 ] wherein it is held that where assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is most appropriate to consider mark up on basis of average speed over LIBOR charged in France. Accordingly, orders of learned lower authorities are reversed with respect to applicability of Indian interest rate on such loan for benchmarking interest transaction of loan advanced. No other arguments were advanced by either of parties on other issues involved other than that of applicability of PLR vs. LIBOR. In result ground, number 14 of appeal of assessee is allowed." 45. The facts in present appeal shows that during the year assessee has on interest income from DS Business AG of ₹ 28 67 7932/-. The assessee company has given a foreign currency loan to that company in Switzerland. The assessee has provided such loan out of its noninterest- bearing own funds and not out of the interest-bearing borrowed funds. The learned assessing officer as in previous year held that interest rate of 12.6% based on SBI +300 BSP should be at arm's-length level of interest that needs to be charged for the loan advanced by the assessee. However there is no change in the facts compared to earlier year the loan was given to its associated enterprise in Switzerland at the interest rate of 3% per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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