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TMI Blog2021 (8) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... d enterprises (AE). 3. Briefly the facts are, the assessee is a subsidiary of Aventis Pharma Holding GmbH, which, in turn, is a wholly owned subsidiary of Hoechst AGTE. As stated by the Transfer Pricing Officer (TPO, in short), assessee is primarily engaged in manufacture and marketing of formulations across the therapeutic segment of anti infective, arthritis, cardiology, central nervous system, metabolism, oncology and respiratory. During the year under consideration, the assessee had entered into various international transactions with its AEs, such as, imports of actives/formulations from AE, export of formulations/bulk drugs to AE, payment of commission to Aventis Germany, reimbursement of expenses, purchase of shares, purchase of patent rights and trademarks from AE in Germany and France, reimbursement of expenses from AE. As it appears, the assessee aggregated the transactions relating to import and exports of active formulations, bulk drugs, payment of commission, etc. and benchmarked them in the transfer pricing study report applying transactional net margin method (TNMM). Since, the operating margin shown by the assessee at 13.83% was more than the mean operating margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to demonstrate rendition of service by the AE for facilitating the export sales. Drawing our attention to various documentary evidences placed in the paper book, he submitted, the progressive growth in export sales clearly indicates rendition of service by the AE. He submitted, the assessee has specifically entered into an agreement with the AE for availing services for its export sales. He submitted, in pursuance to such agreement, the AE has rendered services to the assessee. He submitted, the payment of export commission at 12.5% on sales was also approved by the Reserve Bank of India (RBI) and is within the outer limit fixed by RBI in circular No.17 dated 19th May, 1999. Therefore, the payment of export commission should be considered to be at arm's length. He submitted, since payment of commission is closely linked to the transactions of exports and imports, they have to be aggregated for the purpose of benchmarking. Whereas, the TPO has selectively segregated payment of commission as an independent transaction for benchmarking while accepting the other transactions. He submitted, when the TPO has accepted TNMM as the most appropriate method in respect of other closely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idences to support its benchmarking and to further demonstrate that export commission paid at 12.5% is at arm's length. Whereas, the TPO has determined ALP of commission at 3% purely on adhoc/estimate basis without following any of the prescribed methods. Though, the TPO has observed that the assessee failed to furnish any direct documentary evidence to demonstrate that services were rendered by the AE to warrant payment of commission; however, he has immediately contradicted himself by stating that the AE has rendered nominal services. Thus, it is very much clear, the TPO while rejecting export commission paid at 12.5% and proposing adjustment, has not followed the statutory mandate. Rather, the decision of the TPO in determining the ALP of export commission at 3% is without any basis and purely on conjectures and surmises. The TPO has not shown any valid reason why assessee's claim that the transactions relating to import and export of formulations and bulk drugs as well as payment of export commission being closely linked, should not be aggregated together for benchmarking purpose. 8. It is also relevant to observe, learned Commissioner (Appeals), while determining the ALP of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's own case in assessment year 1999-2000, learned Commissioner (Appeals) held that assessee is eligible for deduction only in respect of the amount that has the character similar to the payment that the employees are otherwise eligible to receive on retirement or resignation even when there is no closure of the unit. Whereas, the balance amount which is paid towards VRS and early retirement incentive would be inadmissible. Accordingly, he restricted the disallowance to Rs. 8,25,63,328/-. 11. The learned senior counsel of the assessee submitted, identical issue has been decided in favour of the assessee, in its own case in assessment years 2000- 01 & 2001-02. Further, he submitted, the appeals filed against the aforesaid decisions of the Tribunal were not admitted by the Hon'ble High Court. Thus, he submitted, the issue is squarely covered in favour of the assessee. In addition, he relied upon the following decisions:- 1. K Ravindranathan Nair vs CIT 247 ITR 178 (SC) 2. CIT vs Foseco India Ltd 352 ITR 320 (Bom) 3. Foseco India Ltd vs ACIT ITA No.4667/M/2005 12. The learned departmental representative, though, fairly submitted that the issue is covered by the earlier decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings, the assessing officer noticed that the assessee has claimed depreciation of Rs. 55,54,989/- on opening written down value (WDV) of block of assets. Noticing that similar claim made by the assessee was disallowed in the preceding assessment year on the ground that the assets were not utilized for the business, the assessing officer, followed the same and disallowed the depreciation claimed. Though, the assessee contested the disallowance; however, earned Commissioner (Appeals), following the decision taken by him in earlier assessment year, upheld the disallowance. 13. The learned senior counsel for the assessee submitted, while deciding identical issue in assessee's own case in assessment years 1998-99, 1999-2000, 2000-01 and 2001-02 claim of depreciation has been allowed. He submitted, the aforesaid decisions of the Tribunal have been accepted by the department and no further appeals have been filed before the Hon'ble High Court. 14. The learned departmental representative agreed with the aforesaid submissions of the assessee. 15. We have considered rival submissions and perused materials on record. It is evident, assessee's claim of depreciation on the opening WDV of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares; however, learned Commissioner (Appeals), relying upon the alternative contention of the assessee and the revised computation in support of the claim, restricted the disallowance to Rs. 7,264/-. 19. The learned senior counsel for the assessee submitted, similar disallowance made by the assessing officer in assessment years 1998-99 to 2001-02 have been allowed by the Tribunal. Further, he submitted, appeal against Tribunal's decision for assessment year 1998-99 was not admitted by the Hon'ble High Court and in other assessment years, the department has not filed any appeal. 20. The learned departmental representative fairly agreed with the aforesaid submissions of the learned senior counsel for the assessee. 21. Having considered rival submissions, we find, while deciding identical issue in preceding assessment years, the Tribunal has deleted the disallowance of interest expenditure made under section 14A of the Act. In the latest order passed for the assessment year 2001-02 (supra), the Tribunal, following its earlier decisions, has deleted the disallowance under section 14A, holding as under:- "10. Ground No.5 is regarding disallowance U/S.14A. Learned AR stated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards purchase of software system for upgradation of the computer network. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) observed that the amount of Rs. 25,11,883/- represent payment for acquisition of software and payment made to professionals for development of software. Thus, he held that the assessee's claim of deduction to this extent is not allowable, as, such payment would not be admissible. 25. Drawing our attention to page 192 of the paper book, learned senior counsel for the assessee submitted, the payments made were for purchase of application software and consultancy charges. Therefore, expenditure cannot be of capital nature. Further, he submitted, the issue is covered by the decision of the Tribunal in assessee's own case for assessment year 1999-2000. In addition, he relied upon the following decisions:- 1. CIT vs Asahi India Glass Ltd 346 ITR 329 (Del) 2. CIT VS Amway India Enterprise 346 ITR 341 (Del) 3. CIT vs Raychem RPG Ltd 346 ITR 138 (Bom) 26. The learned departmental representative fairly agreed that the issue is covered by the earlier decision of the Tribunal. 27. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference in the profit of the company if the provisions of section 145A is followed is Rs. 1,83,43,096/-. Accordingly, he added back the aforesaid amount representing unutilized modvat credit to the value of closing stock. Assessee contested the aforesaid addition before learned Commissioner (Appeals). Learned Commissioner (Appeals) disposed of the issue by directing the assessing officer to make adjustment to the stock, purchase, sale, excise duty payment and if, after doing so, it results in any difference, then restrict the addition to that extent only. 31. The learned senior counsel of the assessee submitted that even if no adjustment is made on account of unutilized modvat credit, it will have no impact on the profit. In this regard, he relied upon the decision of the first appellate authority in assessee's own case for assessment years 2006-07 and 2007-08. Further, he submitted, no such adjustment has been made from assessment year 2008-09 onwards. He submitted, identical issue relating to adjustment made under section 145A was decided in favour of the assessee in assessment year 1999-2000 and department has not filed any appeal against the decision of the Tribunal. In addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit on which the assessee has claimed deduction under section 80HHC of the Act and verifying them, the assessing officer noticed that the assessee has included sales tax set off in the business profits as well as in the turnover for claiming deduction under section 80HHC of the Act. Further, he observed, the assessee has also included bad debts recovered during the year and processing charges in the business profit and total turnover for claiming deduction under section 80HHC of the Act, instead of reducing 90% of such income, in terms of Explanation (baa) of section 80HHC. Whereas, the assessing officer was of the view that it has to be reduced by 90% for claiming deduction under section 80HHC. Noticing the above, the assessing officer called upon the assessee to explain, why 90% of the sales-tax set off, bad debts recovered and processing charges should not be reduced from the business profits for computing deduction under section 80HHC of the Act. Though, the assessee objected to the proposed disallowance; however, the assessing officer, rejecting the submissions of the assessee reduced 90% out of the income received from sales-tax set off, DEPB entitlements, bad debts and proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has received DEPB entitlement which has been credited as income on accrual basis. Further, drawing our attention to the observations of the assessing officer, learned senior counsel submitted, the assessing officer himself has stated that the income received from DEPB entitlement does not fall under sections 28(iiia), 28(iiib) & 28(iiic) of the Act. Further, the receipts from DEPB entitlement cannot be considered to be in the nature of brokerage, commission, rent, charges or any other receipt of similar nature so as to bring it within the purview of Explanation (baa) to section 80HHC. He submitted, though, learned Commissioner (Appeals) has agreed with the assessee that DEPB entitlement does not come within the ambit of Explanation (baa); however, he has erroneously held that the assessee would be entitled to claim such deduction only on the DEPB entitlement received and utilized during the year. Thus, he submitted, since the receipt from DEPB entitlement is not covered under Explanation (baa) to section 80HHC of the Act, 90% of such receipts cannot be reduced for computing deduction under section 80HHC of the act. In support of such contention, he relied upon a decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble High Court of Bombay in case of Dresser Rand (322 ITR 449) in which it has been held that receipts like recovery of freight insurance, packing charges, sales tax refund and service income will not be part of business profit and has to be considered for reduction as per Explanation (baa). Subsequently, however Hon'ble High Court in case of Pfizer Ltd. (330 ITR 62) after referring to the judgement of in case of Dresser Rand (supra) held that insurance claim on stock in trade was not an independent item of income and therefore has to be considered as integral part of business profit. However, since the sales tax refund has been specifically considered by the Hon'ble High Court in case of Dresser Rand (supra) respectfully following the said decision, we hold that sales tax refund and set off will be considered for reduction as per Explanation (baa). Further, the alternate claim of the assessee that only the net receipt should be considered for reduction as per Explanation (baa) is covered by the judgement of Hon'ble Supreme Court in case of ACG Associated Capsules P. Ltd. v. CIT (343 ITR 89). We therefore direct the Assessing Officer only the net receipt after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g excluding only processing charges and bad debts from the total turnover while computing the eligible deduction u/s.80HHC. This issue is covered by the decision of the Hon'bie Supreme Court in the case of CIT Vs. Ravindranathan Nair, 295 ITR 228(SC), wherein the Hon'bie Supreme Court has decided this issue in favour of the department "21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993-94. At that time Section 80HHC(3) of the I. T. Act constituted a Code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90% of the sums referred to in clause (baa) to the said Explanation, in the computation of deduction under Section 80HHC ail four variables had to be taken into account. All four variables were required to be given weightage. The substitution of Section SOHHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes dear that ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % as contemplated in clause (baa) to arrive at Business Profits. Therefore, the said processing charges were includible in the total turnover in the formula under Section 80HHC(3) of the l.T. Act. 23. Before concluding we state that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect, tax is collected by the taxpayer on behalf of the government the tax recovered is for the government. It may be an income in the conceptual sense or even under the I. T. Act but while working out the formula under Section 80HHC(3) of the I. T. Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover. An indirect tax like excise duty does not have that element of export turnover as understood in the above formula. As stated above, it is recovered by the taxpayer on behalf of the government Therefore, in the present cases, our judgment in Commissioner of Income Tax. Cotmhatore v. M/s. Lakshmi Machins Works - 2007(6) Scale 168, has no application. 24. Accordingly, the impugned judgments of the High Court and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year would not be covered under Explanation (baa) of section 80HHC of the Act. We fail to understand, how and why DEPB entitlement only to the extent of received and utilized during the year would not be covered under Explanation (baa) of section 80HHC of the Act. In our view, the nature and character of DEPB entitlement would remain same, whether it is utilized or unutilized. Further, the reasoning of the assessing officer that DEPB entitlement is covered under section 28(iv) requires thorough examination. It is also noticed, while deciding identical issue in assessee's own case in assessment year 2000-01 (supra), the Tribunal has directed the assessing officer to compute deduction on DEPB license by following the ratio laid down by the Hon'ble Supreme Court in case of Topman Exports vs CIT (supra). For better appreciation, the observations of the Tribunal in this regard are reproduced below:- "19. Ground No.(vii) is regarding directing the AO to calculate deduction u/s.80HHC without reducing 90% of the DEPB license sold without appreciating the facts of the case. This issue has been decided in favour of the assessee by the decision of Hon'ble Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n BOHHC in the case of the appellants in accordance with this judgment There shall be no order as to costs." 19.1 We have considered rival contentions and perused the record. As the issue is covered by the decision of the Hon'ble Supreme Court in the case of Topman Exports (supra), respectfully following the same, we direct the AO to compute deduction on DEPB since license sold in terms of decision in the case of Topman Exports (supra)." 47. Pertinently, the same view was reiterated by the Tribunal while deciding revenue's appeal for assessment year 2001-02 (supra). On a careful perusal of the observations of the Tribunal reproduced above, it appears that the Tribunal has proceeded on the basis that the income claimed as deduction under section 80HHC of the Act arises out of sale of DEPB license. However, before us, it is the specific contention of the learned senior counsel for the assessee that DEPB entitlement has not arisen out of sale of DEPB license, but has accrued as income to the assessee. On a reading of the impugned assessment order as well as the order passed by the learned Commissioner (Appeals), prima facie, we are of the view that various facts relating to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om various hospitals on account of sales effected in the year 1998. However, due to amalgamation, the amounts could not be recovered in absence of proper documentation. Thus, it was submitted, the bad debts written off has to be allowed as deduction either under section 36(1)(vii) or as business loss under section 28 of the Act. Learned Commissioner (Appeals), relying upon his order passed for assessment year 2000-01 granted partial relief to the assessee, while, upholding disallowance for the balance amount. 50. The learned senior counsel for the assessee submitted, the only reason for disallowance of assessee's claim is, the assessee has not proved that the debt is not recoverable. He submitted, as per the amended provisions of section 36(1)(vii), there is no requirement for the assessee to prove that the debt has become bad and not recoverable. He submitted, once the debt is written off in the books of account, it has to be allowed. In support, learned senior counsel relied upon the following decisions:- i. TRF Ltd vs CIT (2010) 323 ITR 397 (SC) ii. ACIT vs Glaxo Smithkline Pharmaceuticals Ltd ITA No.6444/Mum/2007, dt 28-01-2011 51. The learned departmental representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this is a recurring dispute between the assessee and the revenue right from assessment year 1994-95. In all the preceding assessment years, the addition/enhancement made to the ALV has been deleted and as stated before us, the revenue has accepted the decision of the Tribunal. In the latest order passed for assessment year 2001-02, the Tribunal, in ITA No.8978 & 8746/Mum/2004 dated 23.07.2014 has decided the issue in favour of the assessee, holding as under:- "6.2 We have heard rival contentions, perused the record and orders of the Tribunal and found that the very same issue has already been decided by the Tribunal in assessee's own case in terms discussed above. After considering the decision of Hon'ble Supreme Court, the Tribunal has concluded that gross annual ratable value of the property for the purposes of computation of house property income is to be determined at the annual value determined by Municipal Corporation. As the facts and circumstances during the year under consideration are same, hence, respectfully following the decision of the Tribunal, we direct the AO to determine ALV at the value determined by Municipal Corporation for the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al turnover while computing the eligible deduction u/s.80HHC. This issue has been decided by the Hon'ble Supreme Court in the case of CIT Vs. Laxmi Machine Works, 290 ITR 667(SC), wherein it was held that excise duty has no element of profit, therefore, not includible in total turnover for computing deduction u/s.80HHC. Respectfully, following the decision of the Hon'ble Supreme Court, we do not find any infirmity in the order of CIT(A) directing for exclusion of excise duty from the total turnover for computing deduction u/s.80HHC." 64. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals) on the issue. 65. As regards set off of sales-tax refund, while deciding corresponding issue raised in ground 7(a) of assessee's appeal in ITA No.3092/Mum/2016, we have followed the decision of the Tribunal in assessee's own case for assessment year 2000-01, wherein, it is held that sales tax set off and refund are not eligible for deduction in view of Explanation (baa) to section 80HHC. Therefore, 90% of such receipt has to be excluded from the business profits as well as turnover for computing deduction under section 80HHC of the Act. Our decision therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some connection, link, attributes to - ' export. This proposition propounded by the CIT(A) is apparently against the provisions of section 80HHC(3)(b). If the provisions of sec 80HHC(3)(b) are read in conjunction with clause (e) of Explanation to the said sub. section, it is clear that the indirect cost . for the purpose of allocation under sub.sec (3) shall be taken as the total indirect cost incurred for the total turnover (local + export) and the same has to be allocated in the ratio of export turnover of trading goods to the total turnover 10.1 For ready reference, we quote sec 80HHC(3)(b) and clause (e) of Explanation as under: [(3) For the purposes of sub-section (1) - (a)...................... : (b) where the export out of India is of trading goods, the profits ' derived from such export shall be the export tumover45 in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c)............ , Explanation.-For the purposes of this sub-section,- (a).................... (b) .................. (d) (e)"indirect costs" means costs, not being direct costs, allocated in ratio of the export turnover i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) would stand and will have full effect in so far as it is against the revenue; but if the plea raised by the revenue is accepted as regards the validity of the impugned order but then the revenue succeeds only to the extent that the appeal of the assesses would fait. 10.7 The scope of Rule 27 of ITAT Rules has been discussed by the Hon'b!e jurisdictions! High Court in the case of Bamasi (B.R.) v. Commissioner of Income-tax reported in 83 ITR 223 as under, "But even if the assesses had not made such a statement, the above judgment shows that the assesses would be entitled to raise a new ground, provided it is a ground of law and does not necessitate any other evidence to be recorded, the nature of which would not only be a defence to the appeal itself, but may also affect the validity of the entire assessment proceedings. If the ground succeeds, the only result would be that the appeal would fail. The acceptance of the ground would show that the entire assessment proceedings were invalid, but yet the Tribunal which hears that appeal would have no power to disturb or to set aside the order in favour of the appellant against which the appeal has been filed. The ground would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be taken as part direct expenses. A perusal of the details show that as far as the Head Office Expenses is concerned, the working thereof is correct and hence needed to be accepted. 30 However, the appellant company exported trading goods during the year that were procured from Hyderabad and Mumbai. At both the places the appellant company has branch offices apart from the head office being located in Mumbai. Though it was claimed that the job of procurement of trading goods exported are carried out from head office that is having separate procurement and export divisions, while the involvement of branch office at Mumbai can be ruled out with a specific office for the purpose located therein, in respect of the branch office at Hyderabad, the other place for procurement, the same cannot be accepted. Hence the expenditure incurred at Hyderabad branch office to the extent not directly related to domestic sales is also required to be taken as part of the indirect cost for working out deduction under section 80 HHC (3)(b) of the Act, The Assessing Officer shall rework out the indirect cost under the section accordingly." x x x x x x 10.10 As we have already discussed that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfructuous, is dismissed. 77. In ground 15, the revenue has challenged partial relief granted by learned Commissioner (Appeals) with regard to addition made under section 145A. While deciding corresponding ground, being ground 6 in assessee's appeal in ITA No.3092/Mum/2016 in the earlier part of the order, we have deleted the entire disallowance. That being the case, this ground having become infructuous, is dismissed. 78. In the result, appeal is partly allowed. ITA No.2072/Mum/2010 79. In this appeal, the revenue has challenged the deletion of penalty imposed under section 271(1)(c) of the Act. 80. Briefly the facts are, while completing the assessment for the impugned assessment year, the assessing officer made various additions and disallowances. Out of such additions/disallowances, the assessing officer initiated proceedings for imposition of penalty under section 271(1)(c) of the Act alleging concealment of income on the following additions:- A. Software Expenditure - Rs. 12,27,147/- B. Depreciation on obsolete assets - Rs. 55,54,998/- C. VRS expenses - Rs. 8,24,60,028/- D. Bad debts - Rs. 26,41,568/- E. Transfer Pricing Adjustment - R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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