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TMI Blog2024 (11) TMI 818X X X X Extracts X X X X X X X X Extracts X X X X ..... en in AY 2006-07 with regard to allocation of common expenses incurred at the Head Office. It is also pertinent to note that the Co-ordinate Bench has also accepted the plea of the assessee that certain common income should also be allocated to the eligible units. We notice that the CIT(A) has restored this issue to the file of the AO with the direction to follow the ITAT's order. Accordingly, we also direct the AO to allocate both common expenses and common income to the eligible units while computing deduction u/s 80IB/80IC and 10B of the Act as per the direction issued by the ITAT in the earlier years. Miscellaneous income earned on sale of scraps and by products in eligible units are eligible for deduction u/s 80IB/80IC - We notice that the AO did not allow deduction in respect of these kinds of receipts, without making any specific discussion. CIT(A) also did not adjudicate this issue specifically. As brought to our notice that the Mumbai Bench of Tribunal has examined an identical issue in the context of deduction u/s 80IC of the Act in the case of Addl.CIT vs. Sterlite Technologies Ltd. [ 2017 (1) TMI 1249 - ITAT MUMBAI ] wherein it was held that the income arising on sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. It may be akin to CSR expenses, but it would not qualify as CSR expenses. Hence, we are of the view that the assessee cannot take support of the decisions rendered in respect of CSR expenses. We are of the view that the Ld. CIT(A) was justified in confirming the disallowance of sum incurred on the relief materials given to the victims of Tsunami. Claim of enhancement of Written Down Value (WDV) of assets by the amount of Insurance claim not received - HELD THAT:- We do not find any merit in the contentions of the assessee that the insurance claim amount of Rs. 8.00 crores refunded to the assessee should be considered as refund of part of purchase consideration, since the insurance claim of Rs. 8.00 crores was received by the then parent company in connection with destruction of Salt Pans and the said amount only was refunded to the assessee. Hence, in our view, it would fall within the meaning of moneys payable . In this connection, we are of the view that the mode or manner of paying the insurance compensation by M/s Conopco Inc to the assessee is irrelevant. In Ground No.12, the assessee is contending that the above said amount should be treated as capital receipt, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee are directed against the order dated 30-08-2019 passed by the Ld. Commissioner of Income Tax (Appeals)-56, Mumbai [Ld.CIT(A)] and they relate to the Assessment Year (AY.) 2005-06. 2. The assessee is a leading consumer products manufacturing company. It filed its return of income for the year under consideration declaring a total income of Rs. 420.68 crores. The AO, however, completed the assessment determining the total income of the assessee at Rs. 480.27 crores. Aggrieved by the additions made by the AO, the assessee preferred an appeal before the Ld.CIT(A) and it was partly allowed. Aggrieved by the decisions taken by the Ld.CIT(A) against each of them, both the parties have preferred appeals before the ITAT. The assessee has also filed Cross Objection against the appeal filed by the Revenue. 3. We shall first take up the appeal filed by the assessee. Ground Nos.1 to 4 urged by the assessee are related to the computation of deduction u/s 80IB/80IC and 10B of the Income Tax Act, 1961 ( the Act ). The assessee is having its manufacturing units at various locations, of which certain units are eligible for deduction u/s 80IB/80IC and 10B of the Act (eligible units). The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he earlier years. 4. Ground Nos.5 6 urged by the assessee are related to the issue whether the miscellaneous income earned on sale of scraps and by products in eligible units are eligible for deduction u/s 80IB/80IC of the Act. We notice that the AO did not allow deduction in respect of these kinds of receipts, without making any specific discussion. The Ld.CIT(A) also did not adjudicate this issue specifically. 4.1. It was brought to our notice that the Mumbai Bench of Tribunal has examined an identical issue in the context of deduction u/s 80IC of the Act in the case of Addl.CIT vs. Sterlite Technologies Ltd (ITA Nos. 2139, 2140,2029 and 2020/Mum/2014 dated 20-01-2017) and the Co-ordinate Bench has followed the decisions rendered by the Hon ble Delhi and Gujarat High Courts in the following cases, wherein it was held that the income arising on sale of scraps is held to be eligible for deduction u/s 80IB/80IC of the Act:- (a) CIT vs. Sadhu Forging Ltd (336 ITR 444)(Del) (b) CIT vs. Harjivandas Juthabhai Zaveri (258 ITR 785)(Guj) Accordingly, the Co-ordinate Bench directed the AO to allow deduction u/s 80IC of the Act in respect of income from sale of scrap:- 4.2. The Ld D.R, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of opening stock, purchases, sales and closing stock with CENVAT amount. The AO, following sec.145A of the Act, assessed the unutilized CENVAT amount as income of the assessee. The Ld.CIT(A) also confirmed the same. 5.1. The submission of Ld.A.R is that sec.145A of the Act prescribes Inclusive method of accounting, wherein the value of opening stock, purchases, sales and closing stock have to be adjusted with CENVAT amount. However, the assessee has followed Exclusive method of accounting, wherein the CENVAT component is kept in a separate account without adjusting the same with opening stock, purchases, sales and closing stock. The contention of the assessee is that the Net profit of the assessee will remain the same under Exclusive method of accounting of CENVAT or under Inclusive method of accounting of CENVAT. 5.2. We notice that the Co-ordinate Bench has considered an identical issue in AY 2006-07 in ITA No.7868/Mum/2010 and the matter has been restored to the file of the AO for examining it afresh. Since, it is a case of method of accounting and since it is stated that there will be no impact on the profit under both Exclusive method and Inclusive method of accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rials including construction of houses to the victims of Tsunami. The assessee, being manufacturer of nutritional and hygiene products, have also distributed its own products to the victims of Tsunami at free of cost. The aggregate value of products so distributed by the assessee was quantified as Rs. 5.00 crores and the same were claimed as business expenditure. 7.3. The assessee has claimed this amount u/s 37(1) of the Act as business expenses. Sec.37(1) of the Act reads as under:- Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Any expenditure is allowable u/s 37(1) of the Act, only if it is, inter alia, laid out or expended wholly and exclusively for the purposes of business or profession. We noticed earlier that the AO did not accept it as an expense laid out or expended wholly and exclusively for the purposes of business. We notice that the assessee has rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is done out of genuine philanthropy only. During the Tsunami calamity, the assessee has also decided to distribute the relief materials to the victims like any other citizens, who were giving various types of assistance to the victims. All those assistance was done out of genuine philanthropy only. Accordingly, when the dominant objective is philanthropic in nature, the same cannot be considered as an expenditure laid out or incurred wholly and exclusively for the purposes of business. It is pertinent to note that the assessee has not shown that there existed any business connection in incurring this expenditure. 7.6. The assessee has also taken a plea that this expenditure should be considered as Sales promotion expenses. We are unable to accept the same. It is inconceivable that a business man would promote its products amongst the badly affected Tsunami victims, who have been rendered penny less. Hence, this plea of the assessee deserves rejection. 7.7. The assessee has also taken a plea that this expenditure should be considered as CSR expenditure. It was not shown that this expenditure has been incurred as per the requirement of Companies Act as CSR expenditure. It may be akin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in AY 2001-02. Accordingly, the assessee increased the amount of WDV of AY 2005-06 by adding the insurance claim amount of Rs. 22.44 crores, i.e., the amount that was originally reduced from WDV in AY.2001-02 was added to the WDV of AY 2005-06. 8.4. The AO did not accept the above said claim of the assessee. He referred to the definition of WDV given in sec.43(6) of the Act, wherein it is provided that the WDV could be enhanced only by the cost of new assets acquired during the year. Since the assessee has not purchased any new asset, the AO held that the WDV cannot be increased by any other mode. 8.5. Before the Ld.CIT(A), the assessee furnished a new/additional information. The earlier parent of M/s International Best Foods Ltd, viz., M/s Conopco Inc., had received a sum of USD1,733,143.67 equivalent to Rs. 8.00 crores from Insurance Company. We noticed that above said M/s Conopco Inc had sold the shares held by it in M/s International Best Foods Ltd for a sum of Rs. 57.75 crores. Consequent to the receipt of Insurance claim amount mentioned above, an agreement was reached between the assessee and M/s Conopco Inc, as per which the seller of shares (M/s Conopco Inc) would refund p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e does not result in acquisition of any new asset, which is a condition prescribed in sec.43(6)(c) of the Act. Accordingly, we are of the view that the AO was right in law in holding that the WDV cannot be increased by the amount of insurance claim not received by the assessee. 8.8. As per Clause (B) of the above said provision, the WDV of block of assets should reduced by the moneys payable in respect of any asset which is falling within that block, which is sold or discarded or demolished or destroyed. We noticed that the assessee s Salt Pans were destroyed in the year relevant to AY 2001-02 and an insurance claim was lodged by M/s International Best Foods Ltd., and/or by its then Parent Company. The amount of insurance claim was Rs. 22.44 crores and the said amount was treated as moneys payable in respect of destruction of Salt Pans by the assessee, even though it was not aware the fate of claim so made. Accordingly, the above said amount of Rs. 22.44 crores was reduced from the WDV by the assessee as per Clause (B) of sec.43(6)(c) of the Act. However, it is stated that the Insurance Company has rejected the Insurance claim and hence the assessee seeks to increase the value of W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y from assessment AY 2001-02 onwards. The depreciation for AY 2005-06 should accordingly be allowed on the enhanced WDV. The net result is that the WDV of the block should be increased by Rs. 14.44 crores in AY 2001-02 and the WDV of AY 2005-06 should be arrived at accordingly. 8.12. We do not find any merit in the contentions of the assessee that the insurance claim amount of Rs. 8.00 crores refunded to the assessee should be considered as refund of part of purchase consideration, since the insurance claim of Rs. 8.00 crores was received by the then parent company in connection with destruction of Salt Pans and the said amount only was refunded to the assessee. Hence, in our view, it would fall within the meaning of moneys payable . In this connection, we are of the view that the mode or manner of paying the insurance compensation by M/s Conopco Inc to the assessee is irrelevant. In Ground No.12, the assessee is contending that the above said amount should be treated as capital receipt, which is liable to be rejected for the reasons discussed above. 8.13. In view of the foregoing discussions, we modify the order passed by Ld.CIT(A) on this issue and direct the AO to increase the W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kward areas and not to fund part of cost of assets. We also notice that identical view has been expressed by Hon ble Bombay High Court in the case of Harinagar Sugar Mills in IYXA 1132 of 2014 dated 4th January, 2017. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO not to reduce the amount of subsidy from WDV while computing depreciation. 10. The Ld A.R did not press Ground Nos. 14 and 15. Hence, both these grounds do not require adjudication. 11. Ground No.16 is related to dispute of rate of tax applicable to the dividend distributed to Non-resident shareholders. The assessee paid Dividend Distribution Tax (DDT) as per provisions of sec.115O of the Act on the amount of dividend declared by it. Before us, it has raised an additional ground contending that the DDT has to be charged on the dividend distributed to Non-resident shareholders at the rate applicable to dividend income under the treaty between India and the country of residence of non-resident shareholders. 11.1. We heard the parties on this issue and perused the record. We notice that this issue has been decided against the assessee by the Special Bench of ITAT in the case of Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in holding that all the adjustments stands subsumed once the entity level benchmarking is found to be at arm's length, which goes against the basic principle of transaction by transaction approach to be followed in Transfer Pricing which is also upheld by Punjab and Haryana High Court in case of M/s Knorr Bremse India Pvt. Ltd Vs ACIT Faridabad [(2016)380 ITR 307) in para 40 and 41, where Hon'ble High Court has rejected the contention that comparison at entity level margin will take care of the various transactions. (viii) Without prejudice, in the facts and in the circumstances of the case the Ld. CIT (A) has erred in granting relief to assessee following entity level approach without appreciating that various transactions are independent of each other and there are no facts and findings to suggest that various transactions forming part of entity are inextricably interrelated and intertwined in such a way that they cannot be separated. (ix) In the facts and in the circumstances of the case the Ld. CIT(A) has erred in allowing additional ground by placing reliance on the orders of the Hon'ble ITAT and of the Hon'ble High Court in the assessee's case for AY20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entity level benchmarking is found to be at arm's length, even though the TPO did not carry out any entity level benchmarking and the entity level benchmarking is not suitable to the facts of this transaction. Reliance placed on the Hon'ble Punjab and Haryana High Court decision in case of M/s Knorr Bremse India Pvt. Ltd Vs ACIT Faridabad ((2016)380 ITR 307). (xiv) In the facts and in the circumstances of the case the Ld. CIT(A) has erred in deleting the adjustment of Rs 8,09,96,000/- on account of tax paid by the assessee on royalty on the ground that this adjustment stood subsumed once the entity level benchmarking is found to be at arm's length, even though the TPO did not carry out any entity level benchmarking and the entity level benchmarking is not suitable to the facts of this transaction. Reliance placed on the Hon'ble Punjab and Haryana High Court decision in case of M/s Knorr Bremse India Pvt. Ltd Vs ACIT Faridabad (2016)380 ITR 307). (xv) In the facts and in the circumstances of the case the Ld. CIT(A) has erred in deleting the adjustment of Rs. 24,15,710/-on account of royalty receivable from Nepal Lever Ltd. on the ground that this adjustment stood s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce claim. This issue has been decided by us while adjudicating the Ground Nos. 11 12 urged by the assessee. The decision rendered against those grounds in the assessee s appeal shall apply to this ground of the Revenue. 14. In Ground Nos. (ii) to (vi), the Revenue is contending that the Ld. CIT(A) should not have admitted additional ground urged before him. 14.1. We heard the parties and perused the record. With regard to admission of additional ground, we notice that the Ld.CIT(A) has given proper reasons for admitting the additional ground urged by the assessee and in this regard, he has observed as under in paragraph 36 of his order:- 36. The above additional ground was duly forwarded to the Assessing Officer on 21.08.2017. The effect of adjudicating the additional ground is that if allowed, certain other grounds of appeal would stand allowed. I find the same ground was raised in AY 2003-04 and 2004-05 and was admitted. I also find that issue raised emanates from decision of Hon ble ITAT in ITA No.7868/Mum/2010 dated 10-12-2012 in case of appellant itself .. We notice that an identical additional ground had been admitted in the earlier years by the Ld.CIT(A) and further, the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The brief facts relating to these 17 grounds are as follows: a. The Assessee s Transfer Pricing Study and Form 3CEB has entered into international transactions with its Associated Enterprises( AE ) by adopting entity level TNMM as the most appropriate method. b. The operating margin of the Assessee was arrived at 11.91%. The arithmetical mean of the comparable companies selected by the Appellant Assessee worked out to 10.38%. In the circumstances, the Assessee contended that its transactions were at length. c. The TPO, however, disagreed with the use of entity level TNMM for benchmarking all the international transactions. The TPO held that certain royalty paid to Unilever Plc. under the Technical Collaboration Agreement dated 12 August 1999 and the intra group services should be benchmarked separately. d. The TPO thereafter held that no royalty was payable by the assessee in respect of the turnover of Beauty and Make-up preparations, and, on Toilet Soaps and Bathing Bars since the entire technology required in connection with those products was owned and developed by the assessee. The TPO held that an embargo under the laws of Nepal on Nepal Lever Ltd. from paying royalty to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty, etc. as done by the TPO. 36. In view of the above findings, the other arguments with regard to the segmental accounts vis a vis internal comparables and that the assessee s profit margin on A.E. transactions are far more than the non A.E. transactions and various other adjustments like payment of royalty, receiving of royalty, advertisement and sales promotion and advertisement, adjustment out of R D cess, payment of service tax, research and innovation development related services and undercharging for central services, have become purely academic and, hence, the same are not adjudicated upon even though both the partie shave argued at length. Thus, on this preliminary ground itself, the entire transfer pricing adjustment of368,79,26,000 stands deleted and, accordingly, grounds no.1 to 15, technically speaking, stands allowed. h. The Department carried the above order of the Tribunal in Appeal before the Hon ble Bombay High Court. It is most important to note here that the department did not challenge the finding of the Hon ble tribunal in so far as it held that the other adjustments like payment of royalty, receipt of royalty, advertisement, and sales promotion, and adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount charged for business auxiliary services, that a mark-up of 30.56% was rightly charged in respect of such services as against the mark-up charged by the assessee, that that business auxiliary services rendered by the assessee were functionally comparable with the seven comparable companies, namely Ajcon Global Services Ltd., Brescon Corporate Advisors Ltd., Epic Energy Ltd., Sumedha Fiscal Services Ltd ,Integrated Enterprises (India) Ltd. and NIS Sparta Ltd., that no royalty was payable by the assessee in respect of turnover of Beauty, Make-up preparations, Toilet Soaps and Bathing Bars, that the entire technology required in connection with those products was owned and developed by the assessee, that the AO had rightly determined arm's length at NIL for those transactions, that that the assessee ought to have received royalty of Rs. 26,22,000/- from Nepal Lever Ltd. The DRP further held that the TDS @15% amounting to Rs. 14.08 crores service tax amounting to Rs 7.94 crores and R D Cess amounting to Rs. 2.49 crores, paid by the assessee, on royalty remitted to Unilever Plc.under the Technical Collaboration Agreement, between the assessee and the AE-was excessive. It al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reto and marked ExhibitK is a copy of the Order of the Tribunal for AY 2006 07, marked Exhibit L is a copy of the Order of the Hon ble High Court for AY 06-07 (394 ITR 73(Bom.) and marked Exhibit M is a copy of the Order of the Hon ble Supreme Court dismissing the SLP there against(259 Taxman 218). Also annexed and marked Exhibit N is a copy of the order of the Tribunal for AY 2009 10 in ITA 1321/Mum/2014. 15.4. Since the Ld.CIT(A) has followed the decision rendered by the Co-ordinate Bench in the assessee s own case in AY.2006-07, we do not find any reason to interfere with the order passed by the Ld.CIT(A) on Transfer Pricing issues urged before us. 16. We shall now take up the Cross Objection filed by the assessee. The Ld A.R submitted that the Cross Objection will be relevant only if the Hon ble Tribunal allows the appeal of the Revenue in respect of Transfer Pricing issues. In the earlier paragraphs, we have dismissed the grounds urged by the Revenue on Transfer Pricing issues. Hence, the Cross Objection filed by the assessee shall become infructuous. 17. In the result, the appeal filed by the assessee and Revenue are partly allowed. The Cross Objection filed by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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