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TMI Blog2018 (8) TMI 2167X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;) since the Appellant has already identified and disallowed expenditure incurred in relation to income which does not form part of total income under the Act on objective basis. 1.1 On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) erred in stating that no separate books of accounts in respect of Treasury Unit has been maintained and no transparent method of allocation of indirect expenses has been followed by the Appellant and thereby invoking provisions of Rule 8D of the Rules. 1.2 On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) erred in stating that the Appellant failed to cogent evidence to prove that investments were made out of non-interest bearing funds and upholding reasons recorded by the learned Assessing Officer that investment were made from interest bearing funds and thereby invoking provisions of Rule 8D of the Rules. 1.3 On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) erred upholding disallowance under section 14A of the Act read with Rule 8D of the Rules merely on the basis of assumptions that investment would have been made using interest bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted under scrutiny by issuing of notice u/s. 143(2) of the act on 15 Sep, 2011. The facts pertaining to the issue in the grounds of appeal of the assessee are that during the assessment proceedings the assessing officer noticed that in the computation of income the assessee has claimed dividend income of Rs. 89,27.021 as exempt income and the assessee itself has disallowed an amount of Rs. 8,34,503/- u/s. 14A of the act. The assessee was asked to furnish the basis of working out the amount disallowable u/s 14A of the act. On perusal of the details filed the assessing officer observed that assessee company has disallowed only administrative expenditure in respect of treasury division. Therefore, he asked the assessee why not common management expenses have not been allocated towards earning exempt income keeping in view the provision of rule 8D of the IT Rule. The assessee explained that it has made investment in the mutual funds from its own funds and cost of treasury division and all other applicable expenses have been considered for disallowance u/s. 14A of the act. The assessee has also explained that only those expenses which has an proximate nexus with the exempt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other hand, ld. departmental representative has supported the order of ld. CIT (A) on this issue. 7. We have heard both the sides and perused the material on record carefully on this issue. We noticed that during the year under consideration assessee company had earned dividend income of Rs. 89,27,021/- which was claimed as exempt u/s. 10(34) of the act. In the computation of income, the assessee had disallowed an amount of Rs. 8,34,503/- u/s. 14A of the act as expenses incurred towards earning tax free income. We have gone through the balance sheet and profit and loss account filed and noticed that assessee has share capital and reserves funds totaling of Rs. 146,71,08,964/- as on 31st March, 2008. As per balance sheet as on 31st March, 2008, the assessee has secured loan amount was Rs. 5,54,55,955/- which was Rs. 3,73,068,602/- as on 31st March, 2007. We have noticed that there is no unsecured loan appearing in the balance sheet of the assessee as on 31st March, 2008. It has total investment in mutual fund to the amount of Rs. 20,22,72,726/- as per schedule 6 of investments to the balance sheet as on 31st March, 2008. These facts demonstrate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing officer noticed that assessee has incurred an amount of Rs. 66,26,795/- for registering PPL products in foreign countries. The assessee company explained that these expenses have been incurred to enable assessee to register and sell its products in specified territories. The assessing officer observed that the process of getting the product registered is a long drawn process wherein the goods have to pass through series of tests and studies on bio-equivalence and clinical research to the satisfaction of the authority of those countries. Once, the product is registered and approval is granted by the particular country, the assessee can continue to export its goods over a long period of time. Therefore, the assessing officer was of the view that registration of the product clearly entitled the assessee to a benefit of enduring nature in the form of marketing right (intangible assets) to that country. Therefore, the assessing officer has treated these expenses as capital in nature and added to the total income of the assessee. 11. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT (A) has allowed the appeal of the assessee stating that product registratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and Arrow Exim Pvt. Ltd. 35 DTR 280 (Guj). 14. We have heard the rival contention on this issue and perused the material on record. During the course of assessment proceedings, the assessee had submitted cost statement of the closing stock as on 31st March, 2008 with IDBI bank on 15th April, 2008 showing closing stock of Rs. 36,45,13,165/- whereas the value of inventory shown in the audited books of account of the assessee was at Rs. 30,26,33,680/-. The assessee has also explained that details of closing stock used to be furnished to the bank on the basis of estimated fair market value whereas inventory shown under books of account was valued on cost or market rate whichever was lower on the basis of accounting standard-2. It is also noticed that loan obtained from the bank during the year was reduced to Rs. 5.54 crores as on 31st March, 2008 as against Rs. 12.5 crores as on 31st March, 2007 which demonstrate that there is no question of inflating the value of stock because of reduction in the amount of loan obtained from the bank. The assessing officer has not disproved the above facts contended by the assessee in support of its claim that difference is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thereafter, the assessing officer has asked the assessee to furnish the cost of various items in the categories as specified above. Thereafter, the assessing officer has discussed the decision of Hon'ble Supreme Court in Liberty India Ltd. 307 ITR 218 and he has mentioned five important issues laid down by the Hon'ble Supreme Court as under:- "i) It is not the ownership of the undertaking which attracts the incentives. ii) What attracts the incentives is the generation of profits (operational profits). iii) Each of the eligible businesses constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of "Segment Reporting" stands introduced in the Indian Accounting Standards (IAS) by the ICAI. (iv) The words "derived from" are narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. (v) The unit would be entitled to deduction only to the extent of profits derived from such undertaking." The assessing officer was of the view that the unit at Baddi has only manufacturing assets and carried ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parate activities of the unit. Further provisions of section 80IC do not require assessee to split the activities and contribute the profit attributable to separate activities which constitute one business. On the contrary, provisions specifically mandate to contribute the profit from the business carried out on all the undertakings. The assessing officer has not accepted the explanation of the assessee and stated that only manufacturing activity is being carried out by the Baddi unit. He has further stated that after manufacturing of goods, they are transferred to the CFA for sale who raise the finally sale bill on the distributors/customers. These CFAs are part of the manufacturing network of the PPL legal entity. All sub- functions of marketing, branding, price of the product etc. are specifically carried out by the legal entity. Thus for all the purposes, the Baddi unit functions only as a target manufacturer as a legal entity. However, for accounting purpose final sale price is debited to the head office account in the books of the Baddi unit. PPL legal entity functions and controls the marketing network through whom goods are marketed. He was of the view that on transfer of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also the corporate brand PPL. Similarly, the Baddi unit also uses the strong marketing network owned by PPL the legal entity, without payment of any cost. Hence, if 15% of the turnover is taken as royalty towards exploitation of the product/Corporate Brand and free usage of the established marketing network, the amount of royalty payable would work out to Rs. 26,95,73,302/-(15% of 179.71 crore). Accordingly, the profits eligible for deduction u/s 80IC would stand reduced to Rs. 2,56,98,001/- to Rs. 29,52,71,303- Rs. 26,95,73,302). 16. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT (A) has allowed the appeal of the assessee. In the appeal, the ld. CIT (A) has allowed the appeal of the assessee by stating that the provision of section 80IC does not suggest any segregation in respect of eligible profit with regard to different element of operation. He has further stated that the term eligible business u/s. 80IA (5) means overall business i.e. manufacturing along with marketing. He has also placed reliance on the decision of ITA in the case of Cadila Healthcare Pvt. Ltd. 3140/Ahd/2000 and Nitco vs. DCIT 30 SOT 74 The relevant part of the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible business' mentioned in Section 80-1 A(5) of the Act means the overall activity, i.e. manufacturing of a product along with the marketing activity. 7.8.4 From the provisions of section 80IA (8) of the Act it is apparent that the same are applicable only where the goods or services are transferred from the eligible business to any other business carried on by the assessee or vice versa. In the facts of the present case, admittedly there is no such transfer of goods or service between different units run by the assessee. The support provided by the Head office has been duly accounted for by way of deduction of expenses on pro-rata basis of the turnover. This is a case where manufacturing products were sold through C&F in the market. If there is no intercorporate transfer, then the AO has no right to determine the fair market value of such goods or to compute the arm's length price of such goods. 7.8.5 For computing the income from eligible profits of the Undertaking, the expenditure relatable to such units and also expenditure incurred at head office, which had no separate source of income, are to be apportioned to the respective units. Head office is not a separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one unit, expenses properly relatable to one or other unit should be to that unit only but the head office expenses and directors remuneration have to be allocated on turnover basis for purposes of computing deduction under s. 80IA. 7.8.9 The Hon'ble ITAT, Ahmedabad Bench in the case of Cadila Healthcare Ltd in ITA No. 3140/Ahd/2010 for AY 2006-07 has decided the issue in favour of the assessee. The facts of the case were similar to the case of the appellant. The AO hi that case also had restricted the profits to only manufacturing activity and had worked out the contribution of the Head office in identical manner as that in the case of the appellant. The Hon'ble IT AT, Ahmedabad bench has held that AO cannot invoke sec. 80IC(7) r/w sec .80IA(8) when manufactured products were sold by the unit through C&F in the market and when sale was not routed through the HO. It was held that * In the instant case, it was not the situation that first sales were made by the Baddi Unit (which claimed sec. 80IC deduction) in favour of the head office or the marketing unit and thereupon the sales were executed by the head office to the open market. Once it was not so, then the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demarcation. But at present the legal status is that the Statute has only chosen to give the benefit to "any business of drug manufacturing activity" which is incurring expenditure on research activity is eligible for this prescribed weighted deduction. The segregation as suggested by the AO has first to be brought into the Statute and then to be implemented. Without such law, in our considered opinion, it -was not fair as also not justifiable on the part of the AO to disturb the method of accounting of the assessee regularly followed in the normal course of business. It is true that otherwise no fallacy or mistake was detected in the books of accounts of Baddi Unit prepared on stand alone basis through which the only source of income/profit was the manufacturing of the specified products. We therefore hold that the AO's action of segregation was merely based upon a hypothesis, hence hereby rejected. 7.8.10 Similar view has been taken by the Hon'ble IT AT in the case of Cadila Healthcare Ltd for AY 2007-08 reported in 56 SOT 089. The Bench has examined the issue afresh and has held that "In the present case, there was no transfer of goods by the Baddi unit to any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are computed as if such eligible business were the only source of income of the assessee. The assessee is under legal obligation by virtue of s. 80-IB(1) to compute the 'profits and gains of the eligible business' separately and that of the others separately. Provisions of s. 80-IA(5) are distinct, deemed and overriding provisions and they, in the combination of s. 80-IB(1), advocate for special computation of 'pro/its and gains of the eligible business' in general and for considering all the expenses, both direct and indirect, among all the ongoing projects, if not exclusively against the profits and gains of the eligible business, the only source of income of the assessee. Further, the provisions of s. 80-IA/80-IB do not encourage the disclosure of the profits of the eligible business more than the ordinary profits. The provisions of s. 80-IB(1) read with the deemed provisions of sub-s. (5) (erstwhile sub-s. (7) of s. 80-IA with its overriding application, prescribe for the special mode/manner of computation of the profits and gains of the eligible business, which must be computed as if it the only source of income. When such computation is undertaken as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds are sold. It is required to complete the whole cycle consisting of different components i.e. production, marketing and selling of product etc. It is undisputed facts that in most of the cases the manufacturing unit and its sale and marketing units are situated at different places in order to capture the market of the product on different geographical locations. We observe that assessee has carried all its business activities as a whole business and the same cannot be segregated from each other. After perusal of material on record we observe in the case of the assessee the sale and market division are the integral part of the manufacturing unit which cannot be separated on artificial basis. In the case of the assessee there are only two units located at Kalol and Baddi and while claiming tax benefits incomes and expenses incurred for Kalol units has been reduced from the total profits and deduction has been claimed on the basis of profit attributable to Baddi unit. The marketing and distribution costs are generally allocated on the basis of turnover on scientific basis therefore we do not justify the action of the assessing officer of segregation of profit to Baddi unit on assump ..... X X X X Extracts X X X X X X X X Extracts X X X X
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