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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 ..... rds administrative expenses. We justify the decision of the CIT (A) for the disallowance u/s 14A r.w. Rule 8D as computed by the assessing officer in para 8.11 of the assessment and we delete the other part of expenses in the category of interest disallowance to the amount. Nature of expenses - Disallowance on account of product registration expenses - AO noticed that assessee has incurred an amount for registering PPL products in foreign countries - assessee company explained that these expenses have been incurred to enable assessee to register and sell its products in specified territories - CIT(A) deleted addition - HELD THAT:- It is noticed that assessee has incurred these expenses for registering its product in various countries to enable the assessee to sell the product in such counties. As in absence of registration, the assessee would not be able to sell the product in the foreign countries as per the regulatory requirement of different countries, it is mandatory to get the product of the assessee registered in respect of counties for the purpose of selling in the overseas markets. Therefore, the finding of the assessing officer that assessee is getting benefit of enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities of the unit.
In such circumstances, provisions of section 80IC do not require assessee to split the activities and contribute the profit attributable to separate activities which constitute one business. We have also considered the decision of Cadila Healthcare Ltd. [2012 (6) TMI 13 - ITAT AHMEDABAD] wherein on identical facts on claim of deduction from eligible profits derived by a Baddi unit of a pharmaceutical company it is held that that eligible profits should not be artificially segregated in to manufacturing, marketing and brand profits. Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year. 2.3 Without prejudice to above, on the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) erred in disallowing additional administrative expenses at the rate of 0.5% of the average investments though the Appellant has already, suo moto, disallowed administrative expenses of Rs 8,34,503 in its return of income. 3 Without prejudice to above, on the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) erred in not considering the computational error made by the learned AO whereby the amount disallowed under section 14A of the Act is erroneously stated at Rs 43,43,558 instead of the correct amount of disallowance of Rs 43,13,558 (i.e. Rs 51,48,061 - Rs 8,34,503)." 3. As the facts in these six appeals filed three by assessee and three by revenue are common, so, we take ITA No. 3098/Ahd/2013 & 126/Ahd/2014 as lead cases and its findings will be applicable for the remaining four appeals for the sake of convenience. Also, all the grounds of appeal ITA 3098/Ahd/2013 of the assessee are interconnected therefore for the sake of convenience they are adjudicated together by this common order. 4. The brief fact o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for making investment . Consequently, the assessing officer has applied provision of section 14A(2) r.w. Rule 8D of the IT rule and worked out an amount of Rs. 51,48,061 as disallowable under the aforesaid provision of the act and the income tax rule. After reducing a sum of Rs. 8,34,503 already disallowed by the assessee the assessing officer has disallowed a further sum of Rs. 42,43,558/ and added to the total income of the assessee. 5. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT (A) has sustained the disallowance made by the assessing officer stating that assessee has failed to file cogent evidence to prove that the investments were made out of non-interest bearing fund and further stated that he is of the view that the assessing officer has rightly invoked the provision of section 14A r.w. Rule 8D of the IT Rule. 6. During the course of appellate proceedings before us, ld. counsel has filed paper book containing various submissions made before the assessing officer and ld. CIT (A) during the course of assessment proceedings and appellate proceedings . He has further contended that assessing officer is not correct in making disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... category of interest disallowance to the amount of Rs. 23,28,570/- for the reason supra in this order. Accordingly, the appeal of the assessee is partly allowed. 8. The revenue has raised following grounds of appeal:- ITA No. 126/Ahd/2014 "i) The Id. CIT (A) has erred in law and on facts in deleting the disallowance of Rs. 66,26,795/- made on account of product registration expense. ii) The Id. CIT (A) has erred in law and on facts in deleting the addition of Rs. 6,18,79,485/- made on account of the difference between value of stock as on 31.03.2008 shown before the Bank and the value of stock as on 31.03.2008 accounted for in the books of accounts. iii) The Id. CIT (A) has erred in law and on facts in deleting the addition of Rs. 26,95,73,302/- made on account of reduction of the claim u/s. 80IC of the Act. iv) On the facts and circumstances of the case, the Ld. Commissioner of Income tax (A) ought to have upheld the order of the Assessing Officer. v) It is, therefore, prayed that the order of the Ld. Commissioner of Income tax (A) may be set-aside arid that of the Assessing Officer be restored." 9. The brief fact of the appeal of the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances we observed that ld. CIT (A) has correctly deleted the impugned addition, therefore, the appeal of the revenue is dismissed on this issue. Addition of Rs. 6,18,79,485/- on account of difference in value of stock shown before the bank. 13. On scrutiny the assessing officer has found discrepancies in the value of stock as per bank and value as per books. The assessing officer noticed total value of stock as per bank was to the amount of Rs. 36,45,13,165 as against value as per books of the assessee to the amount of Rs. 30,26,33,680. The assessee explained that closing stock given to the bank was valued on estimated basis and on finalization of the audit the closing stock had been valued at cost or market price whichever was lower.. The assessing officer has not accepted the submission of the assessee and made an addition of Rs. 6,18,79,455/- of difference in value of stock shown to the bank and in the books of accounts of assessee. The ld. CIT (A) has deleted the addition stating that the assessing officer has not pointed out quantitative difference in the stock as per books of account and the stock as per the bank record as the difference is only on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties only. He has stated that profit earned on exploitation of the brand and marketing network should not be included in the profit eligible for tax holiday as the same does not amount to profit earned by Baddi unit. He observed that assessee already had an existing marketing network and earlier the products were also manufactured and sold under the same brand therefore assessee should be entitled to deduction u/s. 80IC of the act only to the extent of manufacturing profit. In the light of the above observation the assessing officer noticed that assessee has claimed a sum of Rs. 29.52 crores as deduction u/s. 80IC of the act for its unit at Baddi, Himachal Pradesh which became operational on 2nd April, 2006. This unit is eligible for deduction as per the provision of section 80IC for assessment year 2008-09. This is the second year of operation of this unit. The assessee has explained that the Baddi unit derived profit @ 16.43% whereas the Kalol unit derived profit @ 19.79%. The assessing officer analyzed the manufacturing item in Himachal Pradesh unit and put them in the following three categories. (i) Items which are earlier being produced through third party manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/customers, which is accounted for as sales in the books of the Baddi unit. These C&F agents sell goods manufactured by both units of the assessee company. d) The sale consideration is directly received in the bank accounts of the head office. Accordingly, in the books of Baddi unit, the head office account is debited by the amount of monthly sales. The head office transfers the funds to the Baddi unit as per requirements of the unit. e) The final sale price billed by the CFAs include the cost of all functions i.e. manufacturing, exploitation of brand owned by the parent company and exploitation of the marketing network owned by the parent company." After analysis of the data, the assessing officer has asked the assessee to explained why the deduction u/s. 80IC claimed for the Baddi Unit should not restricted only to manufacturing profit. He has also compared functioning of the unit of the assessee with Paras Overseas Holding Ltd. to whom 5% of the invoices value was being charged as royalty. The assessee has explained vide letter dated 22nd December, 2009 in detail as reproduced by the assessing officer at page no. 28 to 33 of the assessment order. The assessee has conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is savings of 30.77% on the manufacturing cost. Similarly for the products which were earlier being manufactured at Kalol, the total cost for 6 products was Rs. 32.03. which increased to Rs. 43.84, when the manufacturing base of these products shifted to Baddi. Thus, by shifting the manufacturing facility of these products, the assessee has incurred loss of Rs. 11.81 (32.03- 43.84), or in other words there Is loss of 26.93% on the manufacturing cost. This loss has occurred primarily due to the increased depreciation cost (this being the second year of the unit) and increased cost of interest on term loan taken for the Baddi unit. Thus, on over all average basis, there is profit of only 3.84% (30.77-26.93). Accordingly, the quantum of profits eligible for deduction u/s 80IC being the manufacturing profits is worked out as under Manufacturing Cost (Baddi) Amount Cost of material consumed Manufacturing expenses Employees cost 471197122 58350073 59357333 Total manufacturing cost 588904528 Profits @ 3.84% 22613934 10.38 In the alternate, as discussed in para 10.22 and para 10.24 above, the assessee has charged royalty of 5% for usage of its brands fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own manufacturing appears to be flawed. The assessing officer has worked out the cost of the product which were earlier procured from the third-party vendor and the cost of manufacturing at the new unit at Baddi for every product and has merely totalled the net savings on account of manufacturing. On the basis of these savings, the assessing officer has attributed profits to the manufacturing activity. The assessing officer has not considered the figures of production in terms of quantity to arrive at the benefits on account of the manufacturing. Although I do not agree with the contentions raised by the assessing officer of considering segmental profits for granting deductions, but it is important to highlight that the working made by the assessing officer is incorrect as it does not take into account the volume of production of individual items. 7.8.3 With regard to the approach of assessing officer to consider royalty payments on notional basis to the head office for branding and marketing efforts, there is no provision under the Income tax Act to markup the profits of the head office as a separate profitmaking entity. Provisions of Section 80-IC the Act do not suggest any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddi Unit the assessee has maintained separate books of accounts and therefore drawn a separate profit and loss account. The AO has not pinpointed any defect in the working of the "profit" of the Baddi Unit. 7.8.6 The AO has also concluded that only the incremental profit, representing the difference between the profits earned earlier when the products were procured on P2P basis and the profits earned by the Baddi Unit, should be treated as a manufacturing profit. The AO has worked out the savings at 3.84% and attributed it to Baddi Unit. He has placed reliance on Rolls Royce PIC v. DDJT 19 SOT 42. As already discussed, in absence of any profit generating apparatus, attributing notional profits to the activities of Head office is not provided under Domestic law., hence in the case of appellant such an allocation is not called for. 7.8.7 The profit margins shown by the appellant for eligible unit at Baddi is lower than the profit margin of taxable unit at Kalol. As per computation of income, the profit margin for the Baddi Unit is 16.43% whereas the margins of the taxable unit at Kalol are 19.79%. Hence it is not the case of the AO that the appellant has tried to divert profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be computed as a whole by taking into account the sale price of the product in the market. * If the Statute wanted to draw such line of segregation between the manufacturing activity and the sale activity, then the Statute should have made a specific provision of such demarcation. But at present the legal status is that the Statute does not do so. The Bench further observed - "After the detailed discussion, before we close the controversy we would like to express that the AO's proposition of segmentation of eligible profit of the manufacturing unit was not altogether meaningless. This approach of the AO cannot be brushed aside on the fact of it. But at present, when the method of accounting as applicable under the Statute, do not suggest such segregation or bifurcation, then it is not fair to draw an imaginary line to compute a separate profit of the Baddi Unit. The Baddi Unit has in fact computed its profit as per a separately maintained books of account of the eligible manufacturing activity. To implement the method of the computation at stand alone basis, as conveyed by the AO, the manufacturing unit has prepared a profit & loss account of its manufacturing-cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r market value of the goods so transferred and therefore, the A.O. had to adopt computation of such profit and gains of Baddi unit on reasonable basis. Lastly, the basis adopted by the A.O. had to be reasonable basis and in the facts of the present case, it -was not so." 7.8.11 The expenses incurred by the Head office have been duly appropriated between Kalol unit and Baddi unit. The approach of the appellant in appropriating the expenses incurred by the head office in pro-rata basis in proportion of the sales undertaken by different units is justifiable and has been upheld by a large number of judicial authorities, In the case of NITCO TILES LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX ITAT, MUMBAI 'B-l' BENCH (2009) 30 SOT 474 (Mumbai) has held while deciding the issue of allocation of expenses between eligible and non-eligible units in respect of 80-IB deduction:- "Sec. 80-IB provides for the allowing deduction in respect of the pro/its and gains derived from the eligible business. Sub-s. (13) of s. 80-IB provides for the applicability of the provisions of sub-s. (5) and sub-ss. (7) to (12) of ss. 80-IA, so far as may be, applicable to the eligible business under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in the absence of any contrary facts brought on record before us. Hence, we hold that AO has rightly allocated the expenses between the units on the basis of turnover. " 7.8.13 In the case of Vardhman Holdings Ltd., the Assessing Officer while computing the income unit-wise had applied the ratio of the turnover on each unit to the total turnover and the said percentage was applied to work out the unit-wise allocation of head office expenses. The Hon'ble ITAT Chandigarh Bench in ITA No. 249/CHD/2008 approved the action of the AO. 7.9 In view of the above discussion and decision of Hon'ble ITAT, Ahmedabad Bench in the case of Cadila Healthcare Ltd (supra) on similar facts, I am of the opinion that the action of the assessing officer in reducing the deduction under Sec. 80-IC for the Baddi Unit from Rs. 29,52,71,303/- to Rs. 2,56,98,001/- is unwarranted and the claim of deduction by the appellant deserves to be allowed. The 6th Ground of appeal comprising of sub grounds 6.1 to 6.14, raised by the appellant accordingly stands allowed and appellant gets a relief of Rs. 26,95,73,302/-." 17. We have heard the rival contentions and perused the materia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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