TMI Blog2018 (7) TMI 1887X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that:- From the assessment order, prima–facie, it appears that the Assessing Officer while concluding that PEL has charged more to the assessee towards reimbursement of expenses than what is contemplated in the agreement is under a misconception of fact. However, in the order giving effect to the direction of the Commissioner (Appeals), the Assessing Officer has allowed the payment made towards expenditure fully and disallowed the amount of ₹ 1.47 crore towards royalty. When the terms of the agreement specifically provide for payment of royalty and royalty was paid in compliance to such term, there is no justification for disallowance of royalty payment. Disallowance made is deleted. Disallowance of deduction claimed u/s 35(2AB) in respect of its research and development facility at Ennore and Goregaon - Held that:- As held by the Tribunal, Mumbai Bench, in case of PCP Chemicals Pvt. Ltd. [2017 (10) TMI 1417 - ITAT MUMBAI], approval by the competent authority in Form no.3CM is mandatory for claiming deduction under section 35(2AB) of the Act. However, considering the contention of the learned Sr. Counsel that the assessee has applied for approval in Form no.3CM which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Baddi unit and other units. However, before disallowing assessee’s claim the Department is required to bring on record cogent material to establish that the borrowed funds were utilised in setting–up the Baddi unit and further the R&D expenditure incurred was related to manufacturing activity carried out in Baddi unit. There is no clarity on the fact whether the assessee has maintained unit–wise accounts and the expenditure claimed is as per the accounts. Therefore, if the expenditure is allocated to each unit as per the account maintained such expenditures are backed by evidence, then, there is no reason why a part of it is to be allocated to Baddi unit. In view of the aforesaid, we restore the issue to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Addition on account of transfer pricing adjustment on Corporate Guarantee given to the Banks by the assessee for the loans taken by the Associated Enterprises (AEs) - Held that:- As regards the claim of the assessee that provision of Corporate Guarantee in respect of loans availed by the AEs do not form part of intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I HIGH COURT] has also expressed similar view. The other decisions relied upon by the learned Sr. Counsel are also in the same line. Keeping in view the ratio laid down in the aforesaid decisions, we do not find any infirmity in the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Revenue. Determining the rate of commission on Corporate Guarantee @ 1% - Held that:- As directed the Assessing Officer to determine the arm's length price of the Corporate Guarantee by applying the commission rate of 0.5%. In view of the aforesaid, the ground raised by the Revenue has become redundant, hence, dismissed. - ITA no.5471/Mum./2017, 5583/Mum./2017 (Assessment Year : 2008–09) - - - Dated:- 30-7-2018 - Shri Saktijit Dey And Shri Manoj Kumar Aggarwal, JJ. Assesseeby : Shri Jahangir Mistry, Sr. Counsel a/w Shri Madhur Agrawal and Shri Ronak Doshi Revenue by : Shri Jayant Kumar ORDER Saktijit Dey, Aforesaid cross appeals by the assessee and the Revenue arise out of order dated 28th April 2017, passed by the learned Commissioner (Appeals) 57, Mumbai, for assessment year 2008 09. ITA no.5471/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that as per the provisions of section 144C(3) of the Act, the Assessing Officer has to complete the final assessment on the basis of the draft assessment order if the assessee intimates the Assessing Officer about the acceptance of the variation or no objections are received within the period specified in sub section (2) of the Act. It was submitted by the assessee, since, the assessee had accepted the decision of the Assessing Officer with regard to the deduction claimed under section 80IC of the Act in the draft assessment order, the Assessing Officer has to complete the final assessment order on the basis of the draft assessment order and he cannot make any variation therefrom. The learned Commissioner (Appeals) after considering the submissions of the assessee, however, did not find merit in them. He observed, after the framing of draft assessment order the Assessing Officer has made further enquiries with regard to eligibility of deduction claimed under section 80IC of the Act in respect of Baddi Unit and the assessee was given opportunity of hearing during the final assessment proceedings. The learned Commissioner (Appeals) observed, the provision of section 144C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aft assessment order is either accepted or not objected to by the assessee before the DRP. The learned Sr. Counsel submitted, the provision of section 144C of the Act makes it clear that the Assessing Officer while completing final assessment order cannot deviate from the draft assessment order unless there is specific direction by the DRP. Thus, the learned Sr. Counsel submitted, the disallowance of deduction under section 80IC of the Act made in the final assessment order over and above the amount disallowed in the draft assessment order is without jurisdiction, hence, unsustainable. In support of such contention, he relied upon the following decisions: i) PCIT v/s Woco Motherson Advance Rubber Technologies Ltd., [2017] 80 taxmann.com 63 (Guj.); ii) PCIT v/s WocoMotherson Advance Rubber Technologies Ltd., [2018] 89 taxmann.com 007 (SC); and iii) CIT v/s Sanmina SCI India Pvt. Ltd., [2017] 85 taxmann.com 29. 9. Shri Jayant Kumar, learned Departmental Representative submitted, in course of the assessment proceedings the Assessing Officer has initiated enquiry with regard to the receipt shown in respect of the manufacturing unit at Baddi. He submitted, in this context n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment proceedings, the Assessing Officer examined assessee s claim of deduction under section 80IC of the Act by calling for the books of account and various other information. It is also evident, the Assessing Officer conducted independent enquiry by issuing notices under section 133(6) of the Act. However, while framing the draft assessment order on 29th December 2011, the Assessing Officer disallowed an amount of ₹ 13.63 crore out of the total deduction claimed by the assessee under section 80IC of the Act, thereby, allowing deduction of ₹ 233.47 crore. Undisputedly, against the draft assessment order so passed, assessee did not file any objections before the DRP and the Assessing Officer within the prescribed time limit as per section 144C(2) of the Act. Thus, in absence of any objection from the assessee, the Assessing Officer proceeded to pass the final assessment order under section 143(3) r/w section 144C of the Act on 29th December 2012, as per section 144C(3) of the Act. However, while passing the final assessment order, the Assessing Officer disallowed the entire deduction claimed under section 80IC of the Act amounting to ₹ 247.10 crore, meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer. Sub section (13) of section 144C of the Act provides that the Assessing Officer on receipt of the direction of the DRP shall pass the final assessment order in conformity with the directions of the DRP. Thus, the scheme of section 144C of the Act of the Act, which a code by itself, suggest that where the assessee either accepts the variation suggested in the draft assessment order or does not file any objection before the DRP and the Assessing Officer against the draft assessment order, the Assessing Officer shall pass the final assessment order on the basis of draft assessment order. However, in a case where the assessee files objections against the draft assessment order before the DRP, the Assessing Officer is duty bound to complete the final assessment in conformity with the directions of the DRP. Thus, on a reading of section 144C of the Act it is very much clear that only in a case where the final assessment order is passed in conformity with the directions of the DRP, the Assessing Officer can vary the draft assessment order in respect of any addition / disallowance as per the directions of the DRP. However, where the Assessing Officer passes the final assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order. Even, the DRP is also required to consider the objections raised by the assessee with respect to the variation proposed in the draft assessment order. The DRP is also required to issue directions with respect to the variation proposed in the draft draft assessment order and even considering the records relating to the draft order. Considering the entire scheme of Section 144C of the Act, it appears that in conformity with the principles of natural justice, the assessee is required to be given an opportunity to submit objections with respect to the variation proposed in the income or loss returned. Therefore, while passing the final assessment order, the Assessing Officer cannot go beyond what is proposed in the draft assessment order. If the submissions made on behalf of the Revenue are accepted that the Assessing Officer, while passing the final assessment order can also go beyond the variation proposed in the draft assessment order, then in that case, it can be said that the assessee shall not given any opportunity to raise objections against such additions or disallowances which were not even proposed in the draft assessment order. Therefore, the same can be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment on the basis of the draft order. In setting out the scope of the DRP to issue directions, sub-section (6) restricts the DRP to consideration of the draft order and the objections filed by the Assessee along with connected evidence, report, records, and enquiries. 9. It is only in sub-section (8) where the power of enhancement is granted to the DRP, that the scope of the variations as proposed under section 144C(1) stand expanded. The interests of both the Assessee and the Revenue to respond to the proposed variations has been protected and an opportunity to be heard has been specifically provided for under sub-section (11). Thus where Legislature provided for any variation in assessment over and above that proposed in the order of draft assessment, it has specifically provided for an opportunity of hearing prior thereto. Thereafter in terms of sub- section (13), the Assessing Officer is bound to conform to the directions given by the DRP and give effect to the same. Contrary to the mandate in sub-section (11), it has been thought unnecessary to grant an opportunity to the assessee prior to the passing of the final order. This leads to the inescapable conclusion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made payment to PEL towards services claimed to have been rendered in respect of taxation management, fund management, accounts and finance, legal matter, secretarial matter, corporate matters, information technologies, etc. The Assessing Officer observed, the services claimed to have been received are quite general in nature and no one to one nexus could be established between the payments made and services provided. Therefore, he called upon the assessee to justify the payment made. In response, the assessee furnished copy of the agreement executed with PEL on 29th April 1995 along with documentary evidences like debit note, break up of expenditure actually incurred by PEL and apportionment made with the group companies. The Assessing Officer after considering the submissions and perusing the documents filed before him observed that the total expenses incurred by PEL which is to be apportioned with the group companies is only ₹ 1,250 lakh whereas the actual apportionment made of service charges is ₹ 1,482 lakh, share of assessee being ₹ 822 lakh, which according to the Assessing Officer is contrary to the terms of agreement. The Assessing Officer observed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en clearly brought out on record the disallowance made on misconception of facts should be deleted. 20. The learned Departmental Representative relying upon the observations of Assessing Officer and the learned Commissioner (Appeals) submitted, there is no mention of royalty in the debit note. Therefore, assessee s claim cannot be accepted without proper verification. 21. We have considered rival submissions and perused materials on record. On a reading of the agreement dated 29th April 1995 with PEL a copy of which is at Page 859 of the paper book, it is noticed that in addition to the reimbursement of expenses incurred by PEL on behalf of the assessee, the assessee was also required to pay to PEL royalty @ not exceeding 0.5% of his turnover of goods manufacture and traded. Thus, it is evident that the payment made of ₹ 822 crore to PEL constitutes both reimbursement of expenses and royalty. This fact is also clear from the working of reimbursement of expenses and royalty at Page 237 of the paper book, which indicates that an amount of ₹ 6.75 crore was for reimbursement of expenses and ₹ 1.47 crore towards royalty. From the assessment order, prima facie, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Form no.3CM by the DSIR, is still awaited, though, the assessee has made application seeking such approval. He submitted, since, assessee s application for approval is not rejected, deduction claimed should be allowed. In support of such contention, he relied upon the decision of the Tribunal, Hyderabad Bench, in Vivimed Labs Ltd. v/s DCIT, [2016] 66 taxmann.com 94 (Hyd.). 26. The learned Departmental Representative strongly relying upon the observations of the learned Commissioner (Appeals) and the Assessing Officer submitted that approval of the competent authority in the manner prescribed under the statute is a mandatory condition for availing deduction under section 35(2AB) of the Act. In support, he relied upon the decision of the Tribunal, Mumbai Bench, in PCP Chemicals Pvt. Ltd. v/s ITO, [2018] 168 ITD 26 (Mum.). 27. We have considered rival submissions and perused materials on record. It is an undisputed fact that there is no approval by the competent authority in Form no.3CM in respect of the expenditure incurred towards the R D facility. Section 35(2AB) of the Act mandates furnishing of approval in Form no.3CM for the purpose of availing deduction. It is the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own option and computation of depreciation was not mandatory. Therefore, the Assessing Officer cannot notionally adjust unclaimed depreciation of preceding assessment years from the WDV. He submitted, the issue has been decided in assessee s own case by the Tribunal, Mumbai Bench, which is reported in [2014] 147 ITD 675 (Mum.). 32. The learned Departmental Representative relied upon the reasoning of the learned Commissioner (Appeals) and the Assessing Officer. 33. We have considered rival submissions and perused materials on record. It is an undisputed fact that BIML before its merger had not claimed depreciation on the assets in the assessment year 1995 96 and 1996 97. The Assessing Officer has accepted this fact. After merger of BIML with the assessee, the assessee had claimed deprecation for the first time on the assets taken over from BMIL. Thus, it is a fact on record that no depreciation was claimed on the taken over assets earlier. The Assessing Officer has notionally computed depreciation on the said assets for the assessment year 1995 96 and 1996 97 and reduced it from the WDV for computing depreciation. As per the provisions of section 32 of the Act applicable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Sr. Counsel submitted, only those investments which yielded dividend income during the relevant previous year should be considered for computing disallowance. In support of his contention, the learned Sr. Counsel relied upon the following decisions: i) HDFC Bank Ltd. v/s DCIT, 383 ITR 529 (Bom.); ii) CIT v/s HDFC Bank Ltd., 366 ITR 505 (Bom.); iii) CIT v/s Reliance Utilities Power Ltd., 313 ITR 340 (Bom.); iv) ACB India Ltd. v/s ACIT, 374 ITR 108 (Del.); v) ACIT v/s Vireet Investments Pvt. Ltd. 83 ITR 103; vi) M/s. Toshvin Analytical Pvt. Ltd. v/s DCIT, ITA no.3089/ Mum./2013 (Mum.); vii) Sylvex Cable Co. Pvt. Ltd. v/s DCIT, ITA no.8581/ Mum./2011, (Mum.); and viii) S. Krishnamurthy v/s ACIT, ITA no.6207/Mum./2012 (Mum.). 38. The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals) and the Assessing Officer. 39. We have considered rival submissions and perused materials on record. We have also applied our mind to the decisions relied upon. As regards disallowance under rule 8D(2)(ii) is concerned, it has been specifically pleaded on behalf of the assessee that it had sufficient interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 8D(2)(iii) r/w section 14A of the Act. Pertinently, before us, the learned Sr. Counsel has submitted working of disallowance under rule 8D(2)(iii) after excluding investment which did not yield any exempt income during the relevant previous year. As per the said working, the disallowance works out to ₹ 2,18,250. The Assessing Officer is also directed to examine the working of the assessee and decide the issue accordingly after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. 40. In ground no.VIII, the assessee has challenged the disallowance of ₹ 13.63 crore out of the deduction claimed under section 80IC. 41. Brief facts are, during the assessment proceedings, the Assessing Officer while examining assessee s claim of deduction under section 80IC of the Act in respect of its manufacturing unit at Baddi, found that on the sales of ₹ 606.89 crore, the profit generated by the unit at Baddi has been shown at ₹ 253.97 crore. Whereas, on the sales of ₹ 1390.52 crore in respect of all other units, the profit generated has been shown at ₹ 78.79 crore. Thus, while the profit rate of Baddi unit is sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manufacturing activity carried out at Baddi unit. In support of its contention, assessee relied upon certain judicial precedents. However, the learned Commissioner (Appeals) did not find merit in the submissions of the assessee. He observed that the assessee was unable to substantiate its claim that the Baddi unit was set up by utilizing assessee s own fund and no borrowed fund was used. He observed, for claiming deduction under section 80IC of the Act, the assessee has shown more profit in respect of Baddi unit by allocating all expenditures to the other units. Referring to the profit rate shown in respect of Baddi unit and other units, he observed that the profit rate of other units is very low compared to Baddi unit. As regards R D expenses, the learned Commissioner (Appeals) observed that the assessee could not explain whether custom manufacturing activity was its business activity or not and in case it is not the business activity of the assessee, why the assessee claimed deduction under section 35(2A) and under section 35(1)(iv) of the Act. Thus, ultimately, the learned Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer. 43. The learned Sr. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the issue requires factual verification it may be restored to the Assessing Officer. 45. We have considered rival submissions and perused materials on record. We have also applied our mind to the decisions relied upon. It is evident, from the assessment stage itself the assessee has consistently taken the stand that no part of the interest expenditure can be allocated to the Baddi unit as it was set up through internal accruals and no borrowed fund was used. It is relevant to observe, in submission dated 14th November 2011 filed before the Addl. Commissioner, the assessee while making the aforesaid plea has furnished the details of availability of fund for utilization in setting up of unit at Baddi. After perusing the orders of the Departmental Authorities, we are of the view that the claim of the assessee has not been properly verified with reference to facts and material brought on record. Similarly, assessee s explanation with regard to R D expenditure has not been verified factually. As it appears, part allocation of the interest and R D expenditure to Baddi unit have been made on presumptive basis only because of disparity between the profit rate of Baddi unit and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,42,42,000, which was treated as adjustment to be made to the arm's length price. On the basis of the transfer pricing adjustment suggested by the Transfer Pricing Officer, the Assessing Officer framed the draft assessment order adding the amount of ₹ 9,42,42,000 which also formed part of the final assessment order. The assessee challenged the aforesaid addition on account of transfer pricing adjustment before the first appellate authority. 48. The learned Commissioner (Appeals) after considering the submissions of the assessee, though, agreed with the Transfer Pricing Officer that provision of Corporate Guarantee comes within the definition of international transaction under section 92B of the Act, however, he was of the view that rate of commission at 3% worked out by the Transfer Pricing Officer is on the higher side. Accordingly, he reduced the commission to 1% which resulted in reduction of addition to ₹ 3,14,14,000. 49. The learned Sr. Counsel for the assessee, though, reiterated that provision of Corporate Guarantee does not come within the purview of international transaction as per section 92B of the Act, however, he submitted, charging of Guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra). Thus, to that extent, the disallowance made under section 14A r/w rule 8D while computing the book profit will not survive. However, the Assessing Officer is directed to compute the book profit in consonance with the provisions of section 115JB of the Act r/w Explanation 1(f) to the said provision. This ground is allowed for statistical purposes. 57. In the result, assessee s appeal is partly allowed. ITA no.5583/Mum./2017 Revenue s Appeal 58. The grounds no.1 to 3, the revenue has challenged the decision of the learned Commissioner (Appeals) with regard to the payment made to PEL towards reimbursement of expenses and royalty. 59. While deciding the corresponding ground raised by the assessee in its appeal being ground no.IV, we have deleted the addition made by the Assessing Officer. Therefore, these grounds have become infructuous, hence, dismissed. 60. In ground no.4, the Revenue has challenged the disallowance of expenditure of ₹ 2,42,85,714, claimed under section 35A of the Act. 61. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of an amount of ₹ 2,42,85,71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tization for patents and copy rights only and not for trade mark. It is relevant to observe, while deciding Revenue s appeal on identical issue in case of SPPL for assessment year 1998 99, the Hon'ble Jurisdictional High Court in Income Tax Appeal no. 466 of 2007, dated 14th September 2011, has held as under: 5. As regards the second question is concerned, the assessing officer disallowed the expenditure incurred on acquisition of trade-mark under Section 35A of the Act on the ground that the said Section is restricted to the expenditure on acquisition of Patents and Copyrights Act and not to the expenditure on acquisition of trademark. The ITAT has allowed the claim of the assessee by holding that the trade-mark is not alien to the patent right as there is a direct link between the patent right and trade-mark. It is held that the patent right cannot be identified in a pharmaceutical field without its own name trademark, meaning thereby the trademark and patent right move together and if trademark is purchased, the patent right with respect to that particular trademark is also passed on to the buyer in the transactions in the pharmaceutical fields. The Tribunal has also co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Jurisdictional High Court, the Revenue being conscious of the fact that if assessee s claim is allowed under section 37 of the Act then the entire amount of ₹ 34 crore has to be allowed in one go, therefore, the Revenue would be in a disadvantageous position, did not press its appeal on the issue of allowability of claim under section 35A of the Act. Therefore, considering the fact that in the preceding assessment years assessee s claim of deduction under section 35A of the Act has been allowed, applying the rule of consistency also assessee s claim of deduction in the impugned assessment year cannot be disallowed. Therefore, we uphold the decision of the learned Commissioner (Appeals) on this issue by dismissing the ground raised by the Revenue. 65. In ground no.5, the Revenue has challenged deletion of addition ₹ 26,76,631, made on account of adjustment to the arm's length price of interest on loans given to AE. 66. Brief facts are, during the proceedings before him the Transfer Pricing Officer noticed that the assessee has advanced short term loans to its AE in Switzerland during the relevant previous year and the amount outstanding as on 31st Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate method for bench marking the interest rate is by applying either LIBOR or EUROBOR. Therefore, the arm's length price of interest chargeable to the AE cannot be determined by applying Indian PLR as the loan given was not in Indian currency. This view of ours gets support from the decisions cited by the learned Sr. Counsel. In case of Tata Autocomp Systems Ltd. (supra), the Hon'ble Jurisdictional High Court held that when the AE is situated in Germany, rate of interest on the loan advanced to the AE has to be determined on the basis of rate of interest prevailing in Germany where the loan has been consumed. The Hon'ble Delhi High Court in Cotton Naturals (I) Pvt. Ltd. (supra) has also expressed similar view. The other decisions relied upon by the learned Sr. Counsel are also in the same line. Keeping in view the ratio laid down in the aforesaid decisions, we do not find any infirmity in the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Revenue. 71. In ground no.6, the Revenue has challenged the decision of the learned Commissioner (Appeals) in determining the rate of commission on Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X
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