TMI Blog2012 (6) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... s 80IC on ground that assessee had shown abnormally higher profit of Baddi Unit to claim deduction - AO suggested that, sales of Baddi Unit must be recorded at arm's length price for internal transfer and not the ultimate sale price - Held that:- This is a case where manufacturing products were sold through C&F in the market. Even this is not the case that first sales were made by the Baddi Unit 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 fixation of market value of such good is out of the ambits of this section. 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. Statute do not subscribe such deemed inter-corporate transfer but subscribe actual earning of profit, then the impugned suggestion of the AO do not have legal sanctity in the eyes of law Regarding AO's proposition of segmentation of eligible profit of the manufacturing unit it is held that when the method of accounting as applicable under the Statute do not require segregation or bifurcation of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation as suggested by the assessee and if any relief is permissible, then the same can be granted but as per law. partial relief provided by DRP by allowing mark-up @ 2% is not disturbed. MAT - provision for doubtful debt not added to the book profit for computing income u/s 115JB - Held that:- Provision for doubtful debt to be added to the book profit for computing income u/s 115JB - Decided against the assessee. Benefit of carry forward of MAT credit u/s 115JAA - Held that:- Since the necessary facts are yet to be examined, therefore, we refer this ground back to the stage of the Assessing Officer to decide accordingly. - IT Appeal NO.3140 (AHD) of 2010 - - - Dated:- 25-5-2012 - MUKUL KR. SHRAWAT, A.K. GARODIA, JJ. ORDER Mukul Kr. Shrawat, Judicial Member This is an appeal at the behest of the Assessee directly filed against the Assessment order passed U/s 143(3) r.w.s. 144C of I.T.Act 1961 ( in short The Act ), however, due to the involvement of Transfer Pricing provisions the sequence of the orders of the Revenue Authorities are as under :- ( i ) An Order of Addl. Commissioner of Income tax Transfer Pricing -I Ahmedabad passed U/s 92CA(3) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred is not for starting of a new line of business but for the purpose of expansion or extension of the business already being carried on; then such an expenditure is deductible as revenue expenditure U/s 37(1) of the Act. For this legal proposition case laws relied upon are:- (1) Kesoram Industries Cotton Mills 196 ITR 845 (Cal.) (2) Cama Hotels Ltd. 38 TTJ 21 (Ahd.) 2.4 . The A.O. was not convinced and placed reliance on the following decisions :- ( i ) Ambica Mills Ltd. 236 ITR 921 (Guj) ( ii ) CIT v. S.L.M. Maneklal Industries Ltd. 107 ITR 133 (Guj.) ( iii ) E.I.D. Parry (India ) Ltd. 257 ITR 253 (Mad.) (iv) J.K. Chemicals Ltd. 207 ITR 985 (Bom.) Finally, it was concluded that the expenses incurred by the assessee towards the new project of Rs. 24,00,000/- was 'capital in nature' and the same was disallowed. As far as the directions of the DRP is concerned, it was opined that the said expenditure represented 'legal-expenses' incurred for setting up a new project. According to DRP the A.O. has rightly placed reliance on CIT v. S.L.M. Maneklal Industries 107 ITR 133 (Guj.) and E.I.D. Perry 257 ITR 253 (Mad.). An another decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be held deductible as revenue expenses. In the said case the expenditure was for getting feasibility report for setting up a new mini steel plant, a new line of business different from it's existing business of manufacturing of steel tubes. Because the expenditure was for a new project different from existing business hence held as 'capital- expenditure' Revenue has also cited SLM Maneklal 107 ITR 133 (Guj.) however the observation therein was that what is required to be considered is the object with which a particular expenditure was incurred. In the said case the amount was spent for obtaining an expert opinion by way of preliminary expense for the purpose of establishing a foundry. The Hon'ble court has said that the preliminary expenditure was incurred for the purpose of bringing into existence a 'capital asset', therefore the preliminary expenditure itself was an expenditure of capital nature, it was held. Thus in the light of the case-laws discussed we are of the view that the factual matrix of the case has demonstrated that the expenditure in question was not for setting up a new line of business but for the setting up a new production unit for expansion of the same l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount Expenses (Rs.) Total (Rs.) From 01/04/05 to 30/09/05 From 01/10/05 to 31/03/06 From 01/04/05 to 31/03/06 Product Registration Expenses 6,296,905 15,688,655 21,985,560 Registration Expenses 639,835 1,621,308 2,261,143 Product Registration Expenses 1,588,829 967,694 2,556,523 Total 8,525,569 18,277,657 26,803,226" "Reimbursement of expenses incurred on behalf of Cadila Healthcare for Product Registration Support Services Name of the Company Expenses (Rs.) Total (Rs.) From 01/04/05 to 30/09/05 From 01/10/05 to 31/03/06 From 01/04/05 to 31/03/06 Zydus Healthcare USA LLC 17,851,991 13,112,203 30,964,194 Zydus France SAS 57,719 1,477,619 1,535,338 Zydus Healthcare SA (Pty.) Ltd. - 4,922,532 4,922,532 Total 17,909,710 19,512,354 37,422,064 Total Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.37(1) of the Act. 3.5. In respect of 'Patent fees' the explanation of the assessee was as under ;- "As regard details of 'Patents Registration Fees', we are enclosing herewith, copy of the said account for the year under assessment, marked as Annexure No.-1. From the facts available on the record you could find that the Assessee Company carries on Scientific Research work on large scale for last so many years. A patent is a set of exclusive rights granted by a state to an inventor for a limited period of time for a public disclosure of an invention. The exclusive right granted to a patentee in most countries is the right to prevent others from making or using the patented invention without permission. The expenses incurred by us for carrying out various patent registration formalities including statutory fees prescribed in different countries are duly reflected in the copy of accounts, as above. All that the registration of patents did was to enable the Assessee Company to obtain a speedy and less expensive remedy against the infringement of the patent rights. It gives benefit of exclusive right to use its patents. It is incurred for protection of the business of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance was placed as follows; -- ( i ) Maschmeijer Aromatics 214 ITR 22 (Mad.) ( ii ) Digvijay Cements 159 ITR 253 (Guj.) ( iii ) Laxmi Sugar Mills 84 ITR 439 (All.) ( iv ) L T Plastics 73 Taxman 673 (All.) 3.10. We have heard both the sides on this issue. We have also perused the details furnished in the form of a compilation. Under the head 'Other Marketing Expenses' the assessee has claimed 'Product Registration Expenses'. The assessee has also claimed 'Trade-mark Registration fees' and 'Patent Registration fees'. The question which was raised by the revenue department was that whether by incurring those expenditure the assessee has created an intangible asset. The revenue has also raised a question that whether by incurring those expenditure the assessee has enjoyed long drawn enduring benefit. We have noted that for pharmaceutical product the assessee is required to obtain a registration from government drug regulatory authority. We have been informed that the assessee company has obtained its various products registered in other countries. We have also been informed that the pharmaceutical products have also been registered by the local authorities as also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that there was acquisition of certain rights for use of trademark and patents. On those facts it was held that undoubtedly the consideration paid was capital in nature. Even this precedent is not going to help the revenue. We have perused L T Demag Plastic ( supra ) and have noticed that a payment was made for acquisition of trademark. The said company had entered into an agreement with L T, whereby the latter permitted the assessee to use its trademark in consideration of payment of a huge sum of Rs. 3 crores. Hence it was held that the cost incurred by the assessee was for acquiring new trademark and was a capital expenditure. Whereas in the case in hand it was not an acquisition of trade-work but only registration of an existing trade-work. We therefore hold that the reliance placed by the revenue do not tally with the facts of the case in hand, hence rejected. 3.12. We hereby hold that the payments in question are inextricably linked with the working of the assessee's business. By incurring those expenditure the assessee has not acquired any new right of permanent character. The licenses or the registrations are required to be renewed and therefore part of the day to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nhanced rate of deduction @ 150% U/s 35(2AB) of the Act., especially when the expenditure was not incurred by the assessee in the approved in-house facility. The AO has reiterated that as per the D S I R certificate, expenses of Rs. 1437.50 lacs on clinical trial was incurred outside the approved facility. There was a reference of section 43 [4] of the Act, in which the term "scientific research " has been defined. Explanation of the assessee was as under:- " 'Clinical Drug Trial' is an integral part of the ongoing Scientific Research carried on by any Pharmaceutical Company. A detailed note and overview of clinical drug trials and clinical research as extracted from Wikipedia is attached herewith marked as Annexure No.-3. 'Bioequivalence-Study' is a highly specialized clinical trial research study which is integrally connected with the Scientific Research carried on by us. A detailed note and overview of bioequivalence-study and clinical research as extracted from Wikipedia is attached herewith marked as Annexure No.-4. As explained under the above note clinical drug trials are a sine qua non for obtaining approval of any drug from the regulatory authority. Taking into conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trial is taking place. Depending on the type of the product, investigators enroll healthy patients/volunteers. The study and investigation compare the new product with the currently prescribed treatment. Clinical trials vary in size from a single center in one country to multi-center in multiple countries. The burden of expenditure and payment is either borne by the government of by a pharmaceutical company. Some of the examples of what a clinical trial may be designed to do are as follows:- "assess the safety and effectiveness of a new medication or device on a specific kind of patient (e.g., patients who have been diagnosed with Alzheimer's disease) Assess the safety and effectiveness of a different dose of a medication that is commonly used (e.g. 10 mg dose instead of 5 mg dose) Assess the safety and effectiveness of an already marketed medication or device for a new indication, i.e. a disease for which the drug is not specifically approved. Assess whether the new medication or device is more effective for the patient's condition than the already used, standard medication or device ("the gold standard" or "standard therapy") Compare the effectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 1241.59 Capital Expenditure (excluding, Land Building) 2740.93 Revenue Expenses on Building 42.25 Revenue Expenditure (excluding Land Building) 6413.97 Total Capital + Revenue (including Land Building) 10438.74 Total Capital + Revenue (excluding Land Building 9154.90 Expenses on Clinical Trials outside the approved facilities not included in above 1437.50" In support, case laws relied upon are as under:- ( i ) Bharat Biotech International Ltd. (ITA No.1327/Hyd/2008) ( ii ) Claris Life Science 221 CTR 301 (Guj.) ( iii ) Radhaswami Satsang 193 ITR 321 (SC) ( iv ) Taraben Ramabai Patel 215 ITR 323 (Guj.) ( v ) Neo Poly Pack (P) Ltd. 245 ITR 492 (Del.) ( vi ) JH Golta 156 ITR 323 (SC) 4.4. From the side of the Revenue Ld. D.R. Mr. V.K. Gupta has placed reliance on the language of Sec. 35(2AB) and argued that it was an admitted factual position that the research was not entirely conducted in-house but conducted by out side agencies. Expenditure incurred towards those agencies was not admissible for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).] 4.6. As far as the definition of "scientific research" is concerned, we have been informed that Section 43(4) has defined the same as under:- Section 43(4) : (i) "scientific research" means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries; (ii) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising out of, scientific research; (iii) references to scientific research related to a business or class of business include- ( a ) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class; ( b ) any scientific research of a medical nature which has a special relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on "scientific research" engaged in an in-house research and development facility. We can also read the sentence in this manner that any expenditure on scientific research directed towards in-house research and development facility. Therefore, the language of this section do not suggest that any expenditure on scientific research should be within the in-house research and development. The language do not suggest that the research is to be conducted within four walls of an undertaking. Had the Legislature intended to restrict the research within the four-walls of a compound, then the possible terminology could be that "any expenditure on scientific research by a in-house research and development facility". Therefore by using the word "by" the meaning gets changed and then it can be read that through the action or means of in-house research the expenditure is incurred. We are of the view that clinical trial is one of the various steps involved in a scientific research specially for the development in a new drug. For the purpose of clinical trial a pharmaceutical company is required to set up a in-house research facility. To conduct the research the qualified team of scientists may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Assessing Officer erred in law and on facts in making a disallowance of Rs. 118,84,177/- u/s.14A. 5.1. On perusal of the computation of income, it was noticed by the AO that the assessee has claimed dividend income of Rs. 37,68,26,721/- as exempted income. As per AO, no expenditure was offered for disallowance u/s.14A. It was explained that the investment in equity shares was out of the own funds. It was informed that the assessee had share capital and free reserves as own funds which were used for the investment in the equity shares. It was also informed that a public issue was made by the assessee company in the month of February/March-2000. The assessee has placed reliance on Hero Cycles (323 ITR 518) [P H]. It was also contended that the provisions of section 14A(2) were effective from A.Y. 2007-08. However, as per AO the said investment activity was an independent activity of the assessee. The AO has placed reliance on Rule 8D and held that not only the direct expenditure relating to exempt income but also the indirect expenditure like interest which is not directly attributable to any particular income is to be computed and then one half percent of the value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct expenses the provisions of Rule-8D were correctly invoked by the A.O. A reliance has also been placed on Haryana Land Reclamation and Development Corporation 302 ITR 218 for the legal proposition that in the absence of any evidence on record to show that the payment of bonus, gratuity and PF were made in respect of the staff engaged in the assessee's business operation and not in respect of the staff engaged for carrying out the work of agriculture farm, therefrom generated exempt income, deduction thereof held as not allowable in view of section 14A of IT Act. 5.5 . Having heard the submissions of both the sides, it is evident from the record available before us that on one hand the direct nexus of utilization of assessee's own funds towards investment in the impugned equity shares was not established and on the other hand from the side of the Revenue equally it was not placed on record that having regard to the accounts of the assessee the A.O. was not satisfied with the claim by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income. The provisions of Rule-8D(2) is to be applied in a case where the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. ( b ) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001-2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003. ( c ) The decisions reported in Sridev Enterprises ( supra ), Munjal Sales Corporation ( supra ) and Radhasoami Satsang ( supra ) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub section (2) and do not offend Article 14 of the Constitution; ( v ) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09; ( vi ) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; ( vii ) The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1488.1 crores, on which profit before tax as per books was declared at Rs. 176.8 cores. The AO has also compared the percentage of profit of the Baddi Unit with other Units as also the overall percentage of profit of the company by reproducing following figures:- (Rs. in Million) Baddi Goa anti-cancer* Goa agiolax Goa contract medita All other units (SBUs) taken together Assessee company- whole Turnover 1991 32 147 96 12614 14881 Book Profits 1168 3 2 30 565 1768 % age of profits to turnover 58.67 8.15 1.19 31.35 4.48 11.88 Claim u/s.80IC 1165 0 0 0 0 1164.85 Claim u/s 80IB 0 0 6.3 9.1 0 15.4 6.2 . This was the start point of the controversy. That as per the allegation of the AO, the assessee had shown abnormally higher profit @ 58.66% for the Baddi Unit. That the said profit was claimed as exempt u/s.80IC of IT Act. In this connection an another observation of the AO was that in respect of other U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The AO has also made out a chart of 'Research and Development' expenses incurred over a number of years, but according to A.O. it was not taken into account for Baddi Unit. The AO's next observation was that likewise the assessee had incurred huge amount on 'Marketing expenses', but those were claimed as Revenue Expenditure u/s.37(1) of IT Act by the Company without allocating to Baddi Unit. The AO has therefore tried to allege that the expenses, such as, indirect cost, advertisement, marketing expenses, research development expenses, etc. were not allocated towards the profit of the Baddi Unit and in this manner the profit of the Baddi Unit was escalated to get higher benefit of deduction u/s.80IC of IT Act. The AO has then noted down that in the past the products, now manufactured by the Baddi Unit, were purchased from the out- side manufacturers on Principle to Principle (P 2 P) basis. A list of 27 such products was reproduced by the AO. It was observed that the assessment year under consideration was the second year of the assessee's claim for deduction u/s.80IC for Baddi Unit. Prior to setting up of the Baddi Unit, the assessee was purchasing all those 27 products, now be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, for the sake of brevity, only limited portion ( first 10), just for example, are reproduced below:- Sr. No. Name of the Product Pack P to P Baddi (Own Mfg.) Purchase Cost from P2P including taxes Average Selling Rate by CHL Purchase Cost from P2P including taxes Average Selling Rate by CHL Cost of Production Average Selling Rate (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) 1. OCID-20-CAP OCID-20-CAP 10 C 15C 4.27 30.10 4.28 30.46 3.94 46.49 2. ATORVA-10 TAB 10T 11.50 54.47 11.50 55.66 6.73 54.99 3. OXALGIN DP TB 10T 2.40 10.46 1.89 11.30 1.88 13.29 4. AMLODAC-AT-TAB 10T 2.19 21.40 2.21 21.42 1.81 21.57 5. OCID-10 CAP 10C 4.39 17.1 7 4.56 18.59 OCID-10 CAP 15C 4.17 32.95 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork are being handled by other divisions for which the assessee has done cost allocation. So, when the goods are transferred from the Badi unit to the marketing division for selling the product, it is the manufacturing cost and a reasonable amount of profit which should be charged by the Baddi unit. In the instant case, the branch transfer price can be the price which the P2P supplier was charging for the products, because in all the products, there is a cost saving by the assessee on manufacturing the goods at Baddi. For example, for item no2 of the chart, where the cost of production is Rs. 6.73 the branch transfer cost can be the price charged by the P2P supplier for the same product i.e. Rs. 11.5 similarly for item no3, where the cost of production is Rs. 1.88 the branch transfer cost can be the price charged by the P2P supplier for the same product i.e. Rs. 2.4." 6.6. So, according to A.O. the branch transfer price could be the price which the P2P supplier were charging for those products. The additional profit earned was the profit earned by setting up the Baddi Unit. That alone could be eligible for 80IC deduction. As per A.O's reasoning, prior to setting up the Unit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits claimed to have been derived by sale of products manufactured from Baddi is not correct. The sale price for the product manufactured at Baddi should consist of cost of production as well as a reasonable amount of profit for the same (which in the instant case can be taken at the price charged by the P2P supplier which included the cost of the product as well as his profit on the same). However, here what the assessee has done is that, it has merged in the 'sale price', the profits derived form the brand value of the products as well as profits derived from marketing network of the products, of which the assessee is the owner and not the Baddi Undertaking. The mandate of Subsection 80IA(5) is that the profits are to be computed as if the eligible business was the only source of income of the assessee. By this mandate, for determination of profit for eligible business, the undertaking has to be considered in isolation. On this prescription, the goods manufactured at Baddi could not have been sold in the market at the sale price shown by the assessee without the help of the brand value or the marketing network which is owned by the assessee (not Baddi Undertaking). What the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d "attributable to". Case law cited was CIT v. Sun Engineering Works Pvt. Ltd. 198 ITR 297. Finally, the AO has computed the profit allegedly derived from Baddi Unit and held that the remaining profit was derived from exploitation of brand and marketing network thus not derived from the Baddi Unit, hence not eligible for deduction. Relevant paragraphs are reproduced below:- "8.48 As discussed above, considering the provisions of section 80IC(1) r.w. subsection (7) thereof w.r. section 80-IA(5) r.w. 80-IA(8), the profits derived from the Baddi Unit are manufacturing profits only. This profit earned/saved could easily be computed by using the product wise quantity Manufactured at Baddi and the product wise profit saved on manufacturing the products at Baddi and not getting it manufactured form P2P supplier. However, despite providing sufficient time, the assessee has not produced product wise data for the goods manufactured at Baddi. Hence, the data as available for the product as explained in the Chart at Para 8.22 above is being used for this purpose. 8.49 It may be seen from the chart at Para 8.22 above that in the earlier years the assessee has earned 80% and 81% respecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Nature of claim Claim made by Assessee (Rs.) Claim allowed by the AO (Rs.) u/s.80IC (Baddi Unit) 116,48,51,853 11,94,79,365 u/s.80IB (contrast Media Unit at Goa) 91,15,766 17,80,758" 7.2. After detailed discussion, DRP was of the view that the AO was right in observing that the established marketing network has played a very important role in pricing of the product and the abnormally high profit as shown by the Baddi Unit was also partly on account of free usage of the marketing network of the assessee-company which was created over the period of time. However, the assessee has contested that the AO should not disturb the computation of deduction of an eligible Unit on the ground that the profits earned by the other Unit of the assessee were comparatively lower, reliance placed on ACIT v. Delhi Press Patra Prakashan 103 TTJ 578 (Del.). The DRP was in agreement with the finding of the AO that the profit of the eligible Undertaking at Baddi Unit has not been correctly worked out by the assessee, because the indirect cost incurred towards exploitation and free usage of the marketing network establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking". He has fervently argued that the Statute do not suggest any segregation in respect of such profit with regard to different operations, such as, manufacturing operation at one hand and the marketing or brand profit on another hand. He has also argued that the language of 80IC is in respect of "any business" referred in sub-section (2) of section 80IC. The Statute has therefore used a larger connotation, i.e. profits and gains of a business which includes not only the manufacturing gains but ancillary gains having direct nexus with the manufacturing activity are eligible for the claim. Mr. Patel has elaborated that there was no purpose of manufacturing a product if the same is not marketable. Even if sub-section(5) of section 80IA is to be considered, then the profits and gains to be computed as if such eligible business is the only source of income. He has ardently pleaded that the eligible business means the overall activity, i.e. manufacturing of a product along with the marketing activity. In the present case, while computing the eligible profit of Baddi Unit, which was the only source of income, the overall business activity thus included the fixing of price of a product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in 2001 and the related expenditure in the nature of Depreciation (as per I.T. Act) for the year to the tune of Rs. 705 lakhs on its written down value has already been debited to the stand-alone P L Account. Thus, no dispute could have been be raised on any count to the extent of 34% of the profits claimed for deduction, since no notional expenditure in respect of R D or Brand Development can be attributed in relation such profits earned from these new products. In respect of other 22 products at Baddi representing self-generated brands, it is pertinent to point out that these Brands were launched by the company during the period 1989 to 2000. The expenditure on R D in the years preceding the launch of these products was very small and insignificant. Therefore, the emphasis of the learned AO, highlighting that the assessee had incurred huge R D expenses to promote these products and that the same has not been taken into account, is without any basis or justification. He has also pointed out that during the course of the hearing before the Hon'ble DRP, the assessee was also asked to justify that the sourcing of certain raw materials for manufacturing the prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods as on that date. He has therefore vehemently contested that the profit of a Unit is distinct from profit of the business as a whole. In the present case, profit of the assessee-company depends upon so many factors, such as, good-will of the business, brand value of the business and the market reputation of the products. The profits of the business of the assessee-company also depends upon the marketing strategies adopted. Whereas, for the purpose of claim of deduction u/s.80IC, one has to consider only the manufacturing profit. A Unit engaged in manufacturing or production is therefore expected to draw true profits derived from manufacturing activity only. 9.1 In respect of argument of the assessee that in the past for A.Y. 2005-06 this very claim was allowed by the AO, hence following the Rule of consistency, for this year as well has to be allowed, Mr. Srivastava has pleaded that the principle of res judicata do not apply on tax cases and in support cited a case law, viz. Distributors (Vadodara) Pvt. Ltd. reported at 155 ITR 120 (SC). 9.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible business, in either case, the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of transfer, then for the purposes of the deduction the profits and gains of such eligible business shall be computed as if the transfer in either case, had been made at the market value of such goods as on that date. Ld. Special Counsel has therefore passionately pleaded that this provision of the IT Act empowers the AO to substitute the value of the transaction as recorded in the books of accounts, if in his opinion the said value is not the fair market value of the goods transferred. In the present case, the AO has fairly demonstrated that the sale price of the products which was recorded at the Baddi Unit was not the fair market price because those very products were purchased on P2P basis in the past at a lower cost. The comparative chart of 27 products was duly recorded by the AO, which was by itself explicitly clear and directly convey the stand of the Revenue. 9.3 Ld. Special Counsel Mr. Srivastava has also took shelter of section 40A(2)(a) for the legal proposition that if in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has again drawn our attention that the only source of income should be the eligible source of income and not other sources of income, such as, profits of marketing division or profits on account of established brand. For the allocation of profit of manufacturing unit the mandate is very clear because Income Tax Rule, 1962 contains Rule 18BBB wherein as per sub-rule(2) a separate report is to be furnished by each undertaking and that report shall be accompanied by a profit loss account and balance-sheet of that Undertaking as if the Undertaking is a distinct entity. He has therefore argued that the allocation of the profit of a manufacturing unit should be made on stand alone basis. He has questioned that how the sale price of the products of the Baddi Unit were determined and recorded. Because of the brand value the sale price must have been determined by the management as if the profit is earned by the assessee-company on sale of the products of the Baddi Unit. It was recorded on the presumption that the sales were executed by the Head Office by charging brand value, the name of the product and the goodwill of the Company. In any case, according to Ld. DR, a reasonable expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (2) in the following manner : (2) This section applies to any undertaking or enterprise ( a ) which has begun or begins to manufacture or produce any Article or thing Therefore, 'manufacturing' is the first criteria for the eligibility of the 'business' to qualify for the deduction. Hence the 'profits' are required to be derived from a manufacturing undertaking which is producing the specified article. That 'profit' is inclusive in the 'gross total income'. As already noted, the terminology "profit" has not been defined in this Act therefore we have taken the help of other resources. The basic question is that what is the "profit" of a manufacturing unit? Firstly, the term "Profit" implies a comparison between the stage of a business at two specific dates separated by an interval of a year. Thus fundamentally the meaning is that the amount of gain made by the business during the year. This can be ascertained by a comparison of the assets of the business at the two dates. To determine the "profit" of a manufacturing Unit the accounting standard has given certain guidelines, enumerated in short. In the accounting the "profit" is the difference between the purchase pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintained separate books of accounts and therefore drawn a separate profit and loss account. In such a situation, whether the AO is empowered to disturb the computation of profit, is always a subject matter of controversy. From the side of the assessee, reliance was placed on ACIT v. Delhi Press Patra Prakashan 103 TTJ 578 (Delhi). In this case, the assessee was claiming deduction u/s.80IA in respect of a Unit No.4. The said Unit was showing profit @ 62%. As against that, AO has noticed that a margin of profit shown by the assessee as a whole was only to the extent of 10%. The AO has therefore recomputed the profit of the said Unit by applying sub-section (10) of section 80IA and restricted the profit of the said Unit to 10% only. While dealing this issue, the Respected Coordinate Bench has concluded that it was not justified to disturb the working of profit merely because the profit rate of eligible unit was substantially higher than overall rate of profit of other Units of the assessee, more so when separate books were maintained by the assessee in respect of the said eligible Unit. In the present case as well the AO has proceeded to disturb the profit of the Baddi Unit and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident. On those facts, since it was found that R D activities were carried out by the assessee, therefore, 15% of the profit was allocated to the R D activities and balance of the profit was attributable to the marketing activities in India. The said decision was entirely based upon the connectivity of the marketing operations with the profits. The CBDT Circular No.23 of 1969 dated 23/07/1969 was also taken into account wherein it was opined that where a non-resident's sales to Indian customers are secured through the services of an agent in India then that profit is attributable to the agent's services. Meaning thereby because of the close connection of the agent's marketing activity the proportionate profit was attributed to the said activity. Contrary to this, there was no finding that upto the extent of 80%, the profit was attributed to the assessee-company. The segregation between 80% and 6% was not on account of any evidence through which it could independently be established that the major portion of the profit could be attributed to the assessee-company and rest of the profit could only be attributed to the Baddi Unit. 10.5 The AO has also made out a case that the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80IC does recognized the provisions of section 80IA. Refer, Sub-section (7) of section 80IC which prescribes as follows:- Section 80IC(7) : The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section. Due to this reason, our attention was drawn on the provisions of section 80IA(5) of IT Act; reads as under:- Section 80IA(5) : Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. As per this section, the profits of an eligible undertaking shall be computed as if such eligible bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t account, the scope of controversy gets minimal. Rather, the intense contention of the Ld.AR is that the facts of the case have explicitly demonstrated that the goods manufactured at Baddi Unit were transported to various C F agents across the country for sale purpose. Therefore, the eligible business is the manufacturing of pharmaceutical products and the only source of income was the profit earned on sale of the products. 10.8 . An interesting argument was raised by ld. Special Counsel that the provisions of section 80IA(8) prescribes the segregation of profit in case of transfer of goods from one Unit to another Unit. But section 80IA(8) reads as follows:- Section 80IA(8) : Where any [goods or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd second that the transfer should be as per the market price determined by the AO. Both these suggestions are not practicable. If these two suggestions are to be implemented, then a Pandora box shall be opened in respect of the determination of arm's length price vis a vis a fair market and then to arrive at reasonable profit. Rather a very complex situation shall emerge. Specially when the Statute do not subscribe such deemed inter-corporate transfer but subscribe actual earning of profit, then the impugned suggestion of the AO do not have legal sanctity in the eyes of law. 10.9 A very pertinent question has been raised by ld.AR Mr. Patel that what should be the line of demarcation to determine the sale price of a product if not the market price. As far as the present system of fixation of sale price of the product is concerned, a consistent method was adopted keeping in mind the several factors, depending upon the market situation, we have been informed. But if the assessee is compelled to deviate from the consistent method of pricing, then any other suggestion shall not be workable because no imaginary line of profit can be drawn, precisely pleaded before us. So the uncerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A which provides incentive in the form of tax deductions to the category of "profit linked incentives". The incentive is linked with generation of 'operational profit'. Therefore, the respected Parliament has confined the grant of deductions only derived from eligible business. Each eligible business constitutes a stand alone item in the matter of computation of profit. The Court has said that because of this reason the concept of "segment reporting" was introduced in Indian Accounting Standards. Ld. Counsel Mr. Srivastava has argued that the deduction u/s.80IC is a profit linked incentive. Only the Operational Profit has to be claimed for 80IC deduction. According to him, each of the eligible business constitutes a stand alone item in the matter of computation of profit. For the computation of profit of an eligible business the word used is "derived" in section 80IC which is a narrower connotation, as compared to the word "attributable". In other words, by using the expression "profits derived by an undertaking", Parliament intended to cover such sources not beyond the first degree, i.e. the first degree of manufacturing activity. The law pronounced by the Hon'ble Supreme Court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of profit must necessarily be at the place where the sale proceeds are received or realized. But on the other hand, it was argued that the profits received relate (i) firstly to his business as a manufacture, (ii) secondly to his trading operations and (iii) thirdly to his business of export. On that basis, it was opined that the profit or loss has to be apportioned between these businesses in a business like manner and also according to well established principle of accountancy. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the place of accrual of profit. The act of sale is the mode of realizing the profits. If the goods are sold to a third person at Mill premises, one could have said that the profits arose by reason of sale. The Profit would only be ascribed to the business of manufacture and would arise at the Mill Premises. Merely because a Mill owner has started another business organization in the nature of sale depot, that cannot wholly deprive the business of manufacture of its profits, though there may have to be apportionment in such a case between the business of manufacture and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as exempt being carried out within the territorial jurisdiction of Indian State. So the Court has observed that to succeed in their claim, it is incumbent upon the assessee to show that there was in fact a part of a business and that the profit had actually accrued or arose in that part of an Indian State. The Court has clearly stated in para-41 that both the elements should found exist and then only the business could be treated as a separate business. However, the said proviso has propounded only deeming provisions, as is apparent from the language of the section itself. For the purpose of the said section, it was deemed to be a separate business. The whole of the profits of which accrue in an Indian State and the other part of the business be deemed to be a separate business. In para-44, the Hon'ble Court has discussed the problem with reference to certain decisions of English Courts and then made an observation that it had been held that if separation is possible in such cases, the proper course is to follow that sever the profits of the two businesses and assess accordingly. The result of the discussion was that the profits of the two businesses were directed to be apportio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion expressed was very specific that a profit can accrue in respect to that part of a business only when apportionment is possible. The Hon'ble Court has said that only on the said assumption that apportionment was possible the said proviso was based upon that presumption only. If no apportionment can be made in respect of the process of a particular business, then that will not be considered to be a part of the business at all and held that the proviso will not apply. It was concluded that the principle of apportionment was implied therein. After this detailed discussion, we thus arrive at the conclusion that the principle of apportionment was the criteria for segregating the manufacturing profit if it was feasible to do so. As against that in the present case the assessee has computed the profit of the Baddi Unit on the basis of the well accepted principle of accountancy that a profit is accrued where a transaction is closed, meaning thereby the profit arises solely at the time of sale. 10.13 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product registration services. Besides, assessee has made reimbursement of expenses incurred. It was also noted that similar reimbursement of expenses for product registration were also made to Zydus Healthcare South Africa and Zydus France, but no "service charges" paid to those Associate Enterprises. The assessee-company has submitted F.A.R. analysis as follows:- "(A) Functions Performed: Cadila is engaged in manufacturing formulations and APIs. It undertakes research and development, manufacturing and product promotion activities. Zydus LLC is involved in registration of pharmaceutical products of Cadila in overseas locations such as USA etc. as well as in providing marketing support services. In relation to the process of obtaining product registration, Cadila supplies all the information / data required for submission to the relevant authorities. Cadila prepares and compiles complete set of registration dossiers for obtaining registration with the concerned regulatory authority in the respective jurisdiction for e.g. US Food Drug Administration in respect of Us market. Cadila also owns the intellectual Property Rights related to the products registered by Zydus LLC. (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for product registration 3,09,64,194 Zydus Healthcare S.A. (Pty.) Ltd. Reimbursement of expenses incurred on behalf of the assessee for product registration 49,22,532 Zydus France SAS, France Reimbursement of expenses incurred on behalf of the assessee for product registration 15,35,338 The TPO has thus concluded that the services charges @ 10% was recommended for upward adjustment in the following manner:- "5.7 In view of above, the explanation submitted by the assessee is rejected and the transaction is being treated as mere reimbursement of expenses and no mark up is allowed for these zero risk administrative operations i.e. non business operation. In view of above Rs. 32,61,124/- (Zyduc LLC has shown Rs. 32,61,124/- as service charges income which is 10% of total expenses incurred in this behalf of Rs. 3,26,11,245/- in place of Rs. 29,77,402/- shown by the assessee in 3CEB report) is added back to the income. Total upward adjustment Rs. 32,61,124/-" 11.4 Interestingly, when the matter reached to DRP, it was directed to AO to allow a mark-up of 2% instead of NIL as per the following directions:- "1.9. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before us is whether to grant the benefit prescribed u/s.92C(2) of IT Act. The assessee has furnished the following calculation:- Particulars Amount (INR) Total cost A 29,774,020 Add mark-up @ 10% paid by cadila to Zydus Us B 2,977,402 Total amount paid by Cadila to Zydus US for availing product registration and marketing support services C = A + B 32,751,422 Mark-up @ 2# as directed by DRP D = A *2% 595,480 Arm's length price arrived at based on direction of DRP order E = A +D 30,369,500 Applying the 5% benefit as provided in Second Proviso to Section 92C(2) F = E*1.05 31,887,975 Adjustment for difference between the amount paid and the arm's length price after allowing the 5% benefit G = C F 863,447 However, in this regard, for the purpose of computation of arm's length price u/s.92C first of all most appropriate method is to be decided and thereafter as per the provisions of section 92C(2) the benefit of variation between the arm's length price so determined and the price at which the interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit. 13. Having heard the submissions of both the sides, we are of the considered view that now this issue stood settled in favour of the Revenue by the order of the Hon'ble Delhi High Court pronounced in the case of Indo Rama Synthetics 320 ITR 340 (Del.). Respectfully following this precedent, we hereby dismiss this part of the ground of the assessee. 13.1 The second limb of this ground is in respect of expenses disallowed u/s.14A of IT Act. The AO's version was that in view of clause (f) Explanation-1 to section 115JB the said adjustment should have been made. According to AO, the amount disallowed u/s.14A is liable to be added as per the provision of sec.115JB r.w.Explantion-1, clause (f) which mandates that the expenditure debited to Profit Loss account a/c. incurred in relation to income exempt u/s.10 is to be added for computation of book profit. However, this very issue now stood settled by Goetze Ltd. 32 SOT 101 (Del.), wherein it was held as under: "We have considered the facts of the case and rival submissions. We may at the outset consider the provisions contained in clause (f) of the Explanation to section 115JA and sub-section (1) of section 14A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troduced by the Finance Act, 1996 with effect form 1.4.1997. A new section 115JAA was also inserted to provide for a tax-credit scheme by which MAT paid can be carried forward for set off against regular tax payable during the subsequent years, subject to certain conditions. In a decision of ITAT Chennai Bench pronounced in the case of ITO v. Data Software Research Company (International) Pvt. Ltd. 126 ITD 442 (Chennai) it was clarified that the carried forward of MAT credit is available for a period of 5 + 1 years. Since the necessary facts are yet to be examined in the light of the above precedence, therefore, we refer this ground back to the stage of the Assessing Officer to decide accordingly. Resultantly, this ground may be treated as allowed but for statistical purposes. 16. Ground No.12 reads as under : 12. That the learned Assessing Officer erred in law and on facts in mechanically initiating penalty proceedings u/s.271(1)(c) of the I.T Act in respect of each of the additions made by him in respect of grounds 1 to 9 hereinabove, on the ground that the assessee has furnished inaccurate particulars of income, ignoring the decision of the Hon'ble Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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