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TMI Blog2015 (10) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of income on 01-11-2005 declaring total income of Rs. 74,65,22,264/-. The return was processed U/s. 143(1) of the Income Tax Act [Act] on 31-03-2006. Subsequently, the case was selected for scrutiny and notice U/s. 143(2) was issued to assessee-company on 18-07-2006. Meanwhile, assessee filed revised return of income on 31-03-2007 declaring an income of Rs. 74,68,47,235/-. Following scrutiny, the Assessing Officer (AO) has disallowed a sum of Rs. 25,65,000/- claimed towards contribution to superannuation fund for specified Directors, and a sum of Rs. 64,78,039/- claimed towards Employees Stock Option (ESOP) Scheme. In claiming deduction U/s. 10B of the Act in respect of its EOU unit at Pashamylaram, assessee has included an amount of Rs. 97,03,57,916/- shown as 'infringement income' in the 'export turnover'. Since assessee has not made any export of goods for the same, and the said amount has been received from another concern following some patent dispute, the AO held that the same cannot be considered as 'export turnover' and, thus, excluded the said amount for computing 'export turnover' for the purpose of deduction U/s. 10B. During the previous year, assessee has incurred co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and Loss account for the financial year 2007-2008 as income from settlement of patent infringement income received from Les Laboratories Servier, France in a suit relating to patent of "Perindopril" being manufactured by the group company of the assessee. It was the contention that this receipt is part of export turnover and is eligible for appropriate deduction u/s 10B. AO excluded the same from export turnover while calculating the deductions. Ld CIT(A) vide the detailed discussion in Para nos. 6.1 to 6.5 approved the action of AO. Hence the ground. 6.1 Before us, Learned Counsel fairly admitted that this issue was decided in AY 2008-09 against assessee. ITAT in ITA No. 66/Hyd/2013 dt 10-01-2014 has held as under: "15. We have considered the issue and examined the facts on record and the case law relied upon by the assessee. As per the note given as part of report of Transfer Pricing Report for assessment year 2007-2008, it can be observed that receipts are in the nature of one time settlement in consideration for costs and liabilities incurred by Matrix as a consequence of ceasing its programme to develop and manufacture 'Perindopril' made using the process. The entire am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the order, there are two segments of income and different segments of profit source and different comparisons are required. While arriving at segmental profits, only those incomes pertains to that segment and cost pertain to that segment are allocated so as to arrive at the operational profits for comparison purposes. This exercise has nothing to do with the principles laid down under section 37(1) or the principles on patent infringement compensation. The simple issue to be examined is, whether the income accounted by the assessee will become operational income for the purpose of arriving at the operational profit. The Assessing Officer has excluded the same stating that the same is nothing but notional revenue. We agree with the finding of the Assessing Officer as held by the DRP that the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two different segments in which assessee is operating and accordingly we agree with the DRP's stand that this income falls under the category of 'other income' and not operating revenue. Not only that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any law. It was submitted that the indirect manufacturing expenses are distributed over operating divisions on the basis of gross material cost and personal costs are distributed over operating divisions on the basis of staff strength in each operating division and selling administrative cost distributed over operating divisions on the basis of sales affected. It was contended that this allocation is consistent with the assessee's allocation in earlier years and also in tune with the principles laid down under the cost accounting principles as well as guidance note issued by the Ministry of Company Affairs in the area of indirect tax. It was the contention that ignoring the scientific basis adopted by the assessee, the Assessing Officer allocated on the basis of turnover of the sales in each unit thereby, arriving at a different percentage and excess apportionment of common overhead costs. The learned CIT(A) approved the same. Hence the ground. 7.2 Ld counsel fairly admitted that this issue was decided in AY 2008-09 in ITA 66/Hyd/2013 dt. 10-01-14 wherein it was decided as under: 45. We have considered the issue and examined the facts. Even though the issue was pending in earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidance note issued by the Institute of Chartered Accountants of India. The Assessing Officer held that the expenditure is not revenue and is contingent and notional in nature. 8.1 Since this issue is also covered by the decision of Coordinate Bench in assessee's own case in ITA No. 66/Hyd/2013 (AY. 2008-09) dt. 10-01-2014, respectfully following the same, we remit the issue to AO to decide afresh as directed in that year. For the sake of record the decision is as under: "41. The assessee formulated employee stock option plan for granting certain stock options to its employees/Directors. This amount has been charged as a personnel cost and has been accounted in line with the guidance note issued by the Institute of Chartered Accountants of India. The Assessing Officer held that the expenditure is not revenue and is contingent and notional in nature. This issue was considered in earlier year also and the DRP following the same rejected the objection. It was submitted that the issue of ESOP was decided by the Hon'ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon Limited vs. DCIT (LTU) Bangalore vide ITA.368 to 371/Bang/2010 etc., dated 16.07.2013 and accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting of 25% of the option. The liability is incurred at the end of the first year though it is discharged at the end of the fourth year when the options are exercised by the employees. The fact that some options may lapse due to non-exercise / resignation etc does not make the entire liability contingent; (iii) However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme; (iv) There is likely to be a difference in the quantum of discount at the stage of vesting of the stock options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the option depending on the market price of the shares then prevailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lower authorities that since the superannuation is unrecognized, deduction was claimed U/s. 37. Tax was deducted at source and the payment part takes the nature of salary. In this connection, reliance was placed in the case of CIT Vs. Karamchand Premchand [200 ITR 281] (Guj). AO decided that since contribution is covered by Section 36(i)(iv) and rules therein, recourse could not be made to Section 37. 10.1 Ld.CIT(A) held that contribution is made to unapproved superannuation fund. It is created for the exclusive benefit of CMD. Hence, disallowance is sustained by CIT(A) by following the decision of Hon'ble Delhi High Court in the case of Sony India (P) Ltd., Vs. CIT [285 ITR 213]. 10.2 Since this issue is covered in favour of assessee by the decision of Co-ordinate Bench in assessee's own case in ITA No.1616/Hyd/2010 (AY. 2006-07) dt. 16-01-2015, this ground is also allowed. The decision is as under. "35. We have considered the submissions of the parties and perused the orders of departmental authorities as well as other materials on record. From the facts and materials on record, it is evident that the incurring of expenditure has not been doubted or disputed by AO. T ..... 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