Subscription   Feedback   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Articles Highlights TMI Notes SMS News Newsletters Calendar Imp. Links Database Experts Contact us More....
Extracts
Home List
← Previous Next →

Matrix Laboratories Ltd. Versus Addl. Commissioner of Income Tax

2015 (10) TMI 814 - ITAT HYDERABAD

Deduction U/s. 10B - extra ordinary income - AO only excluded the Sales Tax and Excise Duty for arriving at total turnover for the purpose of computing deduction U/s. 10B - AO also disallowed claim on employee stock options - CIT(A) allowed par relief - CIT(A) confirming the order of AO in excluding patent infringement income of ₹ 97,03,57,916/- received in convertible foreign exchange from the export turnover of the eligible 100% Export Oriented Undertaking for the purpose of computing de .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

not operating revenue. Not only that the income does not pertain to the relevant financial year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of: extraordinary items. It was decided in number of cases by the Tribunal that incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while do .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e where the unit starts production only at the fag end of the year cost of working on that unit throughout the year for establishing / starting production may not result in allocation of actual expenditure if turn over is considered. In view of this, since Assessing Officer has not given any rationale in adopting the turnover as the basis, ignoring the assessee’s method, we are of the opinion that allocation of expenditure as was done by the assessee is more rationale and is in tune with the pri .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nection with an existing liability and therefore to be disallowed for computing the taxable business profits as held by CIT(A) - Held that:- The difference (discount) between the market price of the shares and their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honor its commitment of allowing the vesting 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 / resignati .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n of the Hon’ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (2013 (8) TMI 629 - ITAT BANGALORE ) - Decided in favour of assessee for statistical purposes.

Superannuation contribution in respect of a promoter Managing Director - disallowance of claim as contribution to superannuation fund is covered u/s 36(1)(iv) the same cannot be allowed u/s 37 - Held that:- On going through the facts and materials on record, we are of the view that the expenditure incurred is all .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aiah, AM For the Petitioner : Shri K A Sai Prasad, AR For the Respondent : Shri S V S S Prasad, DR ORDER Per B Ramakotaiah, AM This appeal filed by assessee is against the order of the Commissioner of Income Tax (Appeals)-V, Hyderabad dated 28-11-2008 For the AY. 2005-06. 2. It is noticed from the power of attorney filed by the Counsel that the name of the company has been changed from Matrix Laboratories Limited to Mylan Laboratories Limited. However, neither assessee filed any revised Form 36 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of ₹ 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 ₹ 74,68,47,235/-. Following scrutiny, the Assessing Officer (AO) has disallowed a sum of ₹ 25,65,000/- claimed towards contribution to superannuation fund for specified Direc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 corporate expenditure of ₹ 12,06,85,650/- which is a common expenditure to be allocated to all units. Assessee splitting the said amount under three different heads, had adopted different criteria for apportioning the said amounts under each head. However, the AO held that the entire common expenditure has to be apportioned on the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on U/s. 10B of the act, assessee has excluded Sales Tax, Excise Duty and consideration not received in respect of export from total turnover . However, referring to the provisions of Section 154(11A) of the Act, the AO only excluded the Sales Tax and Excise Duty for arriving at total turnover for the purpose of computing deduction U/s. 10B. He computed the allowable deduction U/s. 10B in respect of both the above EOU units at ₹ 34,17,81,933/- and at ₹ 47,62,16,474/-. AO also disallow .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for Revenue. 5. We have considered the rival contentions and perused the material on record. The Ground-wise findings are as under: Ground No.1. The Commissioner (Appeals) erred in confirming the order of the Assessing Officer in excluding patent infringement income of ₹ 97,03,57,916/- received in convertible foreign exchange from the export turnover of the eligible 100% Export Oriented Undertaking for the purpose of computing deduction under section 10B of the Act. 6. Facts leading to the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ame 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 Tran .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ar is only a notional deferred income whereas the actual income was received much earlier. As can be seen from the facts on record, the corresponding expenditure pertaining to development of Perindopril was spent much earlier i.e., much prior to assessment year 2005-2006. Therefore, there is no corresponding expenditure in the relevant assessment year. Even if there are costs/ liabilities for developing the product on which the assessee received patent infringement compensation, the costs and li .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y of amount under section 37(1) of the Act and the ITAT order was accordingly confirmed by the Hon ble Delhi High Court. But as seen from the judgment, the issue is not with reference to the Transfer Pricing adjustments but with reference to the claim of amount paid towards patent infringement as revenue expenditure, where the revenue treated it as capital expenditure. In that context, the decision was given which allowed the amount as revenue in nature. The dispute before us is not with referen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

While arriving at the profits of an organization, the operating profits over the operating cost is considered as a basic principle to arrive at operating profits in an assessee s case. As discussed in the later part of 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 operat .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 the income does not pertain to the relevant financial year nor the costs are incurred i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

P that this income from settlement of patent infringement cannot be considered as operational income while working out the segmental profits or as total profits of the assessee for the purpose of comparison. At best, it can be considered as another segment of income for which no expenditure was charged, but the same cannot be included in either of the segmental operations of the assessee. This ground is accordingly rejected. 6.2 Even though the issue was decided in the context of Transfer pricin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t to the total turnover of the company and in this manner reducing the eligible profits under Sec. 10B of the Act, of Unit 3.2 by ₹ 36,33,275/- and of Unit 7 by ₹ 17,20,761/-. 7. This ground is on the quantification of amount eligible for deduction under section 10B and is linked to subsequent proceedings u/ 263 by CIT where eligibility itself was disputed and the matter is subjudice. However, while quantifying the amount the Assessing Officer allocated the corporate over-heads at an .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ing in earlier year, we are of the opinion that issue can be decided independently in this year. After considering the facts as stated in the objections before the DRP and also before us, we are of the opinion that assessee has allocated the corporate overheads on a rational basis based on the material cost of purchase and number of people worked for the unit and also on the basis of head account which is reasonable. Adopting sales turnover as the basis may result in skewed allocation. For examp .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n may not result in allocation of actual expenditure if turn over is considered. In view of this, since Assessing Officer has not given any rationale in adopting the turnover as the basis, ignoring the assessee s method, we are of the opinion that allocation of expenditure as was done by the assessee is more rationale and is in tune with the principles laid down by the Institute of Cost Accountants and also for the purpose of Company Law. Therefore, considering the detailed objections raised by .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

39/- being the amount debited towards Employee Stock Option Plan is not an expenditure incurred in connection with an existing liability and therefore to be disallowed for computing the taxable business profits. 8. 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 Asses .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ployees/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 ca .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made if the market price is different at the time of exercise of the option. In that case also assessee framed an Employee Stock Option Plan (ESOP) pursuant to which it granted options to its employees to subscribe for shares at the face value of ₹ 10. As the market price of each share was ₹ 919, the assessee claimed that it had given a discount o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y on the part of the company to honor its commitment of allowing the vesting 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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-tax Act. (v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal installments on a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ch in the above referred case, after giving an opportunity to assessee. Ground is allowed for statistical purposes. Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (supra). Ground No. 13 is allowed for statistical purposes". 8.2 We order accordingly. Ground is allowed for statistical purposes. Ground No. 4. The Comm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nowledge Park (FDF) unit of ₹ 2,48,40,504/-. 9. Since relief was already granted to assessee by order U/s. 154 dt. 13-03-2009, the above two grounds are not pressed. Ground No. 6. The Commissioner (Appeals) erred in rejecting that Superannuation contribution of ₹ 25,65,000/- in respect of a promoter Managing Director is deductible under sec. 37 of the Act. Alternatively, the contribution which is treated as part of salary on which tax is paid in the hands of promoter Managing Directo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

what is new what is new
  ↓     bird's eye view     ↓  


|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version