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2016 (1) TMI 752 - ITAT MUMBAI

2016 (1) TMI 752 - ITAT MUMBAI - TMI - Disallowance as excess deduction claimed u/s 35(2AB) - Held that:- The brief facts are that deduction u/s 35(2AB) was claimed by the assessee in respect of research and development expenses incurred at New Mangalore and KRS Gardens research centre. Application was made with DSIR dated 28.03.2001. The recognition of the research unit was granted by the DSIR vide its letter dated 03.07.2002 for New Mangalore unit and letter dated 04.12.2002 for KRS Gardens re .....

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he clear position of law and the facts of this case, stand of the Revenue on this issue is rejected. The other issue raised by the AO in disallowing the deduction was that no agreement has been entered as contemplated by section 35(2AB). In this regard also we have noted that the assessee has made requisite compliance as has been required by the prescribed competent authority and compliance of all the procedural requirements has been examined by the competent authority while granting approval. I .....

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has been brought to our notice that during the year, the assessee has acquired shares of this company at book value on account of amalgamation of Bombay Drugs & Pharma Ltd. into itself. It is further brought to our notice that no cash outflow was required for acquiring these shares. Thus, in fact no amount has been invested for making any fresh investment during the year. Thus, the facts remain identical to the assessment year 2001-02, and therefore, the benefit of decision taken by the Tribuna .....

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ssessee's own case for A.Y. 2001-02, wherein Hon'ble Tribunal has allowed relief to the assessee relying upon the judgment of in the case of Alom Extrusions Ltd. [2009 (11) TMI 27 - SUPREME COURT ] and Vinay Cement Ltd. [2007 (3) TMI 346 - Supreme Court of India ] - Decided in favour of assessee

Computation of deduction u/s 80IB - CIT(A) in directing the AO to reduce 30% of the export profits of unit eligible for deduction u/s 80IB before claiming amount of deduction u/s 80HHC - Held .....

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puting profits from trading exports u/s 80HHC rejected - Held that:- This ground is also covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case of Hero Exports v. CIT [2007 (11) TMI 13 - Supreme Court of India ]. In this case it has been held that the principle of attribution is applicable to cases falling u/s 80HHC(3)(b) and therefore, part of indirect cost has to be apportioned to expenses incurred for earning export incentives. 10% of total income has been .....

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o re-adjudicate the same after giving adequate opportunity hearing to the assessee.- Decided in favour of assessee for statistical purposes.

Scrap sales - treated as part of total turnover for the purpose of claiming deduction u/s 80HHC - Held that:- Hon'ble Supreme Court has decided this issue in favour of the assessee in CIT vs. Punjab Stainless Steel Industries (2014 (5) TMI 238 - SUPREME COURT) wherein it has been clearly held that sale proceeds generated from sale of scrap would .....

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claim u/s 57 of the Act, therefore, we uphold the order of Ld. CIT(A) on this ground - Decided in favour of assessee

Netting off of interest receipts against interest payment and apply the explanation (baa) of section 80HHC only in respect of net amount of interest confirmed

Exclusion of Excise Duty from the total turnover for the purpose computation of deduction u/s 80HHC - Held that:- This issue has also been settled by the Hon'ble Supreme Court in the case of CIT v. Lax .....

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as contained in chaper X, dealing with the transfer pricing issues as contained in sections 92-92F and connected rules as contained in Rules 10A,10B,10C,10D and 10E of Income Tax Rules 1962. These sections and rules prescribe various methods that may be employed to establish arm's length price, explaining applicability of each method, the documentation required to be maintained and form of the certificate to be issued by auditors in this regard. These regulations provide that any income arising .....

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revenue for statistical purposes. - ITA No. 1727/Mum/2006, ITA No. 1605/Mum/2006 - Dated:- 16-12-2015 - Amit Shukla, JM And Ashwani Taneja, AM For the Appellant : Shri Nitesh Joshi (AR) For the Respondent : Shri N K Chand (CIT-DR) ORDER Per Ashwani Taneja ( Accountant Member ) These cross appeals have been filed against the order of Ld. Commissioner of Income Tax (Appeals) -X, Mumbai {In short, 'CIT(A)'}, both for the assessment year 2002-03 dated 10.01.2006, passed against the assessmen .....

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by the Assessing Officer as excess deduction claimed u/s 35(2AB) of the IT Act. 3.1. The issue involved here is that in this case deduction was denied by the AO as well as Ld. CIT(A) on the ground that recognition u/s 35(2AB) from the DSIR ( Department of Scientific and Industrial Research) has been received after end of the assessment year, and that agreement as contemplated by section 35(2AB) has not been entered into. 3.2. In this regard, it was submitted by the Ld. Counsel that the position .....

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held in ACIT v. Meco Instruments ITA No.4246/M/2009 dated 20.08.2010 and Sri Biotech Laboratories India Ltd. v. ACIT 36 ITR 88 (Hyd.)(Tri.). 3.3. On the other hand, Ld. CIT-DR has submitted that conditions prescribed in the section, as also referred to by the AO, cannot be termed as merely procedural and therefore, decision relied upon by the Ld. Counsel were distinguishable. It was further submitted that these provisions should be strictly construed, and the purpose cannot be read into the sect .....

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was made with DSIR dated 28.03.2001, copy of which is enclosed at pages 37 to 68 of the paper book. The recognition of the research unit was granted by the DSIR vide its letter dated 03.07.2002 for New Mangalore unit (copy available at P.B. 68) and letter dated 04.12.2002 for KRS Gardens research unit (copy available at page no.69 of the paper book). In view of these facts, it clearly emerges out that assessee had made the applications well in time. Thereafter, granting of approval by the compet .....

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base. In our considered view, under these circumstances, the approval would relate back to the date of the application. In other words, under these circumstances, it can be taken as if the approval was granted on 28.03.2001 i.e. the date of application made by the assessee. Thus, in our view, the grievance raised by the Revenue on this issue is not sustainable. It is further noted by us that this issue is no more res-integra. We can take help of judgment of Hon'ble Delhi High Court in the c .....

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of weighted deduction to the assessee on the ground that recognition and approval was given by the DSIR in February/September 2006, i.e., in the next assessment year and, therefore, the assessee was not entitled to the benefit. The CIT(Appeal) accepted this view of the Assessing Officer and dismissed the appeal, however, the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") has come to the conclusion that the assessee would be entitled to weighted deductions of .....

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hat is to be seen is that the assessee was in indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfils the conditions laid down in the aforesaid provisions. The discussion, which is undertaken by the Gujarat High Court while interpreting the aforesaid provisions, is extracted below: "7. .........The lower authorities are reading more than what is provided by law. A plain and sim .....

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he expenditure so incurred by the assessee. 9. The provisions nowhere suggest or imply that research and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the p .....

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plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by Section 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has provided this provision to encourage the development of the facility by providing dedu .....

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g the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under Section 35(2AB) of the Act by the assessee." 3. We are in full agreement with the aforesaid approach of the Gujarat High Court. No substantial question of law, therefore, arises. The appeal is dismissed." 3.5. It is noted by us that similar view has been taken by Hon'ble Madras High Court in .....

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has been examined by the competent authority while granting approval. In our considered view, we should look substantive compliance of the provisions. Documentation in any particular format and its approval in a particular manner is not object of this action. In any case, all these aspects have been examined by the competent authority while granting approval, thus the AO should not have denied benefit of deduction on his whims and fancies. We find that the assessee has rightly placed reliance on .....

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allowed. 4. Ground No.2: In this ground, the assessee has challenged the action of Ld. CIT(A) in making the disallowance of interest expenditure u/s 14A of the Act. 4.1. During the hearing, it has been submitted by the Ld. Counsel of the assessee that only interest has been disallowed. In A.Y.2001-02 also, similar issue came up before the Hon'ble Tribunal wherein it has been held that no disallowance of interest is called for. It has been further submitted that no fresh investment has been m .....

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817/-. In response, the assessee tried to explain that no borrowed capital was used for purpose of investment in such shares but AO was not satisfied and he disallowed the proportionate interest amounting to ₹ 1,46,87,526/-. 4.3. Being aggrieved, the assessee contested the matter before the Ld. CIT(A), wherein relying upon his earlier order for A.Y. 2001-02, the Ld. CIT(A) confirmed part disallowance of the proportionate interest as per the working given in the order for A.Y.2001-02. 4.4. .....

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ares of domestic company is to the tune of ₹ 2.84 crore. It is palpable that the assessee made investments in shares of Dena Bank in financial year 1996-1997. Investment in Kothari Pioneer Infotech and Kothari Pioneer Blue Chip Fund was made in the previous year ending 31.03.2000. It shows that no fresh investment was made by the assessee during the current year in the shares of these companies. The assessee's annual accounts for the current and also the earlier relevant years are avai .....

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pany for the corresponding date of 31.03.2000 divulges that the assessee earned profit for the said year amounting to ₹ 24.56 crore. The amount of depreciation itself for that year stands at ₹ 6.07 crore which is a non-cash item. When we consider the magnitude of profit with the company and the investments made in these shares of Kothari group, it can be easily noticed that the profit for the relevant year itself was much more than the amount of investment. Coming to the investments .....

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estments were made from interest free funds. While reaching this conclusion the Hon'ble jurisdictional High Court considered the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT [(1997) 224 ITR 627 (SC)] In view of the aforesaid precedent of the Hon'ble jurisdictional High Court, it is apparent that no interest bearing funds can be said to have been deployed by the assessee for the purposes of making investment in the shares of these t .....

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e learned CIT(A) was not justified in sustaining the disallowance at ₹ 17.65 lakh u/s 14A in respect of the investments made by the assessee in the shares of three domestic companies. The ground raised by the assessee is allowed and that of the Revenue is dismissed." From the above, it is noted that it has been held by the Hon'ble Tribunal that the investment has been made by the assessee out of his own funds and not out of borrowed funds. 4.5. It has been submitted that in this y .....

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his company at book value on account of amalgamation of Bombay Drugs & Pharma Ltd. into itself. It is further brought to our notice that no cash outflow was required for acquiring these shares. Thus, in fact no amount has been invested for making any fresh investment during the year. Thus, the facts remain identical to the assessment year 2001-02, and therefore, the benefit of decision taken by the Tribunal in aforesaid year shall also be available in the impugned year. Therefore, respectful .....

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.10.2002 and the delay in making contribution beyond grace period ranges from 1 to 9 days, and the entire payment has been made before 31.10.2002. These details have been given at page no.15 and 16 of the assessment order. It is further submitted that similar issue came up before the Tribunal in A.Y. 2001-02, wherein disallowance has been deleted. 5.1. On the other hand, Ld. CIT-DR has relied upon the judgment in the case of Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100 (Guj .....

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rival submissions and perusing the relevant material on record we find that the Hon'ble Supreme Court in the case of CIT v. Alom Extrusions Ltd. [(2009) 319 ITR 306 (SC)] has held that the amendment to first proviso and the omission of the second proviso to section 43B by the Finance Act, 2003 is retrospective. In that view of the matter any amount referred to in section 43B, being the sum payable by the employer shall be allowed as deduction if it is paid before the due date of filing of t .....

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n, cannot be disallowed u/s 43B. In view of the above discussion, the grievance of the assessee is accepted and objection of the Revenue is overruled." 5.3. It is noted from the above, the Tribunal has relied upon the judgment of Hon'ble Supreme Court in the case of Alom Extrusions Ltd. and Vinay Cement Ltd. for allowing relief to the assessee. Respectfully following these judgments and the judgments of Tribunal in assessee's own case, we delete the disallowance made in this regard. .....

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ourt in case of Associated Capsules Pvt. Ltd. vs. DCIT 332 ITR 42, has held that no part of the profit eligible for deduction u/s 80-IB is to be reduced while computing the profits eligible for deduction u/s.80HHC. On the other hand, Ld. CIT-DR has relied upon the judgments which are against the assessee, as have been mentioned in para 19 of the judgment of Associated Capsules Pvt. Ltd., (supra). 6.2. We have gone through the submissions made before us by both the sides as well as the judgment o .....

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missions and perused the relevant material on record we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. v. DCIT & Anr. 332 ITR 42 (Bom) in which it has been held that restriction u/s 80-IA(9) is not applicable at the stage of computing deduction u/s 80HHC but only at the stage of allowing deduction u/s 80HHC. In view of the above judgment of the Hon'ble High Court, it becomes app .....

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Ground No.5: In this ground, the assessee has challenged the action of Ld. CIT(A) in rejecting the prayer of the assessee for reduction of indirect costs by 10% of export incentives for the purpose of computing profits from trading exports u/s 80HHC of the Act. 7.1. It is noted by us that similar issue came up before the Tribunal in A.Y.2001-02, wherein the Tribunal has upheld the claim of the assessee by relying upon the decision of Hon'ble Supreme Court in the case of Hero Exports vs CIT 2 .....

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that the principle of attribution is applicable to cases falling u/s 80HHC(3)(b) and therefore, part of indirect cost has to be apportioned to expenses incurred for earning export incentives. 10% of total income has been held as fair estimate in this case. As the view taken by the learned CIT(A) matches with that of the Hon'ble Supreme Court in the aforenoted case, we are of the considered opinion that no interference can be made in the impugned order on this issue." 7.2. Thus, respectf .....

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d by the Ld. Counsel that Ld. CIT(A) has in principle accepted the same, but for this particular amount he denied benefit of the deduction. Working sheet has been filed by him showing that sum of ₹ 2,17,810/- was by mistake got classified under the head miscellaneous income, but actually it is foreign exchange gain. On the other hand, Ld. CIT-DR has submitted that this issue requires examination of facts. 8.2. We have gone through orders of the lower authorities and showing and find that a .....

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he purpose of claiming deduction u/s 80HHC of the Act. 9.1. During the course of hearing it has been submitted by the Ld. Counsel that scrap sales ought to have been reduced from the cost of production and should not have been included in the total turnover for the purpose of computing deduction u/s 80HHC. It has been further stated by him fairly that it was held by the Tribunal in A.Y.2001-02 that scrape sales would form part of total turnover. However, subsequently, Hon'ble Supreme Court i .....

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benefit of deduction u/s 80HHC. 9.2. We have gone through the facts of the case as well as judgment of Hon'ble Supreme Court. It is noted that the Tribunal had decided this issue against the assessee by observing as under: "20. After considering the rival submissions and perusing the relevant material on record we find that the learned CIT(A) sustained the inclusion of 'scrap sale' within the 'total turnover'. The assessee's contention that the amount of realization .....

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nominator of formula for determining the extent of benefit admissible to an assessee u/s 80HHC of the Act. Similar view has been taken by the Mumbai bench of the tribunal in the case of M/s. Albright & Wilson Chemicals India Limited VS. DCIT in ITA No. 4362/m/2003. In our considered opinion the learned CIT(A) was justified in deciding accordingly. This ground of C.O. is not allowed. 9.2. It is brought to our notice that subsequently Hon'ble Supreme Court has decided this issue in favour .....

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the assessee is allowed. ITA No.1605/Mum/2006 (Revenue's Appeal) 11. Ground Nos. 1 & 2: In these grounds, the Revenue has challenged the action of Ld. CIT(A) in directing the AO to allow the interest amounting to ₹ 9,58,28,163/- u/s 57(iii) of the Act. 11.2. In this regard, Ld. Counsel for the assessee has submitted that the assessee company had made investment in its subsidiary companies and therefore, deduction of interest for funds borrowed for making such investment should be .....

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rom the foreign companies would be chargeable to tax under the Act. Therefore, interest on funds used for the purposes of making investment in shares of foreign companies should be allowed as deduction and reliance was placed in this regard on the judgment of Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 (SC). 11.3. On the other hand, Ld. CIT-DR placed reliance on the judgment of Hon'ble Bombay High Court in the case of CIT vs. Amritaben R. Shah reported .....

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essee that investment was made for the purposes of the business of the assessee, and it was made out of capital and free reserves of the assessee, and that part of such investment was made out of exports proceeds kept in EEFC account and hence no disallowance was warranted. But the AO was not satisfied with the submissions of the AO and he disallowed the interest to the tune of ₹ 9,58,28,163/- as per details given in the assessment order in respect of each of the investments. 11.3. Being a .....

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therefore, it could be said that the assessee company had invested into shares of the subsidiaries to increase the business of the assessee company, and therefore, it could be said that funds were used for the purpose of the business. Reliance was placed on various judgments in this regard. It was also alternatively submitted that if the amount is disallowed u/s 36(1)(iii), then appropriate relief should be given u/s 57(iii) of the Act. After considering the detailed submissions of the assessee, .....

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funds flow in its support to show that the appellant company had sufficient interest free funds to invest however at no stage the appellant has refuted the findings of the AO as referred to in para 4 that the appellant had in fact used the borrowed capital for the purpose of investment in such shares of overseas companies. Thus when the AO has categorically found that the amount of borrowed capital was used in such investments which is not refuted by the appellant I am unable to accept the argu .....

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business but for the purpose of investments abroad in shares of subsidiary companies. Further appellant has though claimed that investments in subsidiaries were made to further the business of the appellant company it has not demonstrated by evidence as to how such investments in subsidiaries were furthering the business of the appellant company. Merely because the appellant had made some activities with the subsidiaries would not mean that the investments made in subsidiary had an effect of fu .....

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deduction u/s 57(iii) of the Act and accordingly the AO is directed to allow the expenses u/s 57(iii) of the Act." 11.4. Before us, it has been submitted by the Ld. Counsel that assessee would be satisfied if claim is allowed u/s 57(iii). We find force in the alternative submissions of the Ld. Counsel. Ld. CIT(A) has rightly allowed the claim u/s 57 of the Act, therefore, we uphold the order of Ld. CIT(A) on this ground and therefore, ground nos. 1 & 2 of Revenue's appeal are dismis .....

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ent of employer's contribution towards PF and ESIC was made. It is noted that this issue stands covered with ground no. 3 of assessee's appeal, and therefore, AO is directed to follow our order as given in ground no.3 of assessee's appeal. Thus, ground no. 4 is dismissed. 14. Ground No.5: This ground deals with deduction of profit eligible for deduction u/s.80HHC by 30% of the export profits of unit eligible for deduction u/s 80-IB. It is noted that this issue is connected with groun .....

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est. 15.1. It has been argued by the Ld. Counsel of the assessee that this issue is covered in its favour by the decision given by the Tribunal in assessee's own case for A.Y. 2001-02 following the decision of Hon'ble Supreme Court in Associated Capsules Pvt. Ltd. vs. CIT 343 ITR 89, holding that benefit of the netting off would be available. 15.2. We have gone through the order of earlier year and submissions made before us. This issue came up before Tribunal in A.Y. 2001-02 wherein cla .....

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by the Hon'ble Supreme Court in Associated Capsules Pvt. Ltd. v. CIT [(2012) 343 ITR 89 (SC)] by holding that netting of interest is permissible. The reliance of the ld. DR on the judgment in the case of CIT vs Asian Star Co. Ltd. (2010) 326 ITR 56 (Bom) is misconceived as the same has been reversed by the Hon'ble Supreme Court in the afore-noted case. As such no fault can be found with the impugned order on this score. This ground is not allowed." 15.3. No contrary decision has bee .....

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been brought to our notice that this issue is covered by the order of the Tribunal of assessment year 2001- 02, wherein relying upon the Supreme Court decision in CIT vs. Laxmi Machine Works 290 ITR 667, it has been held that excise duty should be excluded from the total turnover for the purposes of section 80HHC. Relevant observations of the Tribunal's order are reproduced below: "12. Ground no.7 of the Revenue's appeal is against the direction of the learned CIT(A) to exclude the .....

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v. Laxmi Machine Works [(2007) 290 ITR 667 (SC)] holding that the excise duty is not includible in the 'total turnover' in the formula contained in section 80HHC. The impugned order on this issue, being in conformity with the view taken by the Hon'ble Supreme Court, does not warrant any interference. This ground is not allowed." 16.2. No contrary judgment has been placed before us, and therefore, respectfully following judgment of Tribunal and that of Hon'ble Supreme Court, .....

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ee exported pharmaceutical products manufactured by it to its AE i.e. M/s Strides Inc., USA, and compared it with sales made by it to unrelated party i.e. Cellopharm, Brazil, to demonstrate that transactions with AE was at Arm's Length Price. The difference pertaining to profit margin earned form sales made to AE and Cellopharm was explained based on certain factors which were narrated in details in the transfer pricing documentation. However the TPO used the same comparable for making an up .....

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by him that price charged by the assessee company to its AE was reasonable and thus, there was no transfer of profit, and therefore, there was no requirement of upward revision and therefore, addition made by the AO/TPO was deleted. 17.3. Being aggrieved, the Revenue has contested this matter before us. The Ld. CIT-DR has vehemently opposed reasoning given by Ld. CIT(A) for deleting the addition made by the AO. It has been submitted by him that Ld. CIT(A) has not followed the mechanism as has be .....

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s: (i) Aztech Software Technology vs. ACIT (107 ITD 141) (ii) Soni India (P) Ltd. 288 ITR 52 (iii) Coca Cola India Inc. vs. ACIT 309 ITR 194 These judgments were relied by the Ld. CIT-DR in support of the proposition that tax evasion was not required to be proved for invoking provisions of chapter X. If international transactions are there, in view of plain and unambiguous language, ALP has to be determined and that there was no requirement of proving shifting of profits or evasion of tax etc., .....

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zil. Since the product category is different, the transactions and consequently the margins to be earned are not comparable. b. USA was a developed market in so far as nutritional products are concerned with several players. Therefore, it was incumbent on the Assessee to charge Strides Inc. competitive rates. On the other hand, Brazil was a developing market where the Assessee was able to earn comparatively higher margins. c. While the Assessee/ its AE had to establish its presence in the USA an .....

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could be readily marketed/sold to the customer. Price that could be realised for small packs is comparatively higher than price realized for sales made in bulk." 17.5. In addition to the above, it was submitted by the Ld. Counsel that the assessee had urged that TNMM must be regarded as most appropriate method (MAM). But without looking into submissions, the TPO made unreasonable additions. In view of these facts, it was requested that in case, this issue is to be sent back, then it should .....

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er pricing issues as contained in sections 92-92F and connected rules as contained in Rules 10A,10B,10C,10D and 10E of Income Tax Rules 1962. These sections and rules prescribe various methods that may be employed to establish arm's length price, explaining applicability of each method, the documentation required to be maintained and form of the certificate to be issued by auditors in this regard. These regulations provide that any income arising from the international transactions shall be .....

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