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2016 (5) TMI 157 - ITAT DELHI

2016 (5) TMI 157 - ITAT DELHI - TMI - Transfer pricing adjustment - Held that:- Appeal is allowed with a direction that overseas associated enterprises are accepted as ‘tested party’ being the least complex of the transacting entity for the year for comparability analysis of international Transactions of the assessee- appellant. As we have already decided the first step of comparability analysis in ground no 2.2 of the appeal we set aside othergrounds no. 2 to 7 except 2.2 to the file of TPO to .....

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ompensation debited to the profit and loss account pursuant to company’s Employees’Stock Option Scheme - Held that:- The issue is now squarely covered in favour of the assesse by the decision of Honourable Madras high court in CIT Vs. PVP Ventures (2012 (7) TMI 696 - MADRAS HIGH COURT ) ,where in it is held that amount of difference between the market value of the shares issue under ESOP allotted to the employees debited to the profit and loss account in accordance to SEBI guidelines is an ascer .....

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nue is also rejected. - Decided in favour of assessee

Disallowance of deduction of contribution to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation u/s 35/ 37 - Held that:- We reverse the decision of the AO and direct to delete the disallowance of ₹ 47 lacs and ₹ 1250000/- of contribution made by appellant to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation. Furthermore regarding failure to deduct tax on this sum, Ld. DR. could not poi .....

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n be made. - Decided in favour of assessee

Upward adjustment while computing the book profit u/s 115JB - AO has imputed the addition u/s 115JB of the Act as disallowance computed u/s 14A read with Rule 8D of the Income Tax Rule 1962 - Held that:- As we have already deleted the disallowance as per ground No.10 of the appeal wherein we have held that the amount of disallowance cannot be worked out by ld. AO without recording satisfaction on examination of books about the correctness of .....

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/s.14A of the IT Act.

Disallowance of deduction u/s 80IB and 80IC - Held that:- As the deduction with respect to Goa Plant u/s 80IB which is in the 7th year of its claim out of 10 years, has earned eligible profit of ₹ 300682774/- and deduction thereon is claimed at the rate of 30% thereof amounting to ₹ 90204832/- and New Tablet Plant-I u/s 80IC for which this is the 4th year of the claim and assesse has claimed 100% of the eligible profit amounting to ₹ 220579510/- .....

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impugned year. We have carefully considered the argument of the ld. AR and we do not see any dispute on the principle of consistency as it has already been propounded by Hon’ble Supreme Court and various other Hon’ble High Courts. Therefore, following this principal also we are of the view that deduction for the year claimed by the assesse with respect to itsGoa Unit and New Tablet Plant-I cannot be disturbed on the principle of consistency also. Further, this argument cannot be taken shelter r .....

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program to optimize all business processes including Sales, Logistics, Production, Quality, Finance of an entity and SAP is a name of software product and it's a company name too which a leading provider of these solutions, it is rather incorrect to say that separate books of accounts are not maintained by the assessee. Evidence led before ld. AO in the form of profit and loss accounts, before ld. DRP in the form of the profit and loss account and complete balance sheets of the undertaking, befo .....

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king.

Coming to the computation of the eligible income of the assessee for all the eligible units, Ld. AO could not point out any error except dealt with by us which are not on the issue of facts of the case but all of them are on legal grounds, which we have answered in preceding paragraphs of this order. In view of claim of the assessee supported by the audited certificate as provide u/s 80 IA (7) of the act read with rule 18 BBB and supported by the profit and loss account and bala .....

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ng with the old units i.e. Goa Plant and new tablet plant –I of the assessee along with the new tablet plant No –II and III and new SCG plant deduction u/s 80 IB and 80 IC is allowable as computed by the assessee.

Non adjudicating the claim of deduction u/s 35(2AB) of the Act on the cost of the assets provided to the employees working in approved R&D facilities and engaged in research and development activities - Held that:- We have carefully considered the rival contentions and we ar .....

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e ITAT in case of assesse for earlier years same may be allowed.

Disallowance of demand raised under the Drug Price Control Order, 1979 - Held that:- Respectfully following the decision of Honourable Mumbai high court IN Commissioner of Income-tax v. Geoffrey Manners & Co. Ltd [2014 (6) TMI 958 - BOMBAY HIGH COURT] we are of the view that claim of the assessee on account of amount payable under Drug price Control Equalization is prima facie allowable. Further, we also agree with the a .....

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commercial borrowing, hedging contract - Held that:- We set aside this ground of appeal to the file of AO to verify the amount of expenditure incurred by the assesse on account of fluctuation of foreign exchange; and if they are on capital account related to acquisition of asset then to grant depreciation thereon in accordance with the provisions of law. In case if this expenditure is found to be of revenue,nature then allows the same u/s 37(1) of the Act.

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the result, we direct the AO to reduce the book profit u/s 115JB of the Act by the amount of reversal of the provision of ₹ 98.53 lacs, which was out of provision made of ₹ 23.9 crores added to the book profit in AY 2007-08. - ITA No. 196/Del/2013 - Dated:- 25-4-2016 - SH. I. C. SUDHIR JUDICIAL MEMBER AND SH. PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri Ajay Vohra, Sr. Adv. with Sh. Rohit Jain, Adv.and Ms. Deepanvee Rao,Adv. on corporate tax issues For The Revenue : .....

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eferred to in short as DRP ) -II, New Delhi dated 29 September, 2012 raising following grounds of appeal : That on the facts and circumstances of the case, and in law, the Assessment Order dated 16.11.2012 passed under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (The Act ) in pursuance to the directions issued by the Learned Dispute Resolution Panel ( Ld. DRP ) is illegal and bad in law. 1. That the Ld. DRP erred on facts and in law in confirming the additions/ disallowances proposed .....

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ant s international related party transactions do not satisfy the arm s length principle as envisaged under the Act and in doing so the Ld. DRP has grossly erred in agreeing with the Ld. Transfer Pricing Officer s ( TPO ) action of: 2.1 disregarding the arm s length price ( ALP ) and the methodical benchmarking process carried out by the appellant in the Transfer Pricing ( TP ) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ( Ru .....

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arable companies selected by the appellant. 2.5 not taking into cognizance the arguments put forth by the appellant in support of the fact that financial accounts of the overseas AEs need not be re-casted and ignoring the fact that the financials of the overseas comparables furnished in the TP report have similar period as that of the AEs. 3. That the Ld. AO/DRP erred in rejecting the re-casted financials of the overseas AEs, for the period April 2007 to March 2008 4. That the Ld. AO/DRP erred i .....

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mitted before the Ld. DRP and Ld. TPO in order to meet their requirements; 5.2 disregarding the approach adopted by the appellant of using the multiple year/ prior available year s data in the supplementary economic analysis and holding that current year (i.e. Financial Year 2007-08) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing TP documentation; 5.3 resorting to arbitrary rejection of low profi .....

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in computation of the operating margin of the comparables; 5.7 making TP adjustment on total turnover including domestic sales as well as exports made to non AEs and not restricting the amount of adjustment to international transactions with AEs thereby disregarding judicial pronouncements; 5.8 not appreciating that TP adjustment cannot exceed the total profit made by the overseas AEs from the international transactions entered into with the appellant company. 6. On the facts and in the circumst .....

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g deferred employees compensation debited to the Profit & Loss Account (P&L) pursuant to company s Employees Stock Option Scheme (ESOP). 8.1 That the AO/DRP erred on facts and in law in holding that employees compensation expense claimed by the appellant did not represent a crystallized liability and the claim being without any evidence, random in nature, hence not allowable as deduction. 8.2 That the AO/DRP further erred on facts and in law in holding that since the appellant did not de .....

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y (RCHS) and Ranbaxy Science Foundation (RCF) under the provisions of sections 35/37 of the Act. 9.1 That the AO/DRP erred on facts and in law in holding that the contribution made was not allowable since the recipient did not show the amount as taxable receipts. 9.2 That the AO/DRP further erred on facts and in law in holding that since the appellant did not deduct any tax at source, the amount of contribution claimed was disallowable under section 40(a) (ia) of the Act. 10. That the AO/DRP err .....

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ve expenditure suo-moto disallowed by the appellant was actually incurred in relation to the exempt income; (b) Preconditions for applying Rule 8D as prescribed in sub-sections (2) &(3) of section 14A of the Act were not satisfied. 10.2 That the AO/ DRP erred on facts and in law in not appreciating that there was no nexus between any interest expenditure incurred by the appellant and the exempt income and consequently, no part of interest expenditure was, in any case, disallowable under sect .....

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nly been made out of expenditure actually debited to the audited accounts; (b) the method/ formula prescribed in Rule 8D of the Rules was not relevant for computing book profit. 12. That the Ld. AO/DRP erred on facts and in law in disallowing the entire deduction of ₹ 1,36,68,21,506/ crores claimed by the appellant under sections 80-IB and 80-IC of the Act in respect of profits derived by five separate and independent eligible units. 12.1 That the AO/ DRP erred on facts and in law in denyi .....

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ve and robust accounting system/ software. 12.3 That the AO/DRP has grossly erred in holding that the Appellant has not furnished separate report in respect of units / undertakings in the Form No.l0CCB without verifying the fact that the same were submitted during the assessment proceedings. 12.4 That the AO/ DRP exceeded jurisdiction in holding that the appellant was not eligible to claim deduction under sections 80IB & 80IC of the Act for the year under consideration, without appreciating .....

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f the Act since there were no eligible profits once: (a) other incomes are excluded from the gross business income of the appellant; (b) profit of selling and distribution function network and other profit centers, constituting independent/ separate activity, are excluded; (c) Profits of the eligible units are computed after attributing relevant expenses and after considering arm s length results. 12.7 That the AO/ DRP erred on facts and in law in alleging that the appellant violated the provisi .....

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the cost of assets provided to the employees working in approved Research & Development (R&D) facilities and engaged in execution of R&D activities. 14. That the AO/DRP erred on facts and in law in not adjudicating on the claim of deduction of ₹ 2,23,06,073, being the demand raised under the Drugs (Price Control) Order, 1979. 15. That the AO/DRP erred on facts and in law in not adjudicating on the adjustment of exchange fluctuations on External Commercial Borrowings, Hedging co .....

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e Ld. AO/DRP have erred in making arbitrary/ frivolous statements based on conjectures/ surmises and unsound presumptions, which are not in accordance with facts of the case. 19. That the above grounds of objection are independent of, and without prejudice to one another. 02. The assesse is a public limited company engaged in the business of manufacturing and sale of pharmaceutical products. In consonance with its business, assesse carries on research and development activities for development o .....

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#8377; 7623353938/- u/s 115JB of the Income tax Act. Assesse filed audit report in form NO. 3CEB u/s 92E and in Form no 10 CCB of the income tax act on 30 September 2008. Further the return was revised on 25.03.2010 wherein book profit u/s 115JB was shown at ₹ 7637048100/- and regular income was shown at ₹ 1968846227/-. As the book profit tax was more than the regular income tax hence, return of income was taken at book profit income as per section 115JB of the Act. 04. Assesse has e .....

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ed Enterprises ( hereinafter referred to in short as AE ). Based on the report of ld. TPO, ld. AO passed draft assessment order u/s 144C rws. 143(3) on 29.12.2011 at an income of ₹ 5813340115/- and computed book profit u/s 115JB of the Act at ₹ 7720967422/-. Against this assesse filed objections before the Learned Dispute Resolution panel that passed its direction on 29.09.2012. Based on those directions, ld. AO passed final assessment order u/s 143(3) r.ws 144C on 16.11.2012. Assess .....

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t the order is passed without judiciously considering factual and legal objections to draft assessment order by ld. DRP. Assessee further mentioned that ld. DRP has erred in not deleting/ adjudicating/ directing on various addition and disallowances, which are squarely covered in favour of assesse by appellate orders for earlier years in assessee s own case. This ground is general in nature and as against each addition/disallowances separate grounds are raised, therefore, this ground is not deal .....

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book of various decisions relied upon. Ld., CIT DR Shri Amrendra Kumar, also submitted extensively relying about ld. TPO, and Ld. DRP. We have perused their arguments and written submissions carefully. 08. Ground No.2 to 7 of the appeal are related to addition of ₹ 238,16,00,000/- with respect to determination of ALP of International transactions of the assesse with its associated enterprises holding that same do not satisfy the Arm s length principal as per transfer pricing regulations. .....

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pment, manufacturing, quality control process, obtaining regulatory approvals etc. It also has substantial tangible assets and intangibles. It has wholly owned subsidiaries, joint ventures and representative liaison offices in several countries. Regarding its international transactions with AEs who purchases API, raw material, formulations from the appellant and sales them to customers in overseas markets. The Associates Enterprises are mainly engaged in selling, distribution activities except f .....

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Purchase of dosage formulations 35214894 TNMM 5. Allocation of SAP licensed and maintenance charges 13564066 Comparable uncontrolled price (CUP) method 6. Market research and support services availed 863649036 TNMM 7. Provision of technical services 76325310 TNMM 8. Technical services availed 59740808 TNMM 9. Royalties and technical fees received 559814477 TNMM 10. Contract manufacturing services availed 108636205 TNMM 11. According to the Transfer pricing Study Report (hereinafter referred to .....

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ning any intangible property or unique asset and therefore these AEs have been selected as the tested party for the purpose of economic analysis. On these premises, TP study was carried out and it was submitted that the transaction of associated enterprises are at Arm s length. 12. Ld. TPO rejected the selection of the foreign AEs as tested party holding that there is a geographical difference between the comparables submitted by the assesse with the foreign AEs and assesse has compared the AEs .....

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n assessee s own case wherein the ITAT has rejected foreign tested parties because of single set of comparables for benchmarking international transactions entered in to with AEs across the globe were used.On this issue the ld. TPO vide order sheet entry dated 14.03.2011 asked the assesse to furnish separate TP study report taking Indian entity ( i.e. assessee) as tested party which was submitted on 11.05.2011 and further a show-cause notice was also issued on 03rd October 2011 on this issue whi .....

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case of the assessee as tested party as well as the comparable. After that the ld. TPO selected five final comparable whose average PLI of OP/OE was 20.41% and after granting R&D adjustment of 0.5% computed the Arm s length prices of International transactions at ₹ 4450.75 crores whereas price charged by the assesse is ₹ 4212.59 crores and thereby resulting in a difference ₹ 238.16 crores which was proposed to be added to the income of the assessee. Against this assesse pr .....

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Rahul Mitra , CA, ld. AR submitted that ground No.2.2 of the appeal is against not accepting overseas associated enterprises as the tested partythough same being the least complex entities of the transacting parties. He submitted that these groundsmight first be heard on grounds of TP adjustment. He submitted a written synopsis and for which he referred to page no.3 of that synopsis regarding selection of tested parties. He submitted that ld. TPO has rejected the contention of the assesse for t .....

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sufficient financial data, which are reliable and accurate as required under the Income tax rules, is not available for all the comparables. (iv) Region-wise benchmarking has been carried out instead of the country wise benchmarking of the margins of assessee s AEs located in 28 countries, which is not reliable since the economic conditions of two countries might not be the same even within the same continent selected. (v) Appropriate comparables for all overseas AEs are not available and there .....

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with Central Board of Direct Taxes ( CBDT ), Ministry of Finance, Government of India in respect of AY 2014-15. In the APA, based on the functions, asset and risk ( FAR ) analysis of the Appellant and the AEs, it has been concluded that assessee is an entrepreneur manufacturer and the AEs are functioning as a distributor / secondary manufacturer. Based on the same, the CBDT has approved that for the purpose of transfer pricing analysis, AEs should be selected as the tested party with TNMM as th .....

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AEs adopted as the tested party in the Appellant s own case for AY 2014-15, the same treatment shall be given to the International transactions, which are also same in this year i.e. in AY 2008-09. Thereafter he referred to the various clauses and conditions of APA. (b) He further submitted that the assesse is performing complex functions owning valuable intangible and bearing significant risk compared to their AEs. For support , he referred to the revised TP guidelines of July 22, 2010 and spec .....

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ested party is upper most steps in the process suggested by OECD in transfer pricing comparability analysis and therefore it is first step. Therefore, selection of tested party is to be made based on the above-referredguidelines other it may give erroneous results. (f) He submitted that this view has been affirmed in decision of Development consultants Pvt. Ltd. Vs. DCIT, 115 TTJ 557 and General Motors India Pvt. Ltd. Vs. DCIT (ITA No.3096 and 3308 of ITAT Ahmedabad. He relied on decision of Mas .....

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le with respect to various AEs keeping in view the functional and geographical similarity. Therefore, he submitted that order of ITAT was rendered because of lacuna in TP documentation that is not the case in the present year. Therefore, to the facts of the case of this year above judgment should not be applied approving assessee as tested party. However, the principle of selection of tested party is to be followed. (h) He further submitted that present year shows regional benchmarking undertake .....

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ation of margin of comparable companies and submitted that TP adjustment should be restricted to transactions with AE and not on overall turnover of the company. (k) He further objected that addition could not exceed the total profit made by the overseas AES on sale of products of assesse. (l) He also objected to several quantitative filters applied by ld. TPO. In the end, he contended that the order of ld. TPO and confirmation by that by Ld. DRP is erroneous. He strongly contended that foreign .....

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e that foreign AE cannot be taken as tested party (b) Regarding claim of the aseesee the APA has been entered in to between the assesse and CBDT, he submitted that it is merely a negotiated agreement and cannot be relied upon for this year. (c) He further submitted that APA cannot be applied retrospectively in the present year as it is beyond the roll back period of APA, if any. He further referred to the APA stating that it is specifically applicable for AY for which it is entered in to . (d) H .....

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s for both the years of assessee and AES are similar. 17. On specific query from the bench, whether the FAR analysis of the year under appeal and FAR analysis for the APA year are similar. It was submitted by ld. AR that they are identical. He drew attention towards the APA as well as the submission dated 11.05.2011, he also referred page no.190 of that submission to show the risk analysis of this year with the risk analysis for the year for APA. He also referred to the TP study report and APA t .....

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uments relied upon before us in the form of two paper book volumes, One supplementary paper book and one decision paper book on transfer pricing issues. 19. Generally, in transfer pricing comparability analysis, the tested party is usually the party participating in a transaction for which profitability most reliably can be ascertained and for which the reliable data of comparables can be found and the tested party will typically be the party with least intangibles. 20. As per section 92C(1) of .....

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which can be of great help. 21. In order to understand the concept of tested party, one need to refer to the transfer pricing legislations of developed countries where the principles of transfer pricing have been in use for a long time and act as a guiding force for all the developing economies. The transfer pricing guidelines issued by the US Internal revenue services under section 482 provide and discuss the concept of transfer pricing. Section 1.482-5 of the US Transfer Pricing Regulations s .....

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nguish it from potential uncontrolled comparables. Thus, in a sense, the tested party would have lesser risk as compared to the other transacting party or the real entrepreneur. 22. As per the OECD Transfer Pricing Guidelines 2010, when applying a cost plus, resale price or transactional net margin method, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party shoul .....

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ssary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the tested party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the .....

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.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rules, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for wh .....

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nly performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to .....

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tions. (c) Availability of Most reliable data of tested party and requirement of minimum adjustments is also one of the most important aspects in selection of tested party. (d) There is no bar against the selection of Tested party either Local party or Foreign party. Neither Income Tax Act and nor any guidelines on Transfer pricing provides so. Therefore selection of tested party is to further the object of comparability analysis by making it less complex and requiring fewer adjustments. (e) The .....

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e the least complex FAR of the party than the volume of comparable data. In this background, we proceed to decide the issue. 26. Appellant has entered into advance pricing agreement under section 92CC of the Act on 07 August 2015 with CBDT for AY 2014-15 . According to Para, 1(F) of that agreement tested party means associated parties as listed in Appendix 1. According to the annexure-1, it has been agreed between the parties that the TNMM with PLI of operating profit margin computed based on au .....

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ccepted of Asia. In case of South Africa, Peru the benchmarking of Europe and in case of Egypt, Brazil and Thailand benchmarking of Asia is accepted. According to Parano.5, it is also emphatically mentioned that foreign AEs are the tested parties. It is also important to notice that how this agreement has been reached between the parties. Page No 500 where in it is held that applicant i.e. appellant is an entrepreneur manufacturer where in the functions performed by it are (a) R & D for both .....

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turally, consequent risks assumed are less. After that at page no 525 and 526 of the paper book where in it is agreed that manner in which segmentation of the AEs would be computed being December/ March year end which would be certified by the independent cost accountants. It is further provided that in case of AES are secondary manufacturers as well as low risk distributors margins would be computed separately. Therefore, APA has been agreed on the whole mechanism of computation of Alp of Inter .....

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inciples laid down by the highest revenue authority should be accepted by revenue at least for the purpose of starting the first step of comparability analysis for this year as the nature of international transactions, FAR of appellant and AEs respectively are similar. The availability of data is also on the similar lines as agreed in APA.Though the critical assumptions referred to a set of taxpayer related facts, it mentions that this APA would not have any effect on other years. May that be th .....

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streamline their transfer pricing compliance efforts to reduce the disadvantage in staking their claim for tax. Higher risk of disputes may be reduced by the advance pricing agreements. On the same intentions and objects, the ld. TPO is also required to compute the ALP of the International transactions of the Assessee for this year. Therefore, the agreement entered into by CBDT with the assesse, which has considered all the aspects of the manner of determination of ALP which are also similar for .....

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rule, the agreement may provide for determining the arm's length price or specify the manner in which arm's length price shall be determined in relation to the international transaction entered into by the person during the rollback year (hereinafter referred to as "rollback provision"). (2) The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely:- (i) the international transaction is same as the international t .....

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r all the rollback years in which the said international transaction has been undertaken by the applicant; and (v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule (5); (3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of an international transaction for a rollback year, if,- (i) the determination of arm's length price of the said international transaction for the said year has been subj .....

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roll back is applied, roll back is allowed to the assessee on certain normal condition of filing return of income, Report of accountant and a request in specified format. Off course, it has also normal revenue safeguarding exclusion clauses of income going below the returned income and where ITAT has passed an order on the subject. Therefore even the rules provide that if the International Transactions are same in the year of APA and in the past year than both the parties, assessee and CBDT may .....

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s are least complex and adequate financial data for comparison on region basis / country basis are available and further the financial transactions are same, we hold that based on APA for A Y 2014-15 the selection of tested party should be taken as Foreign AE for the current year too. 31. On looking at the TP Study report of the assesse placed at page Nos. 409 to 478 of Paper Book Volume-II as well as the order of TPO it is apparent that assesse has also adopted region based analysis and also co .....

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weakness of the TP documentation of the assesse where assesse compared the operating margin of all the overseas AEs with reference to a single set of comparables selected from around the world without any regard to the functional and geographical dissimilarities. In that set of facts, coordinate bench has held that such comparability analysis is not appropriate and therefore in absence of comparable data there was no option but to uphold the appellant as a tested party. Therefore,coordinate ben .....

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verseas AE as the tested party. 33. Ld. AR has cited many decisions, which are on the principle of selection of tested party, which is least complex. We are of the view that there is no dispute on this principle as it is well recognized and well accepted in all those decisions. This too has been held by coordinate bench in the case of the assessee for A.Y. 2004-05. We have perused those decisions and applied the same in reasoning and our findings. For the sake of brevity we refer the decision of .....

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is Tribunal was as to whether a minute examination of functional profile is necessary for the selection of comparables and the answer given was that functional profile must be first examined and after that proceed to select the comparable. In this case, the comparables chosen by the assessee were discussed by the TPO and those were discarded for the basic reason that the companies those quoted by the assessee were dealing in product distribution whereas the TPO was of the view that the AE was no .....

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f functions performed to match the identical situations under which functions have been performed. Then risk profile is also required to be compared. We may like to add that there are so many perspectives which were required to be compared and in this connection the Hon ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables etc. Hence, in the present case, it is necessary to consider an an .....

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ssee stated to be engaged in the business of providing electronic data support service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the purpose of selection of comparables and the answer given was that functional profile must be first examined and after that proceeds to select the comparables. Interestingly, in t .....

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the arm s length price, first it is necessary to select the tested party and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables. We are in agreement with the findings of the earlier Bench (supra) that such a selected party should be least complex and should not be unique. (ii) Development Consultants (P) Ltd v. ACIT - 136 TTJ 129 & followed by Sony India (P) Ltd v. DCIT 114 ITD 448: 315 I .....

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hellip;……………………………………………………………. 2…………………………………………………………………………………… 3……………… .....

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to the assessee for its convenience. Futher, being an entrepreneur company, it is difficult to determine the profits of ATKC with respect to work downloaded to India (as the revenue received for work off-shored to India cannot be separately identified). Further, the revenue generated from the services provided by the assessee would form only a small part of the entire operations. The value of engineering drawing and design services rendered by the assessee to TKC for AY 2002-04 was ₹ 1,58 .....

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f the discussion on tested part earlier, the assessee was selected as the tested party being least complex of the two entities. Hence, the transfer pricing analysis in this case was done from the Indian side, wherein, the margins of the assessee with respect to services provided to TKC were compared internally with services provided to other third parties in foreign market. Taking into account the divergent submissions, the Hon ble Tribunal had recorded its findings that - 33. Based on facts and .....

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ad recorded its findings that - 58. ……………………………………………………………….. The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transf .....

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ested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. In substance, a foreign entity (a foreign AE) could also be taken as a tested party for comparison. 11.2. At this juncture, we would like to refer to the United Nation s Practical Manual on Transfer Pric .....

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oose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the test party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable .....

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s been observed as under: 10.4. Emerging Transfer Pricing Challenges in India 10.4.1. Transfer pricing Regulations in India 10.4.1.1………………………………………………………….. 10.4.1.2…………………………………………………………&hell .....

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ons were furnished before the TPO in the transfer pricing documentation [Source: Pages 113 to 210 of the Transfer Pricing Study]. This contradicts the assertion of the learned DR that the assessee had not furnished any financial information of the comparable companies. 11.2.2. The United Nation s Practical Manual on Transfer Pricing also contradicts the TPO s argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn t fall within hi .....

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e TPO had taken GMDAT as the tested party while making adjustment to transaction relating to payment of royalty by GMI to GMDAT. 11.2.4. Rebutting the Revenue s allegation made during the course of proceedings that the segmental financial statement of GMDAT was not reliable, the assessee reiterates that the segmental data relied upon for benchmarking international transactions relating to import of CKD Kits and components was completely reliable and was based on sound allocation keys. To substan .....

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the automotive segment. 11.2.6. In this connection, we tend to recall the ruling of the Hon ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP & 1. After due consideration of rival submissions, the Hon ble Court had ruled thus - 16…..If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it shoul .....

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chosen to withdraw the objections, preferring any appeal against the impugned order before any forum would be an exercise in futility, as no appeal would be entertained against an order passed on a concession. Thus, the dispute Resolution Panel has virtually closed all doors for the petitioner. In the circumstances, impugned order of the Dispute Resolution Panel suffers from the vide of being contrary to the record as well as non-application of mind, in as much as the petitioner had never sought .....

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echnologies Ltd v. DCIT (OSD) in ITA No.7985/Mum/2010 dated 30.4.2013. (i) In the case of Aurionpro Solutions Ltd (supra), the issue before the Hon ble Bench was that the assessee engaged in the business of software development and web designing services and that the assessee had lent loans to its AEs stationed at USA, Singapore and Bahrain. The assessee had claimed that the said loans as working capital advanced to its 100% subsidiary outside India. When the issue was referred to TPO, the TPO t .....

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essee took up the issue with the Tribunal. The Hon ble Tribunal, after due consideration of the issue in depth and for the reasons recorded therein, directed the AO/TPO to determine the arm s length interest at Libor plus 2% on the monthly closing balance of advances during the FY. We have, with due regards, perused the issue and the findings of the Hon ble Bench in detail. Ironically, the main issue before the Bench was the percentage of the interest to be calculated on the loan advanced by the .....

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by selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon ble Bench had, after having considered rival submissions, recorded its findings, among others, as under: 11.2.2.(On page12) So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit reali .....

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AE at arm s length. The contention of the ld. AR in considering the profit of the foreign AE as profit A for the purposes of comparison with profit or comparables, being profit B , to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of internal transaction u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing l .....

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nals have taken divergent views in respect of selection of tested party . To illustrate, the earlier Bench of this Tribunal in the case of Mastek Limited ITA No.3096/Ahd/2010 (AY- 2006-07) (supra) had stressed that (at the cost of repetition) we are of the view that in order to determine the most appropriate method for determining the arm s length price, first it is necessary to select the tested party and such a selected party should be least complex and should not be unique, so that prima faci .....

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n by the taxpayer with Datacore US is at arm s length for both the assessment years. Thirdly, the Hon ble Delhi Tribunal in the case of Ranbaxy Laboratories Limited (supra) took a stand that If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. Then, the United Nation s Practical Manual on Transfer Pricing for Developing Countrie .....

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llip;. 11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the tested party either from local or foreign party and the United Nation s Practical Manual on transfer pricing for developing countries had observed that It may be the local or the foreign party , we tend to agree with the same. 34. Above decision reproduced by us covers many divergent views of the coordinate benches and after considering them coordinate bench ha .....

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ability analysis in ground no 2.2 of the appeal we set aside othergrounds no. 2 to 7 except 2.2 to the file of TPO to compute ALP of the international transactions accordingly. In the result ground nos.2 to 7 except ground no.2.2 are allowed for statistical purposes. Needless to say that ld. TPO/ AO shall give due weightage to the Advance pricing agreement signed by the assessee with CBDT on other issues also ( other than the issue of selection of tested Party ) for determination of ALP and in c .....

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he orders of lower authorities extensively. We deal with them as under. 38. Now we come to ground no.8 of the appeal, which is against, disallowance of ₹ 10333543/- being deferred employees compensation debited to the profit and loss account pursuant to company sEmployees Stock Option Scheme. 39. The brief facts are that the assesse has claimed deduction of this sum on issuance of options to certain eligible employees to acquire equity shares of the company at price lower than the market v .....

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the mandatory SEBI guidelines, the difference between the fair market value of the shares and the amount receivable from the employee at the time of exercise of option was debited/ charged to the profit and loss account as expenses. Therefore, the appellant claimed a deduction the scheme as amount of deferred compensation. The ld. AO did not allow holding that it is contingent liability. Further it was also stated that it is in the nature of bonus commission etc. and therefore not allowable u/s .....

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ecision Hon ble Special Bench in case of Biocon ltd. 144 ITD 21. It was also contended that now this issue is also squarely covered in favour of the assesse by decision of Hon ble Madras high court in case of CIT Vs. PVP Ventures ltd. 211 Taxman 554. 40. Against this ld. DR submitted that the liability is contingent in nature and also stated that in case of assesse itself in the prior years it has been held against the assesse. He relied on the orders of the AO and DRP. 41. We have carefully con .....

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he case of the assessee in earlier years where this deduction was denied has been considered by the special bench of tribunal in case of BIOCON Limited V DCIT 35 taxmann.com 335 ( SB) as under :- 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd.[2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering "loss" in certain circumstances within the .....

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in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business or profession". In sections 30 to 36 the expression "expenditure incurred", as well as allowance and depreciation, has also been used. For example depreciation and allowances .....

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rm 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Ex consequenti, the alternative argument of the ld. DR that discount on shares is 'loss' and hence can't be covered u/s 37(1), also does not hold water in the light of the above judgment. In view of the above discussion, we, with utmost respect, are unable to concur with the view taken in Ranbaxy Laboratories Ltd. (supra). Further whether the ESOP expenditur .....

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at during the entire vesting period, it is only a contingent liability and no deduction is admissible under the provisions of the Act for a contingent liability. The options so granted may lapse during the vesting period itself by reason of termination of employment or some of the employees may not choose to exercise the option even after rendering the services during the vesting period. It was, therefore, argued that the discount is nothing but a contingent liability during the vesting period n .....

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years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Act, 1872 defines "contingent contract" as "a contract to do or not do something, if some event, collateral to such contract does not happen". We need to determine as to whether the liability arising on the assessee-company for issuing shares at a disco .....

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rvice 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. It is at the end of the first year that the company incurs liability of fulfilling its promise of allowing proportionate discount, which liability would be actually discharged at the end of the fourth year when the options are exercised by the employees. Now the question arises as to whether the liability at the end of each year can be construed a .....

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e Assessing Officer held it to be a contingent liability and hence not a permissible deduction. When the matter finally came up before the Hon'ble Supreme Court, it was held that the provision for meeting the liability for encashment of earned leave by the employee was an admissible deduction. In holding so, the Hon'ble Apex Court observed that : "the law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the l .....

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rged is not certain." From the above enunciation of law by the Hon'ble Supreme Court, it is manifest that a definite business liability arising in an accounting year qualifies for deduction even though the liability may have to be quantified and discharged at a future date. We consider it our earnest duty to mention that the legislature has inserted clause (f) to section 43B by providing that "any sum payable by the assessee as an employer in lieu of any leave at the credit of his .....

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ace in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. 9.3.4 Almost to the similar effect, there is another judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. In that case, the assessee-company was engaged in selling certain products. At the time of sale, the company provided a standard warranty t .....

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e same on the ground that the liability was merely a contingent liability and hence not allowable as deduction u/s 37 of the Act. When the matter finally came up before the Hon'ble Supreme court, it entitled the assessee to deduction on the "accrual" concept by holding that a provision is recognized when : "(a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation : and (c) .....

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he employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. 9.3.6 As regards the contention of the ld. DR about the contingent liability arising on account of the .....

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ut if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liabili .....

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ucted on this payment it is disallowable. No such provision for deduction of tax at sources on this expenditure has been brought to our notice. Therefore we hold that provisions of section 40a(ia) does not apply to payment of salaries for the year under appeal. Hence, this argument of the revenue is also rejected. In the result ground no 8 of the appeal is allowed. 43. Ground no.9 of the appeal is against disallowance of deduction of contribution of ₹ 47 lacs and ₹ 1250,000 made by t .....

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Act . Ld. DRP confirmed the findings of the AO. 44. Before us, it was contested that contributions were made in the course of the business of the appellant and therefore it resulted into advantage on business carried on by the appellant and hence incurred wholly and exclusively for the purpose of the business. It was also stated that this issue is squarely covered in favour of the appellant by the decision of the Tribunal in appellant s own case in ITA 4251 and 3925/Del/2002 for AY 1997-98. It .....

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lowable. 45. Against this, the ld. DR relied on the orders of the AO and ld. DRP. 46. We have carefully considered the rival contentions. In view of the decision of Hon ble Delhi high court in case of assesse for AY 1997-98 order dated 17.03.2012 in ITA no.743/2008 and 20.11.2012 for AY 2002-03 to AY 2005-06, We reverse the decision of the AO and direct to delete the disallowance of ₹ 47 lacs and ₹ 1250000/- of contribution made by appellant to Ranbaxy Community Healthcare Society an .....

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7. Ground no.10 of the appeal is against disallowance of ₹ 74066105/- u/s 14A of the act by applying the formula prescribed under Rule 8D of the Income Tax Rules, 1962. 48. During the year appellant received ₹ 7968/- towards dividend income which is exempt u/s 10 of the Act. The investments on which this dividend income is received were made before many years. In case of investment in Great Eastern Shipping Company Ltd wasamounting to ₹ 34899/- only. Further dividend of ₹ .....

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- from it and made addition of ₹ 74066105/- u/s 14A of the Act. Ld. DRP confirmed the action of the AO. Therefore, assesse is in appeal before us. 49. Before us it was contended that (a) Rule 8D was wrongly computed by Ld. AO considering the entire investment including investment which did not yield any exempt income. He should have only considered the investments, which has yielded the exempt income; if at all disallowance under Rule 8D was to be made. (b) As meager dividend of ₹ 79 .....

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e judicial pronouncement including that of jurisdictional high court. 50. Against this ld. DR submitted that for AY 2008-09 there is no escapement of disallowance according to Rule 8D and therefore he relied on the orders of Ld. AO and ld. DRP. 51. We have carefully considered the rival contentions. In this case assesse himself has disallowed ₹ 3311708/- which itself is far more in excess of exempt income. Honourable Delhi high court in Joint Investments (p) Limited V CIT 59 taxmann.com 29 .....

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ect which is completely unnoticed by the CIT (A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is ₹ 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., ₹ 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted to mean that the entire tax-exempt income is to be disallowed. The window for disallowance is indicate .....

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fered by assesse of ₹ 3311708/- which are also certified by the tax auditor is incorrect. In absence of such satisfaction AO does not have any authority to invoke provisions of Rule 8D. On this count also the addition cannot be upheld. Honourable Delhi high court in case of CIT V TaikishaEngineering Limited in 54 taxmann.com 109 has held as under :- 13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisf .....

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unt of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said A .....

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at the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amoun .....

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bed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. .....

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entioned above that by virtue of Notification No.45 of 2008, dated March 24, 2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the asses see; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not fo .....

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termine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. I .....

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d component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, .....

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disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by .....

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of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression "prescribed" in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not sa .....

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ee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that .....

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ing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before Ap .....

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vidend business (i.e., earning exempt income). It is for exactly such situations that a machinery/method for computing the proportion of expenditure incurred in relation to the dividend business has been provided by way of section 14A(2)/(3) and rule 8D." 17. More important and relevant for us are the observations in Godrej and Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by the Assessing Officer with reference to the accounts under Section 14(2) .....

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s the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity t .....

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so incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)." 18. It is in this context we feel that the findings recorded by the CIT(A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his sa .....

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nce to the accounts . Therefore, in view of above two decisionsof Honourablejurisdictional High court we hold that no such further disallowance over and above what is admitted by the assessee can be made.Hence, ground no.10 of the appeal of the assesse is allowed and disallowance of ₹ 74066105/- u/s 14A of the Act is directed to be deleted. 52. Ground no.11 of the appeal is against making an upward adjustment of ₹ 74066105/- while computing the book profit u/s 115JB of the Act. The f .....

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book profit of the company while working out tax payable in accordance with section 115JB of the Income tax Act. He submitted that this action of the ld. AO is erroneous. He submitted that section 14A of the act applies to Chapter IV of the Income tax Act whereas the computation of book profit is made under ChapterXIIB of the act and therefore no disallowance u/s 14A of the act which is restricted to chapter IV of the act can be made while computing book profit u/s 115JB of the act. He further s .....

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.2015. He further relied on the decision of coordinate bench in Quippo Telecom Infrastructure vs. ACIT in ITA No, 4931/Del/2010. 54. Against this ld., DR relied on the orders of the lower authorities. 55. We have carefully considered the rival contentions. The ld. AO has imputed the addition u/s 115JB of the Act as disallowance computed u/s 14A read with Rule 8D of the Income Tax Rule 1962. As we have already deleted the disallowance as per ground No.10 of the appeal wherein we have held that th .....

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4A applying rule 8D of the Income tax act. As per our considered view, no addition u/s.115JB is warranted for amount of disallowance u/s.14A of the IT Act. Our view is supported by following decisions :- (i) Cadila Healthcare Ltd. v. Addl. CIT [2012] 21 taxmann.com 483 (Ahd. - Trib); (ii) Reliance Industrial Infrastructure Ltd. [IT Appeal Nos. 69 & 70/(Mum) of 2009, dated 5-4-2013]; (iii) Essar Teleholdings Ltd. [IT Appeal No. 3850 (Mum.) of 2010, dated 29-7-2011]; (iv) J.K. Paper Ltd. [IT A .....

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115JB.In view of this we allow ground no.11 of the appeal. 56. Ground no.12 of the appeal is against the disallowing the entire deduction of ₹ 136,68,21,506/- claimed by the assesse u/s 80IB and 80IC of the Act in respect of five separate and independent eligible units. Facts relating to this ground are that In the previous year relevant to the assessment year 2008-09, i.e. the year under consideration, the appellant claimed deduction amounting to ₹ 136.68 crores under section 80IB/I .....

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books of accounts on SAP ERP, which were duly audited and report of the auditor along with the profit and loss account of the units was filed along with the return of income. The net profits of the units were computed by (i) reducing actual direct expenses incurred at respective units; and (ii) allocating and apportioning common expenses debited at head office/research center, based on sales.During the course of the assessment, the ld. AO specifically directed the appellant to justify the claim .....

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.2011 under section 143(3) r.w.s. 144C, inter-alia, denying the claim of deduction under sections 80IB/80IC of the Act. Against the previously mentioned order, the appellant filed objections before the ld. DRP, which upheld the draft order passed by the assessing officer. Accordingly, final assessment order was passed by the assessing officer under section 143(3) r.w.s. 144C of the Act where in claim of deduction amounting to ₹ 136.68 crores under sections 80IB/80IC of the Act on the groun .....

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IB/IC of the Act, were disproportionately high as compared to total business profits of the appellant-company and further that global sales price was adopted for the purpose of claiming higher deduction. Ld. AO further held that appellant did not give the basis of apportionment of common expenses, etc. Ld. DRP agreed with the order of Ld. AO. Therefore, assessee is in appeal before us on this ground. 57. Before us the |Ld. AR specifically contested this disallowance on following grounds:- a) He .....

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ted that the claim of deduction under sections 80IB/ IC of the Act, has been consistently examined and allowed to the appellant on a year-to-year basis. b) Further, he submitted that it is of utmost importance to note that for the assessment years 2001-02 and 2002-03, re-assessment proceedings under section 147 of the Act were initiated in the case of the appellant and one of the reasons for reopening the assessment was for verifying deduction under section 80IB/IC of the Act, especially in cont .....

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s and on being fully satisfied, the deduction was allowed.It is, however, only in the assessment year 2008-09, that the assessing officer, for the first time, denied the claim of deduction made under section 80IB/IC of the Act on the primary ground that the appellant had failed to maintain separate books of accounts in respect of unit(s) for which deduction was claimed. In this regard, hesubmitted that it is a well settled proposition of law that where the Act provides for a deduction which is a .....

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change in the fundamental facts.Reliance, in this regard, is placed on the following observations made in the following decisions: (i) Saurashtra Cement & Chemical Industries v. CIT: 123 ITR 669 (Guj) No doubt, the relief of tax holiday under s. 80J can be withheld or discontinued provided the relief granted in the initial year of assessment is disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the Income-tax Officer cannot examine the quest .....

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ase of Saurashtra Cement v. CIT: 123 ITR 669. Hence, the approach of the Tribunal on all the counts has been perfectly legal. (iii) CIT v Gujarat State Fertilizers Co. Ltd: 247 ITR 690 (Guj.) Having heard learned counsel for the parties and critically examining the relevant provisions contained in section 80J in the light of the decisions cited before us, we are of the considered opinion that, as in the preceding assessment years, the appellant cannot be denied the benefit of deduction at the pr .....

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e previous assessment year, it was not open to disturb the relief for the subsequent years without disturbing the relief granted in the initial year. Our attention is also invited to the judgment of this court in the case of CIT vs. Paul Brothers reported in [1995] 216 ITR 548 where in court was considering the issue for the assessment year 1981-82. This court took a view that for the purpose of Section80-HH or Section80-J, there is no provision for withdrawal of deduction for the subsequent yea .....

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d Director of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and acc .....

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he claim to exemption under section10A of the Act. Therefore, it is not open to the department to deny the benefit of Section10A for subsequent assessment yearsi. e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit. (vi) CIT vs. Escorts Ltd : 338 ITR 435 (vii) CIT vs. Delhi Press Pa .....

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in the first year in which such deduction was/were claimed. The deduction having been admitted in the earlier years, which have now attained finality, it is not, it is submitted, open to the Revenue to disallow the claim of the appellant for deduction under those provisions for the year under consideration without disturbing the claim for earlier years. In this regard, it will be appreciated that the units were set up in earlier years and deduction in respect of profits derived therefrom was, i .....

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iple of consistency. He relied on following decisions for this proposition: (i) CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC) (ii) Radhasoami Satsang v. CIT: 193 ITR 321 (SC) (iii) DIT (E) v. Apparel Export Promotion Council: 244 ITR 734 (Del) (iv) CIT v. Neo Polypack (P) Ltd: 245 ITR 492 (Del.) (v) CIT v. Dalmia Promoters Developers (P) Ltd: 281 ITR 346 (Del.) (vi) DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) (vii) CIT v. P. KhrishnaWarrier: 208 ITR 823 (Ker) (viii) CIT v Haris .....

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rmation has been brought on record for the same d) Referring to one of the reasons for denial of deduction that separate books of account and balance sheet and profit and loss account were allegedly not maintained/ prepared for the eligible units/ undertaking, thereby violating the condition prescribed in section 80IA(5)/(7) of the Act, he submitted that Ld. assessing officer failed to appreciate the case of the appellant that its records were maintained on a business area basis on SAP ERP Syste .....

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uring unit . Each business area is further sub-divided for e.g. the manufacturing business area further comprises of various plants. Each plant is given a separate Plant Code within the business area. In this regard, it may be noted that a plant location may have different production units (referred to as Blocks ), manufacturing different kinds of medicines. The appellant refers to the units, which are eligible to claim deduction under section 80-IB/IC of the Act, as New Industrial Undertaking ( .....

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d on such batch number and plant wise SKU codes. In the SAP ERP System of the appellant, the following codes are assigned to identify each and every transaction: (i) Plant Code is assigned for every Plant within each Business area; (ii) Unique batch number is assigned to each batch of packed form of medicine [i.e., SKU]; (iii) Each and every production order of medicine is assigned separate and identifiable code, based on which the entire expenses incurred to produce the medicine is identifiable .....

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h undertaking of the appellant is treated as independent and separate unit based on the combination of coding hierarchy in the ERP based accounts. An expenditure relating to a unit is recorded in the manner that such expenditure gets captured to the respective unit only, since each and every direct expenditure, at the time of recording is recorded based on the coding hierarchy, which identifies the Business unit for which transactions are being recorded. For example, sale by Unit 1 would be reco .....

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which has not been disputed by the assessing officer. It may be noted that such direct costs in majority of the cases form more than 60% of the total expenses during the year under consideration. (ii) Common Manufacturing costs i.e., cost of common utilities used by manufacturing blocks located at a plant location, which are allocated to each block on the basis of raw material consumption/ value of assets. Such costs includePower, fuel, boiler related expenses, stores and spares, consumables.Pl .....

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the company ld.AR submitted that this basis of computation of profits of the undertaking is clearly disclosed and form part of the audit report under sections 80IB/IC of the Act in Form 10CCB .For this he referred to page no 974 to 1038 of the paperbook where in the relevant balance sheet, profit and loss account and certificate of deduction claimed in attached. He submitted that in the ERP based software of the company , reports and financial statements for each unit can be taken out separatel .....

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of the Act, which is duly supported by certificate of the Chartered Accountant. f) He submitted that ld. AO was swayed by the facts that only common thing in the entire system is that a common ERP based accounting software is installed at the company level. He also took us to production & sales process adopted by the appellant submitted in the form of a flow chart to show that based on the unique product/batch code, the details of all transactions/entries relating to each business area or i .....

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ds common manufacturing/ head office/R&D expenses, he submitted that same are allocated to units consistently followed year to year and accepted by the Revenue from assessment years 2002-03 to 2007-08. g) Regarding observation of ld. AO that allocation of head office expenses and R&D expenses has not been made on a reasonable basis he submitted that in so far as R&D expenses is concerned, the same primarily represents cost related to the development of new medicinal products. It is o .....

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ed in future, would be manufactured by each of the units or any one of them. He submitted that there is nothing to indicate that in the event of the appellant deciding to commercially exploit the benefits of the R & D work, the products would be manufactured by the said units. Therefore, his submission was that the presumption of a nexus between the R & D activities and the units is incorrect. i) Regarding allocation of head office expenses hesubmitted that the same relates to costs that .....

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urther relied on the decision of Honourable Delhi high court in the case of CIT vs. EHPT India Pvt Ltd: 350 ITR 41 (Del) where in allocation of expenses based on head counts andturnover is upheld to stress that there is no bar in law for common expenses to be allocated on a scientific/ rational basis to the eligible unit. j) Therefore,he submitted it from above method of accounting followed by the assessee that itamounts to maintenance of separate books of account for each of the undertakings.He .....

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s only required is that the assessee has to furnish report of a Chartered Accountant in the prescribed Form No.10CCB certifying that deduction has been rightly computed in respect of profit derived from the undertaking.Ld. AR extensively referred to provisions of section 80 IA (7) of the act, Form No 10CCB, and relevant income tax rules and submitted that it law does not prescribe maintenance of separate books of accounts for the claim of these deduction. He further relied on the following decis .....

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s of accounts in the SAP ERP system. Therefore, otherwise it cannot be said that assessee has not maintained separate books of accounts for eligible units. l) With reference to the allegation of the assessing officer that the appellant has adopted global selling price, which included element of profits earned from the selling and distribution activity and hence could not be considered to be at arm s length, Ld. AR referred to the provisions of section 80 IA (8) of the act and submitted that the .....

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cts which are readily saleable in the market and no further processing/packaging is required in such SKU s. The finished pharma products in the form of SKU s manufactured by the NIU s are either sold in the overseas markets or in the domestic markets in India and no transfer of any SKU is undertaken between the units. The products manufactured and meant for export in overseas markets are cleared from NIU s to the company s godown (situated in Village Rahulkhedi, Indore or Okhla, Delhi) vide a St .....

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tion under sections 80IB/IC of the Act) clear the SKU s to the company s godown for final sale to the stockists. The godown only facilitates movement of goods from NIU s for onward sales. Hence, no stock transfer takes place from one unit to the other unit. Further NIU does not recognize any amount as sale in its books of accounts, until the SKU manufactured by the respective NIU is actually sold to the stockists. The NIU books the amount of sale based on price at which SKU has been transferred .....

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what is market value and submitted that the final sale price is the gross income of each unit. He also stressed up on the facts that entire selling and development costs are also allocated to each unit; for that reason, too, adoption of final sale price is inevitable. n) Further, in respect of the Selling & Distribution function of the appellant, it is respectfully submitted that selling & development network (S&D) is an integral part of the appellant-company and works cohesively wi .....

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le controversy has been considered and decided in favour of assessee regarding services given by the entity to the NIUs of selling and distribution to be charged at the market rate for working out legible profit of NIus. o) Further, as far as the computation of deduction based on profits from manufacturing activities in the ratio of turnover of manufacturing units with that of the company, he submitted that the method of computation sought to be applied by the assessing officer has nowhere been .....

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he Act. For this, Ld. AR submitted that during the course of assessment proceedings, in support of its claim of deduction under sections 80-IB/IC of the Act filed prescribed Form 10CCB along with profit & loss account. He agreed that though the appellant had not enclosed the balance sheet in respect of the eligible undertaking along with the prescribed Form 10CCB, but it was duly filed before the Dispute Resolution panel. Further, the profit & loss account was duly filed with the assessi .....

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of income. For the proposition that the filing the report of the chartered accountant is mandatory but filing the same along with the return of income is directory, he relied on following decisions i. CIT vs. Nagpur Hotel Owner s Association: 247 ITR 201 (SC) ii. CIT v. Centimeters Electricals (P.) Ltd.: 317 ITR 249 (Del) iii. CIT v. Axis Computers India P. Ltd.: 178 Taxman 143 (Del) iv. CIT vs. Web Commerce (India) (P.) Ltd.: 178 Taxman 310 (Del) - SLP of revenue dismissed in SLP No. SLP (C) N .....

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285 ITR 260 (Mad.) xiv. Amit vegetable Oil Ltd. v. CIT : 158 Taxman 36 (All) xv. CIT v. Shivanand Electronics: 75 Taxman 93 (Bom) xvi. CIT v. Dr. L.M. Singhvi: 157 Taxman 312 (Raj) xvii. CIT V. Medicaps Ltd.: 323 ITR 554 (MP) xviii. CIT vs. American Data Solutions (P.) Ltd: 223 Taxman 143 (HC) (Kar) xix. CIT vs. Godha Chemicals (P.) Ltd.: 353 ITR 679 (Raj.) (Mag) xx. CIT vs. Gujarat Oil & Allied Services: 201 ITR 325 (Guj) xxi. CIT v. A.N. Arunachalam: 208 ITR 481 (Mad) xxii. CIT v. Shivanan .....

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ld. AO grosslyerred in denying the claim of deduction made under section 80IB/IC of the Act. 59. Countering the claim of the ld. AR, ld. DR submitted before us citing Pg. 974 of the paper book volume IV stating that in AY 2002-03 assesse has not claimed any deduction u/s 80IB of the Act. He further submitted that this is the first year of verification of computation methodically adopted by the assesse so that even if the deduction has not been disturbed in the first year the revenue has full rig .....

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hat declaration in Form No.10CCB shows that the assesse has submitted the balance sheet and profit and loss account;however, there was no such balance sheet andonly profit and loss account was submitted along with audit report. 61. He further submitted that no separate balance sheet was maintained as is evident from page 999 where the assumptions have been noted for the purpose of allocation of various expenditure. Hence, he submitted that no separate books of account are maintained for eligible .....

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he loss and therefore the assesse is not eligible for any deduction, as there is no profit. He further referred to page no.58 of the assessment orders and submitted that there are four reasons given by the AO on that page namely (i) Assesse does not maintain a separate balance sheet and profit and loss account of the undertaking. (ii) Other income not eligible for deduction is more than the gross business income returned by the company therefore there is no profit (iii) The assesse does not reco .....

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ious units and he submitted that deduction u/s 80IC with respect to new tablet plant No.III is the first time claimed during the year amounting to ₹ 523509006/- and therefore this claim has been examined for the first time during the year and hence without considering the other points there is no deduction allowable to the assesse on this sum at least. 65. Based on the above submission it was submitted that the whole issue of claim of the deduction should be set aside to the file of Assess .....

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atter of principle and the method adopted by the assesse for working is clear, accepted and followed consistently there is no need for setting aside the issue. (c) That comparison of gross total income with the income eligible for unit for deduction is erroneous and ld. DR has not pointed out where is the error in the computation of profits of eligible units. He relied on the provisions of section 80 A which speaks about the deduction from gross total income. He also took us to the computation o .....

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hich is at page no.1031 and profit and loss account is also at page no.1032 of the paper book. He submitted that it is prepared on the same basis following the same accounting practices and adopting same methodology therefore though, deduction is claimed for the first year there is no infirmity pointed out by the revenue in the working of deduction. (e) That the four points, which have been stated at page 58 of the order, have already been replied and in rebuttal nothing has been stated by the l .....

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amined, whether such deduction claimed was allowed and reason for variations in the deduction claimed and allowed. Assesse has also submitted the copy of the assessment orders for respective years that have been submitted in supplementary paper book by the assesse. It was further submitted in the chart that AY 2001- 2002 and 2002-03 reassessment proceedings were initiated for verification of allocation of head office and R&D expenses with respect to claim of the assesse u/s 80IB and 8IC and .....

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tion is claim @30% of the eligible profit. New Tablet Plant-I 80IC 31.03.2005 4th 2005-06 Rs.220579510 It is eligible for deduction @100% of profit for the year New Tablet Plant-II 80IC 31.03.2006 3rd 2006-07 Rs.156142930 It is eligible for deduction @100% of profit for the year New SGC plant 80IC 31.03.2007 2nd 2007-08 Rs.376385228 It is eligible for deduction @100% of profit for the year New tablet plant-III 80IC 31.03.2008 1st 2008-09 RS.523509006 It is eligible for deduction @100% of profit .....

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sment proceedings, the assesse submitted copy of audited accounts of New industrial undertaking and submitted the basis for computation of the profit eligible for deduction for these undertakings. During the course of assessment proceedings assesse was specifically asked to explain the reasons and basis for apportionment of 30% R&D expenditure and 75% of the head office expenses to this new undertaking. Assesse explained vide letter 02.12.2008 and after going through the submission made the .....

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for that year in view of the provision of section 80A(2) of the Act as the gross total income of the assesse was negative. 73. In case of New Tablet Plant-III, this is the first year of deduction and assesse has claimed the same in return of income and it is under dispute in this appeal. 74. It is argument of the ld. AR that it is the well settled proposition of law that where the act provides for the deduction for a certain term period the revenue is required to examine the claim of deduction .....

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esse is being verified is not accordance with the previous assessment orders passed by the AO with respect to deduction u/s 80IB with respect to Goa plant and deduction u/s 80IC of the Act for New Tablet Plant-I. On perusal of those orders, it is apparent that these deductions claimed by the assesse in the initial year of this industrial undertaking have been examined in detail andthen allowed by the revenue after making enquiry. In view of this, the argument of the revenue cannot be accepted th .....

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been set up during this year only and therefore AY 2008-09 is the first year of examination of the claim of the assesse by the AO. Before us the Ld. DR has not pointed out any changes in the facts or law relating to those yeas with the facts of this year with respect to deduction claimed by the assessee with respect to Goa plant and New tablet Plant -I.Therefore, deduction related to these plants cannot be questioned in this year afresh without disturbing the deduction in initial year of the cla .....

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g three years. It is contended on behalf of the assessee that it was necessary for the Assessing Officer to be consistent with the assessment for the earlier years. The question as to the qualification of Unit Nos. 2 & 3 as industrial undertakings arose in the earlier years and the Assessing Officer had accepted that Unit Nos.2 & 3 qualified for deduction under Section 80-I of the Act in the earlier years. By virtue of section 80-I(5) of the Act deduction under section 80-I of the Act wa .....

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s also unless there was any material change in the succeeding years. 70. It is well settled law that the principles of res judicata do not apply to income tax proceedings and assessment for each year is an independent proceeding. It is now equally well established that issues that have been settled and accepted over a period of time should not be revisited in subsequent assessment years in absence of any material change which would justify the change in view. 71. The Supreme Court in the case of .....

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but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter- and if there was not change it was in support of the assessee- we do not .....

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1961." 72. The decision of the Supreme Court in the case Radhasoami Satsang (supra) was on the facts where the question as to the entitlement for exemption under Section 4(3)(i) of the Income Tax Act, 1922 had not been granted for the assessment year 1939-40. The assessee had challenged the assessment order which was accepted by the Appellate Assistant Commissioner who upheld the assessee's claim for exemption. This view was consistently followed by the successive Assessing Officers ti .....

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that justified such a change. Similar view has been expressed by this court in the case of Modi Industries Ltd. (supra). In this case, while considering a claim of deduction made by an assessee under section 80J of the Act, this High Court held as under:- "The second question relates to the claim of the assessee for deduction under Section 80J of the Income Tax Act in respect of its new unit namely 10 ton Furnance Division and Steel Unit 'B'. This case pertains to the assessment yea .....

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ssessee for the assessment year 1973-74 was allowed by the Income Tax Appellate Tribunal. The effect thereof was that the assessee was granted the requisite deduction under Section 80J of the Act for the assessment year 1973-74. The Department has sought reference under Section 256(1) of the Act which reference application was also rejected by the Tribunal. Likewise, for the assessment years 1974-75 and 1975-76, the claims of the assessee were allowed. The assessee, once given thededuction under .....

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assessment year 1991-1992. It is relevant to note that assessments in the earlier years i.e. relating to assessment years 1988-89, 1989-1990 and 1990-1991 has not been disturbed by the Assessing Officer and there has been no change that could justify the Assessing officer adopting a different view in the assessment years 1991-92 and thereafter. As stated hereinbefore, in certain cases where the issues involved have attained finality on account of the subject matter of dispute having been finally .....

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time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity...." 75. In the facts of the present case, where although the Assessing officer has allowed the assessee deduction under section 80-I of the Act in the preceding years, one may still have certain reservations as to whether the issue of eligibility of Unit nos. 2 and 3 fulfilling the conditions has been finally settled, since the question has not been a subject m .....

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plants or the ship is first brought into use or the business of the hotel starts functioning or the company commences work by way of repairs to ocean-going vessels or other powered craft. Such deduction is also available for the seven assessment years immediately succeeding the initial assessment year. Surely in cases where an assessee is held to be eligible for deduction in the initial assessment year, the same cannot be denied in the subsequent assessmentyears on the ground of ineligibility s .....

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rrent assessment year without altering or reopening the assessment proceedings in which the eligibility to claim the deduction has been established. 76. In cases where deduction is granted under Section 80-I of the Act, the applicability of the Section is determined in the year in which the new industrial undertaking is established. The qualification as to whether any industrial undertaking fulfills the condition as specified under Section 80-I of the Act has to be determined in the year in whic .....

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round that the industrial undertaking in respect of which deduction is claimed did not fulfill the conditions as specified in Section 80-I(2) of the Act, without undermining the basis on which the deduction was granted to the assessee in the initial assessment year. This in our view would not be permissible unless the past assessments are also disturbed. 77. The Assessing Officers over a period of three years being assessment years 1988-89, 1989-1990 and 1990-1991 have consistently accepted the .....

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l Industries (supra). In that case, the Gujarat High Court held that where relief of a tax holiday had been granted to an assessee in an initial assessment year in which the conditions for grant of tax holiday had to be examined, denial of relief in the subsequent years would not be permissible without disturbing the assessment in the initial assessment year. The relevant extract from the decision of the Gujarat High Court in Saurashtra Cement & Chemical Industries (supra) is quoted below:- .....

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e which could be withdrawn in subsequent years for breach of certain conditions. No doubt, the relief of tax holiday under s. 80J can be withheld or discontinued provided the relief granted in the initial year of assessment is disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the ITO cannot examine the question again and decide to withhold or withdraw the relief which has been already once granted." 79. The Division Bench of the Bombay Hig .....

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e, we hold that as the deduction with respect to Goa Plant u/s 80IB which is in the 7th year of its claim out of 10 years, has earned eligible profit of ₹ 300682774/- and deduction thereon is claimed at the rate of 30% thereof amounting to ₹ 90204832/- and New Tablet Plant-I u/s 80IC for which this is the 4th year of the claim and assesse has claimed 100% of the eligible profit amounting to ₹ 220579510/- as deduction, cannot be disallowed in this year. 76. Coming to the second .....

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not see any dispute on the principle of consistency as it has already been propounded by Hon ble Supreme Court and various other Hon ble High Courts. The latest in point of time is CIT V Excel Industries where honourable Supreme court has held that 28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book .....

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ssment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v.Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this wer .....

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gh it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." 30. Reference was also made to Parashuram Pottery Works Ltd. v. ITO [1977] 106 ITR 1 (SC) and then it was held: "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the .....

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rary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken." 31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot .....

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d New Tablet Plant-III. 78. The third argument advanced by the assesse is that the accounts of the assesse are being maintained on SAP ERP System, which provides separate books of accounts resulting into independent balance sheet and profit and loss account of the eligible unit. For this ld., AR explained in detail how the ERP system works and how it generates individual profit and loss account and balance sheet of the Industrial units. In the present business environment and looking to the natu .....

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nt-I 31.01.2012 Yes 987-999 New Tablet Plant-II 31.01.2012 Yes 1000-1012 New SCG Plant 31.01.2012 Yes 1013-1025 New Tablet Plant-III 31.01.2012 Yes 1026-1038 79. On examination of the above stated balance sheet and profit and loss account of the above industrial undertaking where the claim of the deduction of the assesse is worked out and certified by the Independent accountant is prepared based on similar accounting policies and practices. It is also apparent that the profit and loss and the ba .....

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l undertaking based on sales clocked by the individual units. This practice has been consistently followed by the assesse in past year and the revenue as stated by us earlier with respect to AY 2002-03 onwards, has accepted it. The Assessee has in brief and succinctly has explained the rationale behind allocation of each expenditure to the various units.Regarding R&D expenditure the Assessee has also followed the practice apportioning 30% to the individual undertaking in the ratio of sales. .....

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systems the Assessee can at any moment of time on any day after every transaction can produce the product wise, units wise, geography wise, independent profit and loss account and balance-sheets. Therefore, in our opinion the contention of the ld. AO that common books of account are maintained and not separate books of account is devoid of any merit. As such, Assessee has contended that provision of section 80IB and 80IC does not provide that Assessee should maintain separate books of accounts w .....

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e 39[undertaking] for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form40 duly signed and verified by such accountant. 80. Rule 18BBB of the Income tax rules governing the certificate by an accountant provides as under :- 98[Form of audit report for cl .....

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be in Form No. 10CCB. (2) A separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction under section 80-I or 80-IA or 80-IB1[or 80-IC] and shall be accompanied by the Profit and Loss Account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise were a distinct entity. (3) In the case of an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining an infr .....

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nment or the State Government or the local authority for carrying on the eligible business. This rule also does not provide for maintenance of separate books of accounts .In view of the reading of section 80 IA (7) and Rule 18 BBB, we are of the view that law does not provide that for claiming deduction under those sections there is requirement to maintain separate books of accounts. 81. At this point of time we take note of the decision of Honourable Supreme court in case of M/s Arisudana Spinn .....

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enied that it had undertaken any trading activity during the year in question. On the said sum of ₹ 51,82,666/-, the assessee claimed deduction at the rate of thirty per cent under Section 80IA of the Act amounting to ₹ 15,54,800/-. The Assessing Officer found that the assessee had not maintained a separate trading and profit and loss account for the goods manufactured. In the assessment year in question, it appears that the assessee had sold raw wool, wool waste, textile, and knitti .....

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ndertaking. Consequently, the Assessing Officer worked out, on his own, the manufacturing account, as indicated in his Order, giving a bifurcation in terms of quantity of raw wool produced. On Appeal before honourable court it was held as under :- 4. In our view, the findings given by ITAT and the High Court are findings of fact. In this case, we are not concerned with the interpretation of Section 80IA of the Act. On facts, we find that the assessee ought to have maintained a separate account i .....

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rent that the main purposes of the maintenance of separate account are to deduce correct profit eligible for deduction. Hon Supreme court in above decision has also held in thebackground of the facts that assessee did not produce separate profit and loss account of the eligible undertaking. However, in the case of the assessee such profit and loss account was produced along with the report of the accountant since beginning. Therefore, assessee has maintained separate account of the profit eligib .....

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In view of this, the argument of the revenue that separate books of accounts are required to be maintained with respect to each unit does not have any support of the Income Tax Act or Rules framed thereunder. 82. Nonetheless, assessee has maintained books of accounts of the whole undertaking on SAP ERP systems from which on any day the independent profit and loss account and balance sheet as well as the respective ledgers, cashbook and bankbook and journal of any independent industrial undertaki .....

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system, which provides transaction-by-transaction ledgers, daybooks, cashbooks, and other books such as quantitative details and stock registers. The Ld. AO was of the view that as the books of accounts are maintained for the entity as a whole, it has not maintained separate books of accounts for the eligible industrial undertaking. It will further be appreciated that the primary purpose of maintaining separate books of account in any provision of the Act is only to enable the assessing officer .....

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ss records do not survive and business entity today survives on real time information on each aspect of its business process. In this era when an entity maintains its accounting and business records on Enterprise Resource Planning system, which is a standard procedure or program to optimize all business processes including Sales, Logistics, Production, Quality, Finance of an entity and SAP is a name of software product and it's a company name too which a leading provider of these solutions, .....

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whelming evidence, we reject contention of ld. AO and Ld. DRP that assessee has not maintained separate books of accounts. We hold that assessee has maintainedseparate books of accounts from which correct profit can be deduced at any time of the each of the eligible undertaking.Our view also gets support from the decision of coordinate bench in case of 54 SOT 105 (Hyd) in case of SMR builders where in it is held that:- 37. Section 80IA(7) which is applicable to the provisions of Sec. 80IB requir .....

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expenses are apportioned. The details filed before CIT(A) clearly demonstrate that in the case of the assessee, the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts w .....

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Crs, (ii) export Incentives of ₹ 78.93 crores, (iii) sundries and miscellaneous income ₹ 33.74 Cr and Income from trading activity of ₹ 94.25 Crores totaling to ₹ 225.83 Crs. . It was stated that the gross total income of the assessee is ₹ 178.64 Crores and if the above stated income are excluded i.e. of ₹ 225.83 Crores the total income of the assessee will result in to loss and therefore there is no profit in manufacturing activity of the assessee and hence n .....

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hich provides as under :- Deductions to be made in computing total income. 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 48[80U]. (2) The aggregate amount of the deductions49under this Chapter shall not, in any case, exceed the gross total income of the assessee. The only condition that is prescribed u/s 80A of the act is that .....

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able in view of the clear provisionsof section 80 A of the income tax act. 84. Regarding allocation key of sales for allocation of common expense , the R & D expenses primarily represents cost related to the development of new medicinal products. It is only after innovation of the new product that the same is produced. In these circumstances, the appellant, in line with the traditional allocation methodology adopted in the earlier years apportioned 30% of such R&D expenses to the individ .....

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ndertakings based on sales. This method of allocation has been consistently followed by the assessee since commencement, whichis duly certified by the auditors and accepted in the assessments completed in the past. We do not find any irrationality in the al above allocation keys adopted by the assessee firstly and for the reason that it has been accepted by the revenue in past it cannot be disputed now in subsequent years without there being any change in the factsand / or law. Honourable Delhi .....

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a statutory formula for ascertaining what are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. We are not in the present case concerned with sub-section (4). That sub-section will apply when the combined profits - profits of the exempt unit and those of the non-exempt .....

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its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified. 11. In Hukam Chand Mills Ltd. (supra), in the context of apportioning profits accruing to the assessee under the several categories of businesses carried on by him in British India, it was held that the question as to the method of apportionment was essentially one of fact depending upon the circumstances of the case .....

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intaining the accounts on mercantile basis. The discount on the chits, which was actually the profit arising to the assessee, was declared at the end of the chit period, which at times exceed a period of 12 months. This method adopted by the assessee was being accepted by the department for a number of years. However, for the assessment years 1991-92 to 1997-98 the Assessing Officer took the view that the discount on the chits should be assessed every year, taking into account the number of inst .....

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ethod of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the en .....

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ny great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits. On the contrary, as we have already pointed out, distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the present one where the deduction under Section 10A is available over a period of ten years and only in some years the method of apportionment of incom .....

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ccepting the above allocation methodology adopted by the appellant. 85. Coming to the next argument of the revenue that the sales recorded by the independent units are not Arm s length. For this argument of the revenue a deeper examination of sub-section 8 of section 80(IA) of the Act is required which provides for inter unit transfer of goods and services should be at the market value of the goods and services which means the price that such goods or services would ordinary fetchin the open mar .....

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re not attracted. 86. Further,it is submitted by the assessee that various units are manufacturing different products and final products are sold in the openmarket. Sales of each of the unit are accounted in the profit and loss account by the appellant of that unit. It is not pointed out before us that what is the material or services that has not been accounted for by the assseess as sales and itis not at themarket rate and what is the market rate of such product or services sold by those units .....

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charged and reduced from the profit of the industrial undertaking after valuing service of selling and distribution arm of the company at market rate. At present assessee has allocated it at cost. Therefore, ld. AO has invoked provisions of section 80 IA (8) of the act. It is not dispute that that products manufactured by these industrial units are sold by selling and distribution arm of the assessee and the cost incurred is allocated to these respective units on the basis of appropriate alloca .....

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arefully considered the argument of ld. AR and of the revenue on this point as well as the ld. AO and Ld. DRP. We are of the view that this argument is almost similar to the argument raised by the revenue in the case of Cadila Healthcare Ltd vs. ACIT 21 Taxmann.com 483. Coordinate bench has dealt with these arguments from all the angles of the controversy and has held as under :- 9.4 Ld. Counsel has asserted that undisputedly, it was an "inter-division transfer", hence it was expected .....

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was found that the assessee had not apportioned even a penny of the expenses in development and research of new products of Baddi Unit. 9.5 Next, Revenue's Counsel has drawn our attention on the profit & loss account of the eligible Unit, i.e. Baddi Unit, (refer Page No.87 of the paper-book). Ld. DR has said that sales to the tune of ₹ 1,19,13,22,749/- were recorded for the accounting period ended on 31.3.2006. He has pleaded that if the said Unit was to sale its products on stand .....

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n. He has thus pleaded that the profit derived from "marketing function" cannot be dragged to the manufacturing unit for the purpose of claiming deduction u/s.80IC. The Special Provision is confined to certain Undertakings, as defined in the Statute, and such eligible undertakings are entitled for the deduction of the profit of such undertakings only. He has again drawn our attention that the only source of income should be the eligible source of income and not other sources of income, .....

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it 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 .....

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operations, and thirdly to his business of import and export. Profit or loss has to be apportioned between these businesses in a business like manner and according to well established principles or accountancy." Unquote. He has also placed reliance on Liberty India (supra) . 10. We have heard both the side at length. The controversy as raised by the Addl. CIT Mr. Mahesh Kumar, officiating as AO, has serious repercussions on the subject of computation of "eligible profit" while cla .....

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gains". However, the section we have to deal with i.e. Sec. 80 IC revolves around the term 'profits and gains'. As per section 2(13) 'business' includes trade, commerce or manufacture. In auxiliary, as per section 2(24) 'income' includes (i) profits and gains. An 'income' has to have a component of 'profits & gains' but all type of 'profits & gains' may not be an 'income' for tax purpose under the Act. The section in controvers .....

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e 'business' is prescribed in sub-section (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 articl .....

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in 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 price and the cost of bringing the product to market. A "gross profit" is equal to sales revenue minus cost of goods sold or the expenses that can .....

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is production overheads, such as, direct labour cost and inextricably linked expenditure of production. In general, every manufacturing concern has fixed manufacturing capacity. So the objective of such concern ought to be to maximize the profit. Now the problem, as posed, is that let us assume that the said manufacturing unit is producing two products; viz. "A" & "B". For production of "A" product, let us say, there is less working hours, but fetching more val .....

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missible of such profits of a specified Undertaking engaged in manufacturing of certain article or thing. The business of the said enterprise/concern should be manufacturing of article or thing and the profit therefrom is eligible for deduction u/s.80IC if that profit is part and parcel of the gross total income. As noted hereinabove, profit is the difference between the purchase price and the cost of production along with the cost of bringing the product to market. This basic principle of accou .....

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omputation of profit, is always a subject matter of controversy. From the side of the assessee, reliance was placed on Addl. CIT v. Delhi Press Patra Prakashan [2006] 10 SOT 74 (Delhi) (URO). 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 .....

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roceeded to disturb the profit of the Baddi Unit and held that only 6% profit is eligible for deduction u/s.80IC.While doing so, identically, the AO has not pinpointed any defect in the working of the "profit" of the Baddi Unit. In such a situation, we can say that the legal proposition as laid down by Delhi Bench can also be applied in the present appeal as well. 10.4 The AO has also concluded that only the incremental profit, representing the difference between the profits earned ear .....

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In that case, the assessee was a UK based company carrying on marketing and sales activities in India through a subsidiary. The subsidiary was also rendering support services to the assessee, a UK based company. The assessee was carrying out manufacturing operations. It was held that 35% of its profits could be attributed to the marketing activities carried out in India and, therefore, chargeable to tax in India. The facts of that case were altogether different and there was a finding that undis .....

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hat such part of the income as it was reasonably attributable to the operations carried out in India is taxable. The expression "business connection" was also considered and then it was found that it will include a person acting on behalf of a non-resident and carried on certain activities is having business connection. A business connection has to be real and intimate and through which income must accrue or arise whether directly or indirectly to the non-resident. On those facts, sinc .....

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ough 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 m .....

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e has gross profit of 86%, then the net profit was disclosed at 58%. A question thus arises that what beneficial purpose could be served for the reduction of gross profit to a lower percentage of net profit, specially when the allegation of the A.O. was that there was an attempt to declare higher profit of Baddi unit to get more advantage of deduction. On perusal of the P&L account, it is an admitted factual position that the assessee has in fact debited certain expenses which have included .....

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espect of marketing network and brand of the product related expenses. The AO has not complained about the allocation of expenditure as made by the assessee while computing the profit of the Baddi Unit. Once the assessee has itself taken into account the related expenses to arrive at the net profit, then it was not reasonable on the part of the Revenue Department to further reallocate those expenses by curtailing the percentage of eligible profit. 10.6 From the side of the Revenue, ld. Special C .....

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d name of the company. Only 6% was the manufacturing profit, per A.O. It is true that section 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 .....

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he 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 business is the only source of income of the assessee. In this section again, the Statute has used three terms, i.e. "profit", "business" and "income". As narrated he .....

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fit & loss account of Baddi Unit, then it is apparent that the only source of income was the sales of the qualified products. In the said P&L A/c there was no component of any other sources of income except the sale price and otherwise also the assessee has confined the claim only in respect of the eligible profit which was derived from the sales of the pharmaceutical products. This section do not suggest that the eligible profit should be computed first by transferring the product at an .....

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ting unit and that too at arm's length price. From the side of the appellant an argument was raised that what should be the arm's length price in a situation when a product is ultimately to be sold in the open market. Whether the AO is suggesting that an imaginary line be drawn to determine the profit of the Baddi Unit at a particular stage of transfer of products. Definitely a difficulty will arise to arrive at the sale price as suggested by AO on transfer of product from Baddi to head .....

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d 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 .....

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he purposes of the deduction under this section, 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 or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasona .....

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uch goods, then for the purposes of the deduction the profits and gains of such eligible business shall be computed as if the transfer has been made at the market value of such goods as on that date. Though the section has its own importance but the area under which this section operates is that where one eligible business is transferred to any other business. We again want to emphasis that the word used in this section is "business" and not the word "profit". We can hence dr .....

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nd 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. The AO has suggested two things; first that there must be inter-corporate transfer, and second that the transfer should be as per the market price de .....

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ty 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 .....

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f the P&L A/c sale price was credited to computed the profit. There are certain expenditure which are notional expenditure and there are certain expenditure which are self-generated to create the brand value of a product. Naturally, the allocation of notional expenditure particularly in respect of self-generated brand is a matter of hypothesis and not a matter of realty. Logically it is not realistic to set apart a value of a self generated brand which had grown in number of years. 10.10 The .....

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rted in the segmented statement of profit and loss. In an accounting system, an intra-company sale between divisions or units is not regarded as Revenue for the purpose of such financial reporting. As per the Accounting Standards an Enterprise Revenue ignores in house-sales that represent Revenue to one segment and Expense to another. In this connection, the AO has discussed the Hon'ble Supreme Court decision pronounced in the case of Liberty India (supra). The AO wanted to justify his attem .....

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ives. The Court was discussing Chapter VIA 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 " .....

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red 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 final and should not be disputed. However, a judgement is to be correctly interpreted. 10.11 Finally, on the question of segmentation of profit a vehement reliance was placed on an old precedent n .....

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s derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur which are an essential part of their business and that such profit must be excluded from the assessment under EPT Act. It was narrated that in other words, the Act brings within its ambit all income in the case of a person resident in British India which accrues or arises or which is deemed to accrue or arise to him in British India during the accounting year. If S .....

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usiness includes any trade, commerce or manufacture. It has also been said that all businesses, to which the said law applied, carried on by the same person shall be treated as one business for the purpose of the said Act. The question was about the manufacturing activity and it was contended that if a man is a manufacturer as well as a seller of goods, then in his case the term "part of a business" means carrying on all the two activities together and therefore constitute the part of .....

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t 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 profi .....

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ring business of the assessee in Raichur, profits accrue or arise and if so, at what place. One of the Hon'ble Judges has opined that the manufacturing profit arise at the place of manufacture and that the sale profits arise at the place of sale and that the apportionment has to be made between the two, though the place of receipts and realization of the profits is the place where the sales are made. Simultaneously it was also opined that the manufacturing profit could not be said to have ac .....

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d receiving the proceeds of such sales. The essence of its profit-making business is a series of operations as a whole. 10.12 We have carefully perused this decision of the Hon'ble Supreme Court as cited by the Special Counsel Mr. Srivastava. At the outset, we want to place on record that the entire issue before the Hon'ble Supreme Court was in respect of third proviso to section 5 of EPT Act. The said proviso was duly a reproduced in para-40 of the order and for ready reference typed be .....

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uot; The point for consideration was that whether on those facts the third proviso to section 5 could be invoked. The manufacturing activity of making ground-nut oil was carried out at Raichur (Hyderabad) which was treated as a separate business within the meaning of the said proviso and thereupon it was claimed 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 .....

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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 .....

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profits separately." unquote. The Hon'ble Judge was therefore very much concern about the fact that the business should be capable of earning profits separately. Rather, in the subsequent paras it was further made clear that the manufacturing profit could be sub-divided only if there was no insuperable/challenging difficulty in making such apportionment. A possibility was therefore discussed that there could be apportionment of the net profit that accrue to the business of the assessee .....

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mbay will only be the profits which may reasonably be attributed to that part of the operations carried on in Bombay, that is to say, to sale of part of its oil in Bombay. In this context, an observation was made that a trade is completed at a place where a business transaction is closed. Profits of a business are undoubtedly not "received" till the commodity are sold and they are ascertained only when the sale take place. This aspect has not been doubted or challenged even in the said .....

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rue 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. A .....

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e close the controversy we would like to express that the AO's proposition of segmentation of eligible profit of the manufacturing unit was not altogether meaningless. This approach of the AO cannot be brushed aside on the fact of it. But at present, when the method of accounting as applicable under the Statute, do not suggest such segregation or bifurcation, then it is not fair to draw an imaginary line to compute a separate profit of the Baddi Unit. The Baddi Unit has in fact computed its .....

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the legal status is that the Statute has only chosen to give the benefit to "any business of drug manufacturing activity" which is incurring expenditure on research activity is eligible for this prescribed weighted deduction. The segregation as suggested by the AO has first to be brought into the Statute and then to be implemented. Without such law, in our considered opinion, it was not fair as also not justifiable on the part of the AO to disturb the method of accounting of the assess .....

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e controversy in this ground of appeal with respect to applicability of section 80 IA (8) of the act, on marketing and other selling distribution as well as research and development services provided by the undertaking as a whole to the eligible industrial undertaking at the cost or market rate for working out the eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to the decision cited by the Ld. AR. Therefore, we respectfully following the ab .....

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dertaking. It is admitted fact that assessee did not file balance sheet along with Form No.10CCB but has filed profit and loss accompanied with that audit report.Subsequently, before ld. DRP, those were filed and were available with ld. DRP as well as with AO at the time of framing final assessment order. Hence it is contended by the ld. AR that substantial compliances has been made by the assessee by filing the profit and loss account and complete compliance before passing of the final assessme .....

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annot be denied the deduction merely for this reasons. Further, the balance sheet filed later on by the assessee also did not contain any error or any fact, which could have shown that deduction claimed by the assessee, is erroneous. It is also important to note that no adverse remark is made either by the ld. AO or by ld. DRP on the balance sheet of the eligible undertakings though it were available before them for proper verification and examination. Ld. AR of the appellant has submitted a ple .....

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available to the assessee. Recently, we have considered the identical provisions of section 80-IA(7) in the case of CIT v. Contimeters Electricals (P.) Ltd. [IT Appeal No. 1366 of 2008, decided on 2-12-2008] and held that as long as the audit report is filed before the framing of the assessment, the provisions of section 80-IA(7) would be complied with inasmuch as the same are directory and not mandatory. A similar view would have to be taken in the present case also inasmuch as the provisions a .....

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ted before us HonourableDelhi high court has held that even if the audit report is not filed then also the deduction cannot be denied if same is filed before finalization of assessment. Therefore case of the assessee stands on the better footing. No other contrary decision was put before us by revenue. Hence, we do not wish to agree to the contention of the revenue that as the balance sheets were not filed by the assessee of those eligible industrialundertaking whole of the deduction is not allo .....

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t and balance sheets of the assesse, allocation of all the expenses based on the accepted formula which the assessee is applying for last several years and which has also not been disputed by the ld. AO in past years and allocation key of sales of the units is also not disputed, it deserves to be accepted. We are also of the view that allocation of the expenses are on rational basis and accepted by revenue in earlier years with respect to eligible units claiming deduction for those years. Theref .....

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nst this Ld. AR raised the objection that this issue should not be set aside as only law points are involved in this issue and no further facts are required to be examined.We have carefully considered the rival contentions on this issue. We have noted the above cited decision in Assistant Commissioner of Income-tax *, Central Circle-III(3) v Amarnath Reddy where in it is held as under :- 6. Now, let us examine whether the plea sought to be raised by the ld. D.R. can be admitted by the Tribunal o .....

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t-matter of the appeal before the Tribunal was the question as to what should be the proper written down value of the assets for calculating the depreciation allowance under the Indian Income-tax Act. It was certainly open to the department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the written down value on any of the grounds decided against it. In the case before the Supreme Court, earlier enactment was to be referred to, whereas .....

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as whether the expenditure claimed by the assessee was allowable or not. If it was not disallowable under one particular provision but is disallowable under any other provision, the subject-matter, viz., the allowability of expenditure remains the same. There are a number of decisions in which it has been held that the Tribunal can base its decision on a ground not raised before the appellate authority or in the grounds of appeal before it but is not bound to do so. It is not precluded from cons .....

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ly. It has particularly explained the following observation of the Supreme Court in the case of Hukumchand Mills Ltd. (supra) : "The Tribunal has, however, discretion not to admit any fresh plea being put forward when it would involve investigation of facts." Explaining the above observation, the Madras High Court in the case of N.P. Saraswathi Ammal (supra) observed as follows at page 23 of the report : "We do not regard the last observation as a fetter on the Tribunal s jurisdic .....

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t facts in order to decide the new point may be quite a different thing. The Tribunal may either remand the matter for the purpose, or proceed to investigate the facts themselves. In this part of the decision-making alone, there is scope for the play of the Tribunal s discretion. As to the very power to entertain a new plea, that is not to be ruled out, merely because a consideration thereof would call for further facts to be gone into. In Hukumchand Mills decision [1967] 63 ITR 232, the Supreme .....

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ght of the above discussion, I agree with the view taken by the ld. J.M. to hold that the plea raised by the ld. D.R. is to be accepted and the matter is to be remanded to the Assessing Officer for considering the claim of the assessee for claiming deduction of unaccounted expenditure under section 37(1) of the Act. In the above case the issue as set aside to the file of the ld. AO to decide and examine the facts in the course of hearing before the Tribunal, the revenue raised a fresh plea that .....

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n absence of any fresh plea by the revenue, we are afraid that we cannot agree with the contention of revenue. Our this reason also gets the support from the decision of coordinate bench in Zuari Leasing and Finance Corpo Limited V ITO 112 ITD 205 ( Delhi) (T M ) where in its held that :- 10. It is clear from above that primary power, rather obligation of the Tribunal, is to dispose of the appeal on merits. The incidental power to remand, is only an exception and should be sparingly used when it .....

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one of the parties before the Tribunal to have another inning, particularly when such party had full opportunity to establish its case. Unnecessary remands, when relevant evidence is on record, belies litigant s legitimate expectations and is to be deprecated. Having regard to aforesaid principle, it is necessary to look into records to see whether there is sufficient material on record to dispose of the issue on merit and there is no need to remand the issue to provide a fresh inning to the rev .....

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the assets provided to the employees working in approved R&D facilities and engaged in research and development activities. 93. The brief facts of this ground is that the appellant has incurred an capital expenditure amounting to ₹ 28532155/- on the assets which are provided to the employees who are working and executing R&D work of the company. According to section 35(2AB) weighted deduction on such assets @150% of expenditure is allowable. The assesse has claimed 100% deduction o .....

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it may be sent to ld. AO for verification. 94. We have carefully considered the rival contentions and we are of the view that the issue is squarely covered in favour of the appellant by decision of ITAT in assessee s own case. However, neither the AO nor the ld. DRP has applied its mind to the facts of this case and has not adjudicated on the issue. Facts of this expenditure with adequate details are also not record before us. Therefore we set aside this ground of appeal to the file of AO to ve .....

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ity on the appellant company because of sale of formulation manufactured out of specified medicine amounting to ₹ 22306073/- was determined. Consequently, Ministry of Chemical and Fertilizer raised this demand on the appellant on 31.05.2007. as the demand has arisen during FY 2007-08 the appellant in the note forming part of the return of income has claimed that this amount be allowed as deduction u/s 37 of the Act. However,ld. AO and DRP did not consider this issue at all. Before us ld. A .....

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he submitted that issue is squarely covered by decision of Hon ble high court in case CIT vs. Geoffrey manners & Co ltd 226 taxmann 135 and full facts are stated in the notes to the computation of total income and no new material is required to be placed on record. The Ld. DR relied on the orders of lower authorities and submitted that the claim needs verification and therefore it may be sent to ld. AO for verification. 96. We have carefully perused the rival contention. Honourable Mumbai h .....

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ch was contingent in nature and it has not been crystallized during the previous year because the Assessee approached the Delhi High Court challenging the stipulation in the DrugPriceControlOrder. There was interim stay in favour of the Assessee. Eventually that Writ Petition was allowed. The order of the Delhi High Court was challenged in the Honourable Supreme Court by the Revenue and the Revenue succeeded. The Assessing Officer and the Commissioner concurrently held that the Assessee was enti .....

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sessee, that the Tribunal has not committed any serious and grave error of law as projected. The Tribunal has in accepting the stand of the Assessee concluded that the liability is for contribution to the DrugPrice Equalization Account. The Assessee may have disputed the liability insofar as this contribution, however, the liability is clearly ascertainable one. There was no stay against accrual of the liability under clause 7(2) of the DrugPriceControlOrder. This being a statutory liability it .....

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e issue was answered in favour of the Assessee and against the Revenue. Our attention has been invited to paragraph 5 of this order and it is submitted that in relation to M/s Glaxosmithkline the Tribunal took the same view. That was for the Assessment Year 1984-1985. That order of the Tribunal dated 10.03.2006 had attained finality. The Tribunal followed its own decision in the case of Glaxosmithkline Pharmaceuticals Ltd. (supra) for previous Assessment Years 1982-1983 and 1983-1984. These deci .....

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erein that we find that this question cannot be termed as substantial question of law. 97. Therefore respectfully following the decision of Honourable Mumbai high court we are of the view that claim of the assessee of ₹ 22306073/- on account of amount payable under Drug price Control Equalization is prima facie allowable. Further, we also agree with the argument of ld. AR that when the claim is made by the assesse by way of note then the ld. AO as well as DRP should have considered the cla .....

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thereto and hedging charges to the cost of capital asset and thereafter-granting depreciation thereon after considering it as a cost of acquisition of asset. During the year appellant has incurred mark-to market loos of ₹ 46.40 crores on ECB raised for purchase of plant and machinery and other capital investment. It has also earned gain of ₹ 22.12 crores. It has also incurred further expenditure of ₹ 14.20 crores on borrowings and hedging contracts. The appellant this detail i .....

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rrowings were for the purpose of acquisition of capital assets the same is directly related to the cost of such asset and therefore should be added to the cost of such asset and will result in to depreciation allowance u/s 32 of the Act. Ld. DR relied on the orders of lower authorities. 100. We have carefully considered the rival contentions and we set aside this ground of appeal to the file of AO to verify the amount of expenditure incurred by the assesse on account of fluctuation of foreign ex .....

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ing the year. The brief fact of this issue is that in AY 2007-08 the appellant created provision for diminution in the value of investment of ₹ 23.9 crores by debiting to the profit and loss account. In assessment proceedings,this amount was disallowed while computing the book profit u/s 115JB of the Act. In AY 2008-09 assessee reversed the provision of ₹ 9853213 by crediting it to the profit and loss account. Ld. AO did not reduce the amount of book profit by this sum and ld. DRP di .....

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