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2016 (9) TMI 146 - ITAT MUMBAI

2016 (9) TMI 146 - ITAT MUMBAI - TMI - Transfer pricing adjustment - adjustment under the head interest - Held that:- TPO was not justified in making adjustment under the head interest to be charged. The rate of interest was higher than LIBOR, so, we hold that the IT in question was at armís length. - Allowability of expenditure - Held that:- AO/FAA had not given any plausible reasoning for making the ad hoc addition. The assessee had filed audited accounts and the auditors had not qualified .....

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see before him. Therefore, reversing his order, we decide ground in favour of the assessee. - Computation of deduction u/s.80IB/80IC - Held that:- Gain on account of fluctuation in foreign exchange rate is entitled for deduction u/s.80IB of the Act. So, confirming the order of the FAA, issue is decided against the AO. - Order of the FAA does not suffer from any legal infirmity as far as claim with regard to insurance receipt is concerned - FAA was not justified in denying the 80IB/80 .....

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irectly linked to the business of the assessee cannot be held to an eligible activity for claiming deduction. Confirming the order of the FAA, we decide the issue before us, against the assessee. - Disallowance made under section 14 A - Held that:- We find that the AO had made a disallowance of ₹ 4.45 lakhs, that the FAA had restricted the disallowance, that the assessee had claimed that it had not incurred an expenditure to earn the exempt income, that the AO/FAA had not brought on re .....

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the disallowance should be restricted to 5% of the dividend income, as held in the case of Godrej Agrovet (2014 (8) TMI 457 - BOMBAY HIGH COURT ). Ground number seven is allowed in favour of the assessee, in part. - I.T.A. /8858/Mum/2011 - Dated:- 18-5-2016 - Sh. Rajendra, Accountant Member and C.N. Prasad, Judicial Member For The Revenue : Shri N.K. Chand-CIT For The Assessee : Shri P.J. Pardiwala and Shri Nitesh Joshi PER RAJENDRA, AM Challenging the order dt.25.10.2011 of the CIT(A)-15, Mumb .....

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International Transaction(IT.s) with its Associated Enterprise (AE). He made a reference to Transfer Pricing Officer (TPO) for determination of Arm s Length Price (ALP) of the Transactions reported in Form 3CEB, filed by the assessee. ITA/8173/Mum/2011: 2. First effective ground of appeal, raised by the AO, is about the deleting the TP adjustment made by him under the heads royalty charged, ii)interest charged on loan and iii)guarantee fee charged. During the TP proceedings, the TPO found that t .....

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tellectual Property Rights 2,629,000,000 CUP 7. Advances received from M/s. MME 678,561 NA 8. Reimbursement of expenses (received/ receivable) 4,547,145 At Cost 9. Reimbursement of expenses (paid/payable) 560,100 At Cost 10. Sale of Moulds 83,460 CUP 11. Advance given Nil NA TOTAL 300,00,98,893 He found that the assessee was owner of Trade mark(TM) Parachute and Go Get Noticed (GGN), that it had entered into agreements with Marico Bangladesh Ltd.(MBL)for licensing its TM Parachute in Bangladesh .....

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the OP/TS of the assessee was 11.93% as against the Arithmetic mean of comparables at 1.17%. He directed the assessee to update the margins of the comparables. The updated margin of the comparable companies for the year under appeal was found to be as under:- SN. Name of Comparables PLI as per TP report Updated PLI 1. M/s. Adani Wilmar Limited 0.95 1.72 2. M/s. Amrit Enterprises Ltd. 1.23 0.93 3. M/s. Jhunjhunwala Vanaspati Ltd. 1.52 2.27 4. M/s. Poona Dal and Oil Industries Ltd. 0.37 0.71 5. M .....

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6 to 30.9.2006 @1% from 01.10.2006 to 31.3.2007 2.5% for FY 2006-07 Royalty amount charged Rs.48,87,000/- Rs.45,86,000/- He asked the assessee to show cause as to why rate charged to MME and MBL were different for the similar brand and why royalty rate of 2.5% was not used to charge MBL as well. Vide its letter dtd.25.10.10, the assessee filed detailed submission in that regard. After considering the explanation of the assessee, the TPO held that as per the provisions of section 92(1)income aris .....

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e near future without much brand development expenditure, that the argument of the assessee about non recognition of brand parachute could not be accepted, that the assessee was not justified in arguing that MBLwould have to incur brand development expenditure to popularise the parachute brand in Bangladesh. He further held that TNMM was not the most appropriate method to determine ALP of the royalty payment, that it would be reasonable and appropriate to benchmark the transaction by taking roya .....

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34,20,515/- 2.5% 85,48,250/- 51,27,735/- TOTAL 48,87,000/- 1,58,80,675/- 1,09,93,675/- In view of the above he proposed an adjustment of ₹ 1.09 crores to the value of the IT pertaining to royalty payment. 2.1. The TPO took notice of the break up interest on loan to AE and tabulated the same as follows: S. No. Name of AE/Country Purpose of loan Rate of Interest (%) Interest (Rs. In Crs.) 1. M/s. Sundari LLC, USA Working Capital LIBOR + 150 bps/6% 1.65 2. M/s. MME, UAE Working Capital 9.5% .....

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07 on which interest @ LIBOR + 150 bps was charged to M/s. Sundari LLC, USA, that both the transactions took place at the same period of time and in the same currency i.e. USD, that the loan to AE was secured by all the assets of the AE, that it had not given any security to HSBC banks while obtaining loan from it, that loan taken from HSBC was repaid on 2.2.2006, that as per the provisio to Rule 10B (4) of the Income tax Rules,1962 the rates charged by HSBC for AY.2006-07 could be considered CU .....

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nt and Industrial Developmental Company for a total consideration of USD 35.1 Million, that the assessee had agreed to finance the consideration initially to the extent of ₹ 17.6 million charging interest @9.5%, that the AE got part of its funding finance from ICICI Bank Behrain at the interest rate of 5.5%. The TPO observed that the assessee had charged interest at 9.5% to its AE i.e MME, that it should also have charged at least the rate of interest at the rate 9.5% p.a. to Sundari LLC, .....

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306 7,964 16.6.2006 50,000 289 3,761 17.7.2006 1,00,000 258 6,715 14.8.2006 1,00,000 230 5,986 31.8.2006 1,00,000 213 5,544 06.10.2006 2,00,000 177 9,214 16.11.2006 1,00,000 136 3,540 06.12.2006 1,00,000 116 3,019 17.01.2007 1,00,000 74 1,926 12.02.2007 1,00,000 48 1,249 Total 524,260/- Arm's length interest to be charged in Rs. @ 45.08 (A) 2,36,32,987/- Amount charged by the assessee (B) 1,65,45,240/- Transfer pricing Adjustment (A-B) 70,87,747/- 2.3. The TPO found that the assessee had pr .....

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BLIL 16,31,25,000 0.8% 83 2,96,753 4. M/s. MME 87,00,00,000 0.8% 111 21,16,603 The TPO observed that for a bank providing the CG was normal business activity, that for a company engaged in manufacturing of consumer products providing CG could not be a normal business activity, that if the AE would be bankrupt or would default in making payment with the bank, the assessee would be liable to pay the loan to the bank, that such a situation warranted a higher price, that the assessee should have cha .....

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4.80% 83 17,80,521 2,96,753 14,83,767 3. M/s. MBLIL 16,31,25,000 4.80% 83 17,80,521 2,96,753 14,83,767 4. M/s. MME 87,00,00,000 4.80% 111 1,26,99,616 21,16,603 1,05,83,014 TOTAL 2,83,59,616 47,26,603 2,36,33,014 Accordingly, an adjustment of ₹ 2.36 crores was proposed by the TPO under the head guarantee fees. After receiving order of the TPO, the AO passed the order making addition of all the three proposed additions. 3. Aggrieved by the order of the AO, the assessee preferred an appeal b .....

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BOR+150bps, that vide amendment dated 9.6.2005 and 29.08. 2005 it increased the overall revolving credit loan amount, that the rate of interest fixed was not less than the prevailing bank rate in India as notified by the RBI, that the loan given to Sundari was secured by all of its assets, that the average LIBOR rate during the year under consideration was 5.29%, that the assessee had charged interest to its AE at LIBOR+ 150bps / 6%p.a, that the rate of interest charged by the assessee to its AE .....

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est. 4. After considering the submissions of the assessee and the orders of the TPO/AO, with regard to the royalty payment, the FAA held that the assessee had received payment on account of brand royalty from its AE.s located in Bangladesh and UAE, that the TPO had used the controlled transaction for the purpose of comparability, that he did not consider the factors like geographical differences and the subject matter of royalty, that the expenditure incurred by MBL for advertisement etc. were n .....

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year, that in the AY. 2004- 05 the assessee had availed working capital loan from HSBC, that rate of interest charged with Dynamics of economy, that there was nothing to prove that rate of interest charged to the assessee by HSBC had any influence in determining the transfer price of the interest rate charged to the AE, that the TPO had taken rate of interest at 9.5%, that the assessee had charged the said rate of interest to its one of the AEs, that formula adopted for benchmarking suffered fr .....

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directed the assessee to provide certain details about ECB. Referring to the Master Circular No.07/2006-07 dated 1.7.2006, of the RBI, he held that rate of interest had to be fixed at 7.4012%. Partly allowing the appeal of the assessee, he restricted the disallowance to ₹ 18.66 lakhs. 4.2. Deciding the issue of guarantee commission, the FAA held that CG was an IT, that the assessee itself had shown the transaction as IT in form 3 CEB, that it had charged GC@0.8% from its AEs, that in the .....

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, that if the AE.s had taken loan from outsiders they would be required to pay more interest, that non-compete fee was not an asset, that no depreciation was allowable, that the ratio of Meghalaya Steel was not applicable to the facts of the case, that the Leasing was not the business of the assessee, that there was no first level connection between the income earned by the assessee and deduction claimed. The Authorised Representative(AR)argued that internal CUP could not be applied by comparing .....

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s higher than the LIBOR rate. He relied upon the cases of Tata Autocomp Systems Ltd.(ITA 1320 of 2012 of the Hon ble Bombay High Court), Siva Industries and Holding Ltd.(46 SOT112), Cotton Naturals(I)Private Ltd.(ITA/5855/Del/2012). He further stated that the Hon ble Delhi High Court had confirmed the order of the Cotton Naturals, while deciding the appeal filed by the Department. 5.2. The AR stated that guarantee commission was not an IT. He referred to the cases of Bharti Airtail Limited(43 Ta .....

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al submissions and perused the material before us. We find that the assessee had received payments towards brand royalty from two of its AEs, that one was located in Bangladesh and the other was in UAE, that the agreement with the Bangladesh AE was in respect of Parachute, that with the UAE the assessee had entered into agreement in respect to TMs of Parachute as well as of GGN, that MBL would sell pure edible coconut oil as per the agree - ment, that the UAE-AE was allowed to sell hair creams, .....

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it had been increased from 0.5% to 1% w.e.f. 1.10.2006, that the TPO had not specifically rejected assessee s benchmarking, that overall profitability of the assessee was much higher than the arithmetic mean of the comparables. Considering the above facts, the FAA had held that TP adjustment proposed/ made by the TPO/ AO were liable to be deleted. We do not find any infirmity in the order of the FAA. The AO/TPO had failed to bring anything on record to prove that there was material change in th .....

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ssee repaid the loan in the month of Feb. 2006, that the TPO adopted interest rate of 9.5% p.a., being the interest charged to MME as ALP, that he made an addition of ₹ 70.87 lakhs, that referring to the ECB rates the FAA had given part relief to the assessee. We are of the opinion that the LIBOR rate has to be considered a valid base for determining ALP for foreign loans. If the loan taken and received are in foreign currency LIBOR would be the safest tool to justify or reject the claim o .....

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er: The respondent-assessee is engaged in the business of manufacturing of plastic parts and rendering engineering services. The respondent -assessee had advanced an amount of EURO 26.25 lakhs to its wholly owned subsidiary in Germany. The respondent-assessee charged no interest on the above loan. However, during the course of examination of respondent-assessee s international transaction with its subsidiary company i.e. Associated Enterprises transfer pricing officer (TPO) determine the arm s l .....

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sociate Enterprise to 12%. Consequent to the direction of DRP, the Assessing Officer by an assessment order dated 19.9.2011 charged interest of ₹ 1.76 crores on the above account as a part of the respondent assessee s income. 5. Being aggrieved, the respondent-assessee preferred an appeal to the Tribunal. The Tribunal by the impugned order held: (a) that the interests the loan extended by a company or its Associated Enterprise comes within the ambit of International Transaction and the iss .....

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m/06) and DCIT Vs. Tech Mahindra Ltd.(46 SOT141) by holding that the loan advanced to an Associated Enterprise situated abroad, the rate of interest to be applied is the rate prevailing in the country where the loan has been consumed. The Hon ble Court has decided the matter as follows: 7. We find that the impugned order of the Tribunal inter alia has followed the decision of Bombay bench of Tribunal in the case of VVF Ltd Vs, DCIT (supra) and DCIT Vs. Tech Mahindra Ltd.(supra) to reach the conc .....

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w in respect of the impugned order from that taken in VVF Ltd Vs. DCIT (supra) and DCIT Vs. Tech Mahindra Ltd.(supra). After considering the above orders of the Tribunal and judgment of the Hon ble Court we are of the opinion that TPO was not justified in making adjustment under the head interest to be charged. The rate of interest was higher than LIBOR, so, we hold that the IT in question was at arm s length. 6.2. We find that during the year under appeal the assessee had provided corporate gua .....

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uarantee+ ₹ 100/-. But, he had not mentioned in his order as to which period the rate of 2.75% was applicable. In our opinion, there is no difference between the bank or a corporate entity as far as GC is concerned. Both have to consider the functions performed, assets employed and risks assumed. In case of default by the borrow - er, the corporate guarantor is exposed to the same risk of a bank. In case of an AE the risk would not be as high as in case of an outsider. We find that the ass .....

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t of time, and its break up in plain words, shows the following: 1. An international transaction can be between two or more AEs, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profit .....

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n AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, which was brought on the statute vide Finance Act, 2012. 27. This Explanation states that it is merely clarificatory in nature inasmuch as it is ' for the removal of doubts', an .....

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categories of transactions, which are stated to be included in the scope of expression ' international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions' in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expressio .....

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al agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises". That leaves us with two clauses in the Explanation to Section 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namel .....

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that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression ' international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation deali .....

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impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a ce .....

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tional transaction' shall include "capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business". In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing .....

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ts, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression' having a bearing on profits, income, losses or assets' appearing in Section 92 B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92 B, and yet it may not constitute an international transaction as the condition precedent with regard t .....

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the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, w .....

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e any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act. 33. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if .....

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that the provisions of Explanation to Section 92 B enlarge the scope of Section 92 B itself, even as it is modestly described as ' clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a s .....

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could be a view that issuance of guarantees could be outside the ambit of scope of ' international transaction' itself, he submitted that there are large number of decisions in India and abroad, notably in Canada, dealing with the determination of arm's length price of guarantees. His argument seemed to be that even such a view is to be upheld, entire transfer pricing jurisprudence will be turned upside down. There does not seem to be any legally sustainable merits in this argument .....

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84 Taxman 205, that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein. As observed by Hon'ble Supreme Court in the case of CITv. Sun Engg Works {P} Ltd. [1992] 198 ITR 297/64 Taxman 442 a " judgement must be read as a whole and the observations from the judgement have to be considered in the light of the question which were before court" and that "a decision takes its colour from the quest .....

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which was not even before those judicial forums. Coming to the foreign decisions on the issue of ALP adjustments in guarantee commission, we have noted that in the case of GE Capital Canada Inc (supra), the Tax Court of Canada has indeed dealt with ALP determination of the guarantee fees but then it was done in the light of their domestic law provisions which are quite at variance with the Indian transfer pricing legislation. Unlike elaborate wordings of Section 92B of the Indian Income Tax Act .....

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rary to our understanding of these legal provisions, has been cited before us. There is a decision of the co-ordinate bench in the case of Mahindra & Mahindra (supra), referred to in the DRP order, but that decision does not deal with the scope of amended section 92 B and leaves the issue open by stating that post insertion of Explanation to Section 92 B, the matter will have to be examined in the light of the amended law. We have held that even after the amendment in Section 92 B, by amendi .....

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e judicial precedents cited before us. 36. For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute' international transaction' within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 33,10,161. The assessee gets the relief accordingly. Following the above, we hold that GC is not an IT and hence the provisions of c .....

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t of the loan transaction i.e. ₹ 18.66 lakhs. We find that he had applied the ECB rates for making the adjustment. In our opinion, after considering the fact that the interest rate charged by the assessee was higher than LIBOR rate, he should not have partly upheld the order of the TPO. Following our discussion at paragraph 6.2.of our order, we decide Gr. No.1 in favour of the assessee . 9. Second ground of appeal is about disallowance of 10% of the other miscallan -eous expenses, amountin .....

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llowance merely on the basis of order for the previous year. 9.2. After hearing the rival sides, we are of the opinion that the AO/FAA had not given any plausible reasoning for making the ad hoc addition. The assessee had filed audited accounts and the auditors had not qualified any item for disallowance out of the Miscellaneous Expenses. The AO had also not rejected the books of accounts of the assessee. It is also not clear from the order that as what was the basis for adopting 10% of the expe .....

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sed returns. These claims were about i)reduction of book profit, being depreciation on intangible assets, not charged to profit and loss account, ii)depreciation on non-compete fee treated as capital expenditure in earlier years and reduction of book profit being depreciation on intangible assets not charged to profit and loss account. 10.1. During the appellate proceedings, the FAA held that without filing a revised return the assessee cannot claim a fresh relief. He referred to the case of Goe .....

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e of relief claimed in the additional grounds, while deciding the matter of Prithvi Brokers(supra). We would like to reproduce the relevant portion of the judgement and same reads as under: Even assuming that the Assessing Officer is not entitled to grant a deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities are entitled to consider the claim and to adjudicate the same. A long line of authorities establish clearly that an assessee is entitled .....

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rder was made. In Jute Corporation of India Ltd. case for instance, the ground was available when the return was filed. The assessee did not claim any deduction of its liability to pay purchase tax as "it entertained a belief that it was not liable to pay purchase tax under the Bengal Raw Jute Taxation Act, 1941". Thus, the ground existed when the return was filed. The assessment order was even made and received by the assessee. It is only after the appeal was filed that the assessee c .....

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e must be considered on its own facts. However, such cases include those, where the ground though available when the return was filed or the assessment order was made, was not taken or raised for reasons which the appellate authorities may consider valid. In other words, the jurisdiction of the appellate authorities to consider a fresh or new ground or claim is not restricted to cases where such a ground did not exist when the return was filed and the assessment order was made. Even assuming tha .....

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essee does not file a revised return. Therefore, we are of the opinion that in the interest of Justice, the matter should be restored back to the file of the FAA, who would decide the fresh claims, made by the assessee, as per law. All the three Grounds are decided in favour of the assessee, in part. 11. The next ground deals with depreciation of ₹ 75.27 lakhs under the head non-compete fees paid in the AY.2006-07. As the claim was not made in the regular return of income, so, the AO rejec .....

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f revised computation. To support the argument that depreciation was allowable on non-compete fees, he placed reliance on the matters of Pentasoft Technologies Ltd.(222Taxmann209)of the Hon ble Madras High Court and Ingersoll Rand International Ltd.(48 Taxmann 349) of the Hon ble Karnataka High Court. DR supported the order of the FAA. 11.2. We have heard the rival submission. While deciding the earlier two grounds we have held that appellate authorities are not prohibited from entertaining the .....

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tion 80 IB/80IC of the Act, in the revised return of income. He computed the deduction by making adjustment under the heads rent and store charges, miscellaneous sales and other income. He observed that the assessee had allocated expenses to undertaking of Goa, Pondicherry and Dehradun on the basis of rent and storage cost directly identifying product wise and undertaking wise, that rent and storage charges in respect sales division in ratio of turnover of the undertaking to the total turnover o .....

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d that above income could not be said to be arising out of business of the assessee, that though the income was attributable to the business of the assessee it was not derived from the business carried out by it. 12.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA. Before him, it was argued that the assessee had allocated rent and storage expenses on the basis of cost directly identifiable, that common rent and storage expenses were allocated in the ratio of t .....

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tems included sale of by products, scrap that would arise during the course of manufacturing, that at Pondicherry unit crushing of Copra to extract oil, after filtration, would generate by product called cake, that sale of scrap comprised of sale of gunny bags, chemical empty drums and unusable oil, that generation of by products/scrap was directly linked to the manufacture of products by the eligible undertaking, that the by products/ scrap could not be generated independent of the Manufacturin .....

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were received for loss of products on transport from eligible undertaking to the depot, that the insurance claim received was in relation to products manufactured and sold, that costs with respect to loss was debited to P&L account, that the insurance claim received was nothing but reimbursement of such loss and was directly related to respective undertaking, that such loss was considered as expenditure while computing the profit under section 80 IB/80IC, that the corresponding insurance cla .....

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e earlier years, that the facts for the year under consideration were similar. He directed the AO to follow the orders of his predecessor for the earlier years and allowed the appeal filed by the assessee. With regard to income from sale of by-products and scrap, the FAA held that in the case of Pandian Chemicals Ltd.(270 ITR 448)certain principles were laid down. Relying upon the said judgement, he upheld the order of the AO. Relying upon the judgements of Pfizer Ltd (supra) and Pandian Chemica .....

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to the vendor were eligible for deduction, that such receipts had arisen out of the income derived from the eligible industrial undertaking. 12.2. Before us, the AR contended that by product and scraps were generated in the process of manufacturing, that the receipt from sale of such products was derived from industrial undertaking, that deduction under section 80 IB had to be allowed for the rent received from blow moulding machine, that the rental income was received from the contractor who wo .....

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ch Medicals P Limited(119 ITD143), Sadhu Forging (336 ITR 444)Avanti Feeds Ltd.(35 SOT 50) with regard to the deductibility of scrap for the purpose of 80 IB deduction. About the rent and storage charges, the AR argued that identical issue was allowed in favour of the assessee by the FAA for the AY.s.1999 -00 to 2001-02, 2008-09 and 2009-10, that the AO had not challenged the relief before the Tribunal, that there was no change the facts. With regard to miscellaneous income exchange gain and mon .....

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dealing with ground related to deduction u/s.80IB/80IC of the Act, in the earlier part of the our order, we have mentioned that the issue will be dealt later on as the assessee has also challenged the order of the FAA with regard to the said deduction. It is found that the AO had challenged the decision of the FAA about (i)rent and storage charges, (ii)exchange gain and money received from material return to the vendor, (iii) insurance claim. The assessee is aggrieved in respect of income shown .....

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see, then his order had to be endorsed. Issue regarding rent and storage charges is decided against the AO. 12.3.b. In the matter of Raghunath Exports Pvt. Ltd.(330 ITR 57)it has been held that surplus realisation due to fluctuation in foreign exchange rates is part and parcel of the export turnover for the purposes of s. 80HHC. Paragraph 12 of the judgment reads as follow: We have considered the contentions of the learned advocates for the parties and checked the records. It is not disputed tha .....

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he export followed by payment of the price, by the foreign buyer. Unless there has been an export the aforesaid surplus would not have been realised. Hence, this surplus realisation is certainly relatable to the export. Therefore, we hold that this is an export turnover. Considering the above, we are of the opinion that gain on account of fluctuation in foreign exchange rate is entitled for deduction u/s.80IB of the Act. So, confirming the order of the FAA, issue is decided against the AO. 12.3. .....

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hich the section applies. The basic issue therefore is to determine the extent of profits derived by the assessee from the export of such goods or merchandise. The formula in sub-s. (3) of s. 80HHC has been provided by the Parliament, for the purposes of sub-s. (1) to compute the profits derived from the export of goods. Clause (a) of sub-s. (3) specifies that where the export is of goods or merchandise manufactured or processed by the assessee the profits derived from the export shall be the am .....

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turnover is a facet which has been taken care of by the legislature in the application of the formula which is referred to in subs. (3) of s. 80HHC. The insurance claim for loss of stock-in-trade must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock-intrade. Insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges; h .....

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regard to the eligibility of sale proceeds of by products and scrape for the 80IB/80IC deduction,we would like to refer to the case of Sadhu Forging (336 ITR444). In that matter the Hon ble Delhi High Court has dealt with the issue of sale of scrap for claiming deduction u/s.80IB of the Act and has held as under: 13. Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job work charges, it can thus be said that the appellant had done .....

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ting deduction under s. 80-IB. There cannot be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deduction under s. 80-IB. Respectfully, following the above, we hold that the FAA was not j .....

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ming deduction u/s.80IB/80IC there should be close nexus of the income and the business carried out by an industrial undertaking. Anything and everything indirectly linked to the business of the assessee cannot be held to an eligible activity for claiming deduction. Confirming the order of the FAA, we decide the issue before us, against the assessee. 13. The last ground of appeal is about disallowance made under section 14 A of the Act. During the assessment proceedings, the AO found that the as .....

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ome, that the AO had not brought anything on record to prove that expenses of ₹ 4.45 lakhs were incurred by the assessee. The assessee relied upon the case of Minda Investments Ltd.(52 DTR 1) and Hero Cycles Ltd.(233CTR74). After considering the submission of the assessee and the assessment order, the FAA held that assessee had made some investment against which it had earned an income which was not forming part of the total income, that the provisions of section 14A were clearly applicabl .....

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