TMI Blog2020 (10) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... available with assessee, interest disallowance u/s 36 (1) (iii) of The Act cannot be made. Hence, in view of above facts, we reverse finding of lower authorities in disallowing interest expenditure. Addition to the job charges recovered at a lesser rate from sister concern M/s Dharampal Premchand Ltd then prevailing market rate - HELD THAT:- As decided in own case [ 2019 (4) TMI 1382 - ITAT DELHI] addition of higher rate of job charges is on hypothetical basis and against concept of real income. Further, it is not open to assessing officer to sit in armchair of assessee and to make business decisions on arbitrary basis. Further, there is no provision in Income tax The Act, 1961 that warrants such adjustment and as such, action of assessing officer in increasing rate of job work charged from sister concern M/s. Dharampal Premchand Ltd. is not sustainable under law. Decided against revenue. Disallowance u/s 14A - assessee has received dividend during the year which is claimed as exempt u/s 10 (34) - assessee itself made voluntary disallowance of ₹ 915,256/ in the computation of total income u/s 14A - HELD THAT:- As departmental representative could not show that wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the addition confirmed by coordinate bench in this year is unjustified, therefore, respectfully following the order of the coordinate bench in assessee s own case for that year, we also direct the learned assessing officer to recompute the deduction following the order of the coordinate bench for that year. Disallowance of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) in respect of transfer from silver foil division - HELD THAT:- In assessee s own case for immediately preceding year at most processing cost of silver is service that has been transferred by noneligible unit to eligible unit, which should have been done at market rate. At present assessee has considered process cost on actual cost basis and has loaded on price of silver - we direct assessing officer to adopt a margin of 2% over process cost of processed silver transferred from non-eligible unit to eligible unit and to sustain disallowance of deduction to that extent only. - we direct the learned assessing officer to recompute the eligible profit following the order of the coordinate bench in earlier years with similar directions. Allocation on account of interest to the elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial undertaking. Disallowance of deduction u/s 80 IB/80 IC on allocation of depreciation on fixed assets installed at head office and manufacturing units to eligible units - HELD THAT:- As in assessee s own case for earlier years, we direct the learned assessing officer to delete the disallowance on account of allocation of depreciation. Calculation of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) for use of brand Rajnigandha - HELD THAT:- In the present case it is apparent that brand is owned by the assessee company and no royalties paid by the assessee to any outsider or third party. The learned assessing officer has made the addition/reduce the deduction of the assessee u/s 80 I B/80 IC by comparing the brand Rajanigandha with the brand Tulsi Mix . DR could not show us any deviation in the facts or any brand royalty paid by the assessee with respect to the products manufactured in eligible unit. In view of this, respectfully following the decision of the coordinate bench, we direct the learned assessing officer to delete the disallowance of deduction claimed by the assessee. Disallowance of deduction u/s 80 IB/80 IC in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision of JYOTI CNC AUTOMATION PVT LTD. [ 2018 (8) TMI 757 - GUJARAT HIGH COURT] deleted the above addition. Therefore respectfully following the decision of the coordinate bench in assessee s own case for earlier year, we direct the learned transfer pricing officer/learned AO to delete the addition on account of the arm s-length price of the interest income from its associated enterprise in Switzerland. Ground of the appeal is allowed. - ITA No.1380/DEL/2017 - - - Dated:- 7-10-2020 - Shri Amit Shukla, Judicial Member And Sh. Prashant Maharishi, Accountant Member For the Appellant : Sh. R. S. Singhavi, CA, Sh. Satyajeet Goel, CA For the Respondent : Sh. Sanjay I. Bara, CIT DR ORDER PER PRASHANT MAHARISHI, AM: 1. This appeal is filed by M/s Dharmpal Satyapal co, (The Assessee/Appellant) against the assessment order passed u/s 143 (3) read with Section 144C of The Income Tax Act, 1961 (The Act) by The Asst Commissioner Of Income Tax, Central Circle 29, New Delhi (the Learned AO) for assessment year 2012 13 wherein the returned income of the assessee filed on 28/11/2012 of ₹ 375,363,411/- was assessed at ₹ 1,204,023,319/ and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on facts and circumstance of the case, the assessing officer was not justified in making disallowance of loss of ₹ 5,74,71,113/- on account of sale of commodities on commodity exchange on an illegal and arbitrary basis without appreciating the law and facts of the case. (ii) That the transaction being carried out at recognized stock exchange, the loss is not in the nature speculative loss as per the provisions of section 43(5)(d) and as such the disallowance is based on erroneous interpretation of law. 7(i) That on facts and circumstances of the case, the Ld. Assessing officer has erred in disallowing claim of statutory deduction under section 80IB/80IC by an amount of ₹ 32,49,27,532/-, on account of re-computation of profits of the eligible undertaking by increasing the value of goods procured by the eligible unit from manufacturing units at Noida, on the ground that aforesaid inter-unit transfer should have been at actual cost plus markup^ (attributed at 10%), alleged as arm s length price, as per the provisions of section 80IA(8) read with section 80IB(13)/80IC(7) of the Act. (ii) That the assessing officer erred on facts and in law in attributing di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of profits of the eligible undertaking, by increasing the value of common costs incurred at corporate office, depots, branches, etc. and allocated to such units in an appropriate ratio, with profit margin of 19.67% thereon. (ii) That the assessing officer was not justified in holding that various corporate services were rendered by corporate office, depots, branches, etc. to the eligible undertakings, which should have been allocated to eligible units at fair market price/cost plus appropriate mark-up, for the purposes of computing deduction under section 80IB/IC read with section 80IA(8) of the Act. (iii) That the assessing officer has failed to appreciate that no services were rendered by other divisions, viz., corporate office, depots, branches, etc., to the eligible undertakings, but expenses were incurred by such divisions on behalf of the eligible undertakings, which was subsequently allocated to such eligible units. (iv) That adjustment of cost and consequential claim of deduction u/s 80IB/80IC is illegal, arbitrary and based on conjectures and surmises. 11(i) That on facts and circumstances of the case, the Ld. Assessing officer has erred in disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd circumstances of the case, the Ld. Assessing officer was not justified in making disallowance to the extent of ₹ 50,59,20,379/- being claim of purchase of sandalwood holding the same to be bogus on an illegal and arbitrary basis. (ii) That the assessing officer erred on facts and in law in alleging that cash was received by the appellant from the above concern, that too, on the basis of erroneous inferences/ assumptions on the basis of certain seized documents. (ii). That the allegation of assessing officer that bogus bills were obtained by the appellant from M/s.Surva Vinayak Industries Limited (in short SVIL ) in order to inflate purchase of sandalwood oil is unsubstantiated and without any basis. (iii) That the assessing officer erred on facts and in law relying upon statements/Materials collected behind the back of the appellant, without allowing cross-examination and/ or confronting the same to the appellant, in gross violation of principles of natural justice. (iv) That the assessing officer erred on facts and in law in making huge disallowance, de-hors any material/ evidence found during the course of search. 14(i). That on facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read across the length and breadth of the country. It has its main branches are Delhi, Ahmadabad, Indore, Lucknow, Bhubneshwar, Patna, Bangalore, Coimbatore, Bhiwandi,Raipur, Kolkata, Ranchi, Haldwani, Noida and Jaipur. Assessee is maintaining separate books of accounts in respect of all these branches however the profit and loss accounts are not being drawn an entire cost is transferred to various units including the units eligible for deduction u/s 80 IB/80 IC of the act based upon the sales ratio of all manufacturing units. 4. During assessment year 2005 06 to 2011 12 assessment orders were passed under the provisions of Section 153A/143 (3) of the act based upon search and seizure operations carried out under the provisions of Section 132 of the act on 21/1/2011. A special audit u/s 142 (2A) was also conducted for assessment year 2004 05 to 2011 12. The assessment for the assessment year 2004 05 to 2011 12 was passed considering the findings of search of action and report of special audit. Various disallowances under provisions of the income tax act and adjustment to deduction claimed u/s 80 IB/80 IC of the act was made in those orders. The assessee is continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness profit g. the deduction u/s 80 IB/80 IC was restricted to ₹ 1,244,508,740/ 6. At the time of commencement of the hearing, the learned authorised representative submitted that out of total 15 grounds in the memo of appeal, 13 grounds are covered in favour of the assessee vide order of Hon ble ITAT in assessee s own case for AY 2010-11 and 2011-12 dated 18/04/2019 (ITA No. 3738-39/D/16 3882-83/D/16). The relevant chart containing issues alongwith relevant page referencing is enclosed PB Pg 1-8. To support his contentions he submitted the following chart:- Ground No. Particulars Disallowance/Additions considered by Assessing Officer (Rs.) Assessment order/DRP order ITAT Order for AY 2010-11 11-12 dated 18/04/2019 Remarks 1 Addition on account of reduction in value of opening work in progress 44,49,536/- AO : Page 4 Para 13.1 DRP : Page 11 Para 5.3 Page 16-18 Para 15-19 Addition deleted by ITAT 2 Common Ground challe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of deduction u/s 80IB/IC by applying provisions of sec.80IA(8) in respect of transfer of goods (Katha Supari) from Noida division to eligible undertaking 32,49,27,532/- AO : Page 12 Para 13.6 DRP: Page 25 Para 10.3 Page 37-39 Para 46-48 The Hon ble Tribunal decided the issues as per following observations: No finding by AO and CIT(A) regarding open market value of the goods Uploading of 37.58% (11.27% in present year i.e. AY 2012- 13) on account of manufacturing cost deleted. Application of 10% mark up as per central excise rule rejected/deleted. Tribunal concluded as under: Transaction value to be applied in case of UNPROCESSED goods. Hence, no adjustment. 2% profit mark-up on processing charges of PROCESSED goods. The processing charges will be the same as incurred and uploaded by the assessee while computing profit for the purpose of deduction u/s 80IA As a result, SUBSTANTIAL relief allowed by the Hon ble Tribunal. 8 Disallowance of deduction u/s 80IB/IC by applying provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re can be no royalty in respect of brand owned by the assessee 13 Disallowance of deduction u/s 80IB/IC in respect of royalty paid to sister concern M/s. Dharampal Premchand Ltd. on the basis of provisions of section 80IA(10) 95,09,442/- AO : Page 22 Para 13.12 DRP: Page 40 Para 16.3 Page 101-102 Para 87-88 Adjustment Deleted. 14 Ad-hoc Disallowance on purchase of Sandalwood oil 50,59,20,379/- AO : Page 23-80 Para 13.13 DRP: Page 48 Para 17.3 Page 72-91 Para 68-72 Hon ble ITAT deleted the disallowance in AY 2010-11 on the ground that documents seized during the search relates to AY 2011-12 only and CIT(A) or AO has not given any ground or basis for extrapolating contents of seized documents in the year other than AY 2011- 12. Reliance is also placed on factual finding of Hon ble ITAT in consolidated order for AY 2005-06 to 2009- 10 which was also considered in ITAT order for AY 2010-11 and 2011-12. In the present case also, the impugned disallowance is merely based on doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove sum and therefore this addition was made. The coordinate bench in assessee s own case for earlier year has decided this issue as Under:- 15. Ground number 4 of appeal is with respect to valuation of work in progress. learned assessing officer in para number 23 25 of assessment order noted that special auditor reported that assessee company has not classified its inventory as per requirement of schedule VI of Companies The Act, 1956. He observed that assessee company has not included in valuation of work in progress, indirect cost like manufacturing expenses, power and fuel, direct labor etc. and fixed and variable overheads like depreciation in plant and machinery, factory building, factory management, administration costs and other indirect costs incurred for conversion of stock in trade. Therefore, learned assessing officer noted that valuation of work in progress in form of semi finished goods and unpacked finished goods resulting in under valuation of inventory is of INR 31639765/- resulting in understatement of income to that extent. Unit wise details of valuation of working progress in form of semi finished goods and for unpacked goods was given as per para number 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange is made to method of valuation of closing stock, corresponding effect has to be given to value of opening stock as well and as such action of assessing officer is only enhancing value of closing stock is mechanical and against principle laid down by Hon ble Delhi High Court in case of CIT v. Mahavir Alluminium Ltd. (2008)297 ITR 77 (Del) in which it was held as under: We are of opinion that in present case, there is no question of any double benefit being given to assessee. Paragraph 23.13 of guidance note itself makes it clear that whenever any adjustment is made in valuation of inventory, this will affect both opening as well as closing stock. It is also to be noted that if any adjustment is required to be made by a statute, (as for example Section 145A of The Act), effect to same should be given irrespective of any consequences on computation of income for tax purposes. Section 145A of The Act begins with as non-obstante clause, and therefore, to give effect to Section 145A of The Act, if there is a change in closing stock as on 31st March, 1999, there must necessarily be a corresponding adjustment made in opening stock as on 1st April, 1998. 17. He further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity in the order of the coordinate bench for immediately preceding year where the corresponding addition has been deleted, we respectfully following the decision of the coordinate bench allow ground number 1 of the appeal of the assessee and direct the learned assessing officer to delete the addition of ₹ 4,449,536 on account of adjustment of reduction in the value of opening work in progress for this year. 13. The 3 ground of appeal is against the disallowance of ₹ 333,157/ out of the interest expenditure. Before the learned assessing officer it was submitted that the loans have been given from the retained earnings and the assessee is incurring interest expenditure in respect of the borrowed funds. Therefore in view of available interest free funds in excess of advances and borrowed funds tied up for business purposes, there cannot be any disallowance of interest expenditure. However the learned assessing officer following the earlier years order considered the interest receivable from M/s Ganeshji Overseas Inc amounting to ₹ 319,831 instead of ₹ 652,988. The AO computed the interest that should have been received by the assessee applying the rate of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2004 05 amount is required to be disallowed as per interest paid to cash credit account of bank of assessee. Accordingly, he upheld disallowance partly. 21. Learned authorised representative vehemently contested disallowance confirmed by learned CIT A and submitted that observation of ld AO and CIT(A) are factually and legally incorrect and impugned disallowance is on arbitrary and mechanical basis. It is submitted that funds have been advanced to sister concerns on account of business and commercial expediency, there is no case of any disallowance of interest u/s 36(1)(iii) of The Act. It is relevant to note that appellant assessee is engaged in variety of business segments and loans so made to sister concerns are for purpose of advancing business interest of assessee. There is no finding recorded by ld AO or CIT (A) that funds have not been advanced for business purposes and disallowance is merely on conjectures and surmises. He relied up on decision of Hon ble Delhi High Court in case of Pr. CIT v. Reebok India Company[2018] 259 Taxman 100 (Delhi) Honorable supreme court in Hero Cycles (P) Ltd vs. CIT[2015] 379 ITR 347 (SC) , CIT Vs. S.A. Builders Ltd. 288 ITR 1 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n outstanding loan and advances to sister concern unrelated parties amounting to ₹ 41.27 Crores. However assessee has also stated that it has share capital and reserves and surplus as per audited accounts available as on that date shows that assessee has non-interest-bearing funds available with him of INR 7 1 5,00,00,000. Therefore, it is apparent that non-interest-bearing funds available with assessee far exceeded loans and advances given by assessee to its sister concern at lower interest rate or without charging interest. assessee has also submitted a chart which shows that despite identical facts in assessment year 2013 14 learned assessing officer has not made any addition to total income of assessee on account of interest disallowance. Therefore, situation has been accepted by learned AO in assessment year 13 14 onwards. Even otherwise assessee has submitted copies of bank statement in paper book. Perusal of bank statements shows that whenever advances have been given to sister concern there was balance in cash credit account and it is positive and not negative as held by CIT (A) , therefore, it cannot be said that nexus been proved that amount is advanced out of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was reversed and appeal of assessee to that extent was partly allowed. We do not see any substantial question of law arising from such a view of Tribunal. [underline supplied by us] 26. In view of above undisputed fact that non-or lower interest-bearing advances given to subsidiary or sister concern are less than interest free funds in form of share capital and reserves and surplus available with assessee, interest disallowance u/s 36 (1) (iii) of The Act cannot be made. Hence, in view of above facts, we reverse finding of lower authorities in disallowing interest expenditure. Accordingly, ground number 5 of appeal of assessee is allowed. 14. The learned departmental representative could not controvert the fact that assessee has huge own funds on which no interest is payable by the assessee. Therefore respectfully following the decision of the coordinate bench, we direct the learned assessing officer to delete the disallowance of ₹ 333,157/ made u/s 36 (1) (iii) of the act. Accordingly ground number 3 is allowed. 15. Ground number 4 is addition of ₹ 246,100/ with respect to the job charges recovered at a lesser rate from sister concern M/s Dharampa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediate preceding year and the learned departmental representative could not point out any infirmity, therefore respectfully following the decision of the coordinate bench in assessee s own case, we direct the learned assessing officer to delete the addition/disallowance of ₹ 246,100/ on account of recovery of job charges at a lesser rate from a sister concern then rates charged to outside party. Accordingly ground number 4 of the appeal is allowed. 17. The ground number 5 is with respect to the disallowance and u/s 14 A of The Income Tax Act amounting to ₹ 276,28,704/ . The learned authorised representative submitted that issue is identically covered in favour of the assessee by the order of the coordinate bench where the addition was deleted as no satisfaction was recorded by the learned assessing officer with respect to the disallowance offered by the assessee. He further stated that the assessment order for this year is also identical and there is no satisfaction recorded by the learned assessing officer. 18. The learned departmental representative vehemently supported the order of the learned that AO. 19. We have carefully considered the rival contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Assessee Company has earned only INR 1596000/ as dividend income and borrowed funds were not at all utilized for investment in shares hence disallowance cannot be made. Learned AO rejected explanation of assessee and stated that substantial expenditure has been incurred by assessee for earning exempt income and therefore provisions of section 14 A are clearly attracted, hence, disallowance of INR 50268833/ was made applying provisions of section 14 A read with rule 8D of The Income Tax Rules. Ld CIT(A) has allowed substantial relief to assessee and has directed assessing officer to exclude growth oriented investments while applying Rule 8D(2)(iii). Also, regarding application of Rule 8D(2)(ii), ld CIT(A) held that investments which have been made through cash credit account, rate of interest in cash credit account should be adopted. However, assessee aggrieved with order of lower authorities has preferred this ground before us. 28. Learned authorised representative submitted that assessee has only earned exempt income to extent of ₹ 15,96,000/- which is corroborated from Schedule 16 of P L a/c placed at Page 165 of PB Vol.1 and also taken note by Special Auditor. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. 12,500 43,50,000 42,04,824 Indswift Ltd. 26,000 53,16,647 51,47,192 Dhampur Sugar 37,500 50,76,226 Nil Total 15,96,000 5,20,19,721 4,54,16,313 30. There is no dispute to effect that assessee has its own funds to extent of more than ₹ 590 crores and as such all these investments are fully covered from own funds and there is no case of any disallowance under rule 8D(2)(ii). Also, there being no case of any direct or indirect claim of interest in connection with investment, disallowance u/s 14A read with Rule 8D, if any, has to be restricted to 0.5% of average investment as specified in Rule 8D2(iii). Further, disallowance as per rule 8D(2)(iii) has to be computed only in respect of investments yielding exempt income and accordingly assessing officer is not justified in applying formula prescribed in Rule 8D to entire value of investment. legal position to this effect is well settled and reference may be made to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 15,96,000/- only. legal position to this effect is well supported from decision of Hon ble Supreme Court in case of Pr. CIT v. State Bank of Patiala [2018] 259 Taxman 314 (SC) and Delhi High Court in case of Joint Investments Pvt. Ltd. Vs. CIT [2015] 372 ITR 694 (Del). relevant head note in case of Pr. CIT v. State Bank of Patiala [2018] 259 Taxman 314 (SC) is as under: Section 14A, read with section 263, of Income-tax The Act, 1961 - Expenditure incurred in relation to income not includible in total income (Computation of) - Assessment year 2010-11 - In course of assessment, Assessing Officer made addition on account of apportionment of expenses against exempted income under section 14A - Commissioner passed a revisional order directing Assessing Officer to enhance amount of addition under section 14A - Tribunal set aside revisional order as well as consequent assessment order passed by Assessing Officer enhancing addition made under section 14A - High Court upheld order of Tribunal holding that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure - Whether on facts, SLP filed against decision of High Court w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied provisions of rule 8D and made a disallowance of INR 50268833/ and reduced it from already disallowed sum of INR 437504/ by assessee. Therefore, net disallowance of ₹ 49831329/ was made. As is well known, section 14A of The Act relates to expenditure incurred in relation to income not includible in total income. Sub-section (1) of section 14A provides that for purposes of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income, which does not form part of total income under The Act. As per sub-section (2) of section 14A, Ld . Assessing Officer would determine amount of expenditure incurred in relation to such income which does not form part of total income in accordance with method as may be prescribed, if having regard to accounts of assessee, he is not satisfied with correctness of claim of assessee in respect of such expenditure. Method for such purpose has been prescribed under rule 8D of Rules. Sub-rule (1) of rule 8D substantially reiterates what subsection (2) of section 14A provides. Essentially, under sub-rule (1), Assessing Officer would be authorized to determine expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly ground number 5 of the appeal is allowed. 21. Ground number 6 of the appeal is against the addition of ₹ 57,471,113/ on account of loss on sale of commodities during financial year 2011 12 holding that the same is speculative transaction and hence the loss is a speculative loss. The assessee submitted before the assessing officer enumerating the provisions of Section 43 (5) of the act and the extract of memorandum of the Finance Bill 2005 with respect to the rationalization of the tax treatment of the derivative transactions. Assessee submitted that according to the provisions of clause (d) of subsection 5 of Section 43 of the act read with the memorandum explaining the finance bill 2005, the transactions regarding to the future and options and commodity trading and not considered to be speculative as the same was carried out on a recognised stock exchange leaving a proper audit trail of time and stamp and there is no scope of generating the fictitious losses and gains. The assessee also submitted the copies of the contract note on sample basis for future adoption and commodity. Therefore it was submitted that the loss on the commodity/sales should not be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently relied on following case laws : i. CIT v. Sri Vasavi Gold Bullion (P.) Ltd [2018] 92 taxmann.com 290 (Madras) [PB Pg 185-191] Section 73, read with section 43(5), of the Income-tax Act, 1961 - Losses - In speculations business (Derivative loss) - Whether where assessee suffered loss in trading derivatives carried through Multi Commodity Stock Exchange, derivative transactions being separate from trading in shares, provisions of Explanation to section 73 will not be applicable to such transactions - Held, yes - Whether thus, loss incurred by assessee in derivative transactions through recognised stock exchange will have to be set off against other business income as per provisions of Act - Held, yes - Whether furthermore, since transaction carried out by assessee was a non-speculative transaction, section 43(5) will not be applicable - Held, yes ii. Chirayu Exim P. Ltd. v. ITO (ITA No. 2819/Ahd/16) (17/09/2018)(ITAT Ahmedabad) [PB Pg 192-201] 8 .As regards the claim of losses arising in the commodity exchange platform the stand of the Revenue that the assessee's transaction is not an eligible transaction as contemplated in Section 43(5)(d) of the Act was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made nons peculative only by The Finance Act 2013 with effect from 1/4/ 2014 and therefore for assessment year 2012 13 the transaction is speculative. He further referred to the order of the learned Dispute Resolution Panel and referred paragraph number 9.3 at page number 21. He submitted that that the transaction has not been subjected to commodities transaction tax, it has not been carried out electronically on a screen-based system on a recognised exchange through a member or intermediary registered Under the bylaws. The transaction is not supported by a time stamped contract note. Therefore it cannot be deemed not to be a speculative transaction as claimed by the assessee. 26. We have carefully considered the rival contentions and perused the orders of the lower authorities. In this regard the assessee has submitted that it has entered into transaction with 4 brokers. (1) Kalyani commodity, (2) Pushpa Commodity, (3) Bhagyashree commodities and (4) sun commodity. The assessee has given the details of the transaction entered into by the assessee. Contract notes issued by all brokers were submitted before us. All of them are registered with a stock exchange. They have also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 1,450,763,638/ comes to ₹ 1,775,691,170, therefore he reduced the profit of eligible unit by 32,49,27,532/ . The learned assessing officer categorically noted that this addition is made on the basis of the report of the special auditor in previous year and further the fact of the present assessment year are also same as the fact of the earlier year in which special audit was conducted. This issue has been considered by the coordinate bench in the immediately preceding year in which this addirion/ disallowance was first made as Under:- 40. Ground number 8 of appeal is with respect to finding of learned CIT A in upholding disallowance of deduction u/s 80 IB/IC on ground that fair market value of goods transferred from Noida Division to eligible unit is higher in terms of provisions of section 80 IA (8) read with 80 IB (13) and 80 IC (7) of The Act for reason that in respect of unprocessed goods profit Mark up to extent of 2% instead of 10% as computed by assessing officer was restricted. With respect to processed catechu, he confirmed valuation by assessing officer and uphold markup of manufacturing expenses and profit rate at rate of 37.85% and 10% respectively. Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under Central Excise rules for valuation of goods of captive consumption. He further stated that special auditor has given detailed working of fair market value of transfer of goods from non-eligible unit to eligible undertaking. Thereafter learned assessing officer held that fair market value of said goods exceeds transfer value by a sum of INR 1 01734012/ . Above issue was contested by assessee before learned CIT A. Learned CIT A followed his own order for assessment year 2004 05 wherein i. in case of goods, which are not processed and sent to eligible units as such, he directed learned assessing officer to load profit margin of service charges rate of 2% on value of goods transferred which is directly sent without processing. ii. With respect to goods those are processed, he confirmed loading of average manufacturing expenses of 37.85% as processing value addition has taken place and further confirmed charging of profit at rate of 10%. iii. With respect to cardamom, he confirmed action of assessing officer of loading of manufacturing expenses at rate of 37.58 percent and profit at rate of 10% as per Excise rules subject to deduction of cost of Chilka transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be clarified that these products have been purchased for captive consumption and same is not tradable commodity. There has been no sale to any outside party and as such presumption about any profit or market value is irrelevant and misconceived. Further, special auditor has referred central excise rules for purpose of estimation of profit @ 10%. In this regard we may submit that reference to excise rules is wholly irrelevant and out of context as same have no relevance or bearing under Income Tax The Act. rate of 10% profit as per Rule 8 of Central Excise Valuation Rules is specifically for purpose of calculating excisable value of marketable goods and as such same cannot be made basis for estimating fair market value of consumable items in terms of section 80IA(8) read with section 80IB(13)/80IC(7) of The Act. VIII. It is pertinent to note that provisions of section 80IA(8) read with section 80IB(13)/80IC(7) of The Act authorizes an assessing officer to make adjustments in claim of deduction by substituting fair market value of goods transferred from non-eligible unit to eligible unit. section specifically talks about market value that in itself means that product must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one hundred and ten per cent of cost of production or manufacture of such goods. ] 47. Provisions of section 80 IA (8) provides that (8) Where any goods 39[or services] held for purposes of eligible business are transferred to any other business carried on by assessee, or where any goods 40[or services] held for purposes of any other business carried on by assessee are transferred to eligible business and, in either case, consideration, if any, for such transfer as recorded in accounts of eligible business does not correspond to market value of such goods 41[or services] as on date of transfer, then, for purposes of deduction under this section, profits and gains of such eligible business shall be computed as if transfer, in either case, had been made at market value of such goods 42[or services] as on that date : Provided that where, in opinion of Assessing Officer, computation of profits and gains of eligible business in manner hereinbefore specified presents exceptional difficulties, Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation - 43[For purposes of this sub-section, market value , in relation to any good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, they have a sale price, and such sale prices determination is in open market. Therefore, it is apparent that market price can be more than cost and less than cost of goods. Therefore, any approach of loading of cost on goods, which are transferred from one undertaking to another undertaking without determination of market price of such goods, is not the mandate of provisions of section 80 IA (8) of The Act. Therefore any such attempt to substitute cost plus profit as market value of goods without finding out what could be market value of goods is not acceptable as it is not requirement of law. If views of lower authorities is subscribed to, then it will amount that market price can never be less than cost of goods sold and therefore it presumes a market where only profit exists. Such can never be situation. In view of this, we reject finding of lower authorities and learned assessing officer that value that has been recorded in transfer of goods from one unit to another should further be loaded by cost of 37.58%. Further 10% profit has been presumed under Central Excise provision for purpose of transfer of goods as captive consumption for another unit. Therefore if goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the deduction following the order of the coordinate bench for that year. Accordingly ground number 7 of the appeal is partly allowed. 29. The ground number 8 of the appeal is with respect to the disallowance of deduction u/s 80 IB/80 IC by applying the provisions of Section 80 IA (8) in respect of transfer from silver foil division amounting to ₹ 2,653,575. Both the parties confirm that this issue is identical to the issue decided by the coordinate bench in assessee s own case for immediately preceding year. The coordinate bench has decided this issue as Under:- 114. Ground number 7 of appeal of assessee is with respect to disallowance confirmed by learned CIT A of eligible income u/s 80 IB/80 IC to extent of INR 13634222/ by applying provisions of section 80 IA (8) on ground that fair market value of goods transferred from silver foil division to eligible undertaking was held than that declared by appellant. Brief facts of issue are that special auditor is reported that during year under consideration silver for unit has transferred goods of INR 9 7796985 to various units including INR 4 5266554/ to manufacturing units eligible for deduction u/s 80 IB/80 IC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and confirmed by learned CIT capital is devoid of any merit and therefore should be deleted. 116. Learned departmental representative vehemently supported orders of lower authorities and submitted that when assessee has sold identical material to 3rd party then same is market price of goods as on that date and therefore assessee has reduced profit of non eligible unit and enhanced/increased profit of eligible unit and therefore above disallowance as rightly been made by lower authorities. 117. We have carefully considered rival contentions and perused orders of lower authority. Appellant has procured silver for from third-party vendors and transferred to eligible units at actual cost comprising procurement cost, processing cost, freight expenses et cetera on FIFO basis. Whereas learned assessing officer has taken average sale cost rate to 3rd party to file market value of such civil file to eligible undertaking claiming deduction u/s 80 IB/80 IC of The Act. It is apparent that silver foil item is sold to outsiders; actual price realized by assessee on sale of these items to third party is market value of product as on that date. However, assessee has purchased raw silve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted a details of such expenditure. Assessee also stated that the basis of allocation of the said expenses were made consistently during the earlier years by the assessee company and said allocation was also accepted by the CIT A and coordinate bench for assessment year 2004 05. Therefore the assessee requested that same may not be disturbed. 32. The learned assessing officer rejected the contentions of the assessee and found that assessee should have allocated the full amount of interest expenses to all the units and therefore there is a difference between total interest expenditure of ₹ 52.18 and the interest allocated of ₹ 482,898,472. Therefore he reduced the total interest expenditure by the interest disallowed u/s 14 A of the act and interest disallowed u/s 36 (1) (iii) of the act. Therefore he found that the net interest expenditure should have been allocated by the assessee to the various units is ₹ 493,890,004/ . The assessee has only allocated a sum of ₹ 482,898,472 and therefore there is a short allocation of interest cost to various units of ₹ 109,91,532/ . Therefore he allocated the above sum with respect to all the manufacturin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he correct profit derived from the industrial undertaking. The object is not to reduce the eligible profit of an industrial undertaking by all the expenditure which are not allocated to eligible unit even if they relate to a certain specific activity of the assessee which is not eligible for deduction Under those sections. Similarly a sum of ₹ 6,844,777 was found to be excise duty interest on late payment of tax. On the eligible unit there is no liability of payment of Excise and therefore such interest expenditure cannot be allocated to the eligible units. Further a sum of ₹ 2,138,478 is related to the mix and drink on account of term loan of Yes bank. It is a specific loan taken by the assessee for a specific project which is not related to an eligible unit, therefore is not required to be reduced from the profits of the eligible unit. The sum of interest cost on bill payable, interest on cash credit interest, on current account interest, on service tax and interest on late payment of tax are not at all related to the eligible unit. Learned departmental representative as well as the learned assessing officer has also not shown that these are the interest expnses which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Ld AO has made adjustment on basis of observation of Special Auditor as per which, common cost incurred in respect of eligible units must be allocated after loading mark up @ 26.14% being rate of operating profit after applying provisions of section 80IA(8) read with sub-section 13 of section 80IB and sub section 7 of section 80IC and making an upward adjustment on account of profit element on these common cost. Ld CIT (A) allowed part relief by reducing mark-up from 26.14% to 10%. 59. Learned authorised representative submitted that it is not case of assessing officer or CIT (A) that Head Office of assessee is providing any services to eligible units. Provisions of section 80IA(8) read with sub-section 13 of section 80IB and sub section 7 of section 80IC will only come into play where services have been provided by HO to eligible unit. However, in present case, services have been rendered by third party at market price and head office is merely allocating proportionate cost to eligible units and as such there is no occasion to compute fair market value of these costs since they are not in nature of goods or services rendered by Head office. Further, allocation of deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has allocated all applicable cost to respective units however AO said that it should further be loaded by markup of 26.14% being operating profit after applying provisions of section 80 IA (8) read with subsection 13 of section 80 IB and section 7 of section 80 IC for making an upward adjustment on account of profit element on these common cost. Learned CIT A has reduced markup from 26.14% to 10%. Undisputedly assessee has allocated all cost to respective units for purpose of determining eligible profit for deduction. Only issue is that whether further markup is required to be allocated on these cost or not. Claim of assessee is that various services rendered by 3rd party are at market rate and head office has merely allocated proportionate cost to eligible units and has neither transferred any goods or nor provided any services. It is also claim of assessee that no further services have been rendered by these offices to eligible unit of assessee except allocating cost. Here, undisputedly allocation key has been correctly applied and not questioned by revenue. Therefore, only argument of revenue is that various cost allocated by head office/branches and depot shall also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th these arguments from all angles of controversy and has held as under :- '9.4 Ld. Counsel has asserted that undisputedly, it was an inter-division transfer , hence it was expected to record same at arm's length price. He has pleaded that assessee is blowing hot and cold in same breath. When it comes to transfer of services and goods, it opposes arm's length price adjustment and says that expenses which have been incurred in past need not be taken into consideration. As discussed earlier, this logic do not commensurate with provisions of sections. Even then for argument sake if expenses relatable to current year are to be apportioned; it was found that assessee had not apportioned even a penny of expenses in development and research of new products of Baddi Unit. 9.5 Next, Revenue's Counsel has drawn our attention on profit loss account of eligible Unit, i.e. Baddi Unit, (refer Page No.87 of paper-book). Ld. DR has said that sales to tune of ₹ 1,19,13,22,749/- were recorded for accounting period ended on 31.3.2006. He has pleaded that if said Unit was to sale its products on stand alone basis, then said Unit which was only two years old could not fetch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untancy. Unquote. He has also placed reliance on Liberty India (supra) . 10. We have heard both side at length. controversy as raised by Addl. CIT Mr. Mahesh Kumar, officiating as AO, has serious repercussions on subject of computation of eligible profit while claiming a deduction under Statute. adjustments as suggested by AO while working out manufacturing profit of an eligible Unit has a far reaching consequences on all such tax-payers; therefore we have to deal this issue carefully and little elaborately, so that we can reach to a logical conclusion. 10.1 To begin with, it is better to elucidate that I.T. The Act has only defined 'income' (Sec. 2(24)) as well as 'business' (Sec. 2(13)) but not term profit and gains . However, section we have to deal with i.e. Sec. 80 IC revolves around 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral, every manufacturing concern has fixed manufacturing capacity. So objective of such concern ought to be to maximize profit. Now problem, as posed, is that let us assume that 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 value for less money. However, in production of product B due to complex process of manufacturing it requires more working hours. For pricing product B situation is that more money expenditure and may fetch less value. Therefore, in processing department it is not possible to segregate two components to determine segregated margins. Keeping this accounting principle in mind, we revert back to language of section 80IC which says that a deduction is permissible of such profits of a specified Undertaking engaged in manufacturing of certain article or thing. business of said enterprise/concern should be manufacturing of article or thing and profit therefrom is eligible for deduction u/s.80IC if that profit is part and parcel of gross total income. As noted hereinabove, profit is difference between purchase price and cost of production along with cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on marketing and sales activities in India through a subsidiary. subsidiary was also rendering support services to assessee, a UK based company. assessee was carrying out manufacturing operations. It was held that 35% of its profits could be attributed to marketing activities carried out in India and, therefore, chargeable to tax in India. Facts of that case were altogether different and there was a finding that undisputedly there was a PE in India and as per Indo-UK DTAA income has to be taxed in India. An another fact was that there was no separate account of assessee's India operation and AO had found that on basis of global accounts profits were determined on sales. In that case, marketing was said to be primary activity for earning profit. profit was directly due to operation in India. In that context word attributable was considered and then it was held that such part of income as it was reasonably attributable to operations carried out in India is taxable. 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 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - N.P.) thus represented expenditure which could be said to be in respect of marketing network and brand of product related expenses. AO has not complained about allocation of expenditure as made by assessee while computing profit of Baddi Unit. Once assessee has itself taken into account related expenses to arrive at net profit, then it was not reasonable on part of Revenue Department to further reallocate those expenses by curtailing percentage of eligible profit. 10.6 From side of Revenue, ld. Special Counsel has argued that in terms of provisions of section 80IA(5) deduction is to be computed as if such eligible business is only source of income of assessee. According to him, manufacturing profit was only source of income and that alone should be accounted for in P L account to claim deduction u/s.80IC of The Act. Ld. DR has explained that as per view of A.O. up-to 80% of profit was result of efficient marketing net work plus due to brand name of company. Only 6% was manufacturing profit, per A.O. It is true that section 80IC does recognized provisions of section 80IA. Refer, Sub-section (7) of section 80IC which prescribes as follows:- Section 80IC(7) : provisions conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of account by recording internal transfer of product from Baddhi Unit to head office marketing unit and that too at arm's length price. From side of appellant an argument was raised that what should be arm's length price in a situation when a product is ultimately to be sold in open market. Whether AO is suggesting that an imaginary line be drawn to determine profit of Baddi Unit at a particular stage of transfer of products. Definitely a difficulty will arise to arrive at sale price as suggested by AO on transfer of product from Baddi to head office. What could be reasonable profit which is to be charged by Baddi Unit will then be a subject of dispute and shall be an issue of controversy. On contrary, if sale price is recorded at market price, which is easily ascertainable, that was recorded in Baddi Unit account, scope of controversy gets minimal. Rather, intense contention of Ld.AR is that facts of case have explicitly demonstrated that goods manufactured at Baddi Unit were transported to various C F agents across country for sale purpose. Therefore, eligible business is manufacturing of pharmaceutical products and only source of income was profit earned on sale of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts were sold through C F in market. Even this is not case that first sales were made by Baddi Unit in favour of head office or marketing unit and thereupon sales were executed by head office to open market. Once it was not so, then fixation of market value of such good is out of ambits of this section. If there is no intercorporate transfer, then AO has no right to determine fair market value of such goods or to compute arm's length price of such goods. AO has suggested two things; first that there must be intercorporate transfer, and second that transfer should be as per market price determined by AO. Both these suggestions are not practicable. If these two suggestions are to be implemented, then a Pandora box shall be opened in respect of determination of arm's length price vis a vis a fair market and then to arrive at reasonable profit. Rather a very complex situation shall emerge. Specially when Statute do not subscribe such deemed intercorporate transfer but subscribe actual earning of profit, then impugned suggestion of AO do not have legal sanctity in eyes of law. 10.9 A very pertinent question has been raised by ld.AR Mr. Patel that what should be line of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntested by AR before us that segment reporting is about segregation of business and not about segregation of any specific activity. In case of Liberty India (supra) it was observed that IT The Act broadly provides two types of tax incentives, namely, investment linked incentives and profit linked incentives. Court was discussing Chapter VIA which provides incentive in form of tax deductions to category of profit linked incentives . incentive is linked with generation of 'operational profit'. Therefore, respected Parliament has confined grant of deductions only derived from eligible business. Each eligible business constitutes a stand alone item in matter of computation of profit. Court has said that because of this reason concept of segment reporting was introduced in Indian Accounting Standards. Ld. Counsel Mr. Srivastava has argued that deduction u/s.80IC is a profit linked incentive. Only Operational Profit has to be claimed for 80IC deduction. According to him, each of eligible business constitutes a stand alone item in matter of computation of profit. For computation of profit of an eligible business word used is derived in section 80IC which is a narrower conno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that activities which assessee carried on at Raichur was certainly a business of assessee. On one hand, it was argued that accrual of profit must necessarily be at place where sale proceeds are received or realized. But on other hand, it was argued that profits received relate (i) firstly to his business as a manufacture, (ii) secondly to his trading operations and (iii) thirdly to his business of export. On that basis, it was opined that 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 same person at different places determines also place of accrual of profit. The Act of sale is mode of realizing profits. If goods are sold to a third person at Mill premises, one could have said that profits arose by reason of sale. Profit would only be ascribed to business of manufacture and would arise at Mill Premises. Merely because a Mill owner has started another business organization in nature of sale depot, that cannot wholly deprive business of manufacture of its profits, though there may have to be appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that to succeed in their claim, it is incumbent upon assessee to show that there was in fact a part of a business and that profit had actually accrued or arose in that part of an Indian State. Court has clearly stated in para-41 that both elements should found exist and then only business could be treated as a separate business. However, said proviso has propounded only deeming provisions, as is apparent from language of section itself. For purpose of said section, it was deemed to be a separate business. whole of profits of which accrue in an Indian State and other part of business be deemed to be a separate business. In para-44, Hon'ble Court has discussed 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, proper course is to follow that sever profits of two businesses and assess accordingly. result of discussion was that profits of two businesses were directed to be apportioned. Simultaneously, Hon'ble Court has also made an observation, quote It is true that these are cases where several businesses were amalgamated and carried on together, or more of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of process of a particular business, then that will not be considered to be a part of business at all and held that proviso will not apply. It was concluded that principle of apportionment was implied therein. After this detailed discussion, we thus arrive at conclusion that principle of apportionment was criteria for segregating manufacturing profit if it was feasible to do so. As against that in present case assessee has computed profit of Baddi Unit on basis of well accepted principle of accountancy that a profit is accrued where a transaction is closed, meaning thereby profit arises solely at time of sale. 10.13 After detailed discussion, before we close controversy we would like to express that AO's proposition of segmentation of eligible profit of manufacturing unit was not altogether meaningless. This approach of AO cannot be brushed aside on fact of it. But at present, when method of accounting as applicable under Statute, do not suggest such segregation or bifurcation, then it is not fair to draw an imaginary line to compute a separate profit of Baddi Unit. Baddi Unit has in fact computed its profit as per a separately maintained books of account of eligible man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible and non eligible units of assessee without making any further noticeable addition to such costs, profit ratio of 10% over and above cost cannot be imputed for working out eligible profit of unit. Further learned CIT A in assessee s own case for assessment year 2004 05 has himself held that without any provision of services to assessee, he himself did not agree with finding of learned assessing officer about these facts for assessment year 2004 05. Learned CIT DR also did not point out before us that was there any value addition made by these head office or branches to various cost allocated by assessee. In view of this ground, number 11 of appeal of assessee is allowed and AO is directed to not to markup any profit element on allocation of common cost to eligible undertaking. The learned departmental representative could not point out any reason to deviate from the decision of the coordinate bench in assessee s own case for earlier years. He also could not point out any change in the facts and circumstances of the case of that the loading of the mark up on allocated cost of the goods or services is justified or any other reasons. He could not also show that this is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 is on basis of asset put to use at specific location/unit and same cannot be allocated on pro rata basis. relevant finding of CIT(A) is as under : I have considered assessment order, written submissions and oral arguments of Ld AR. For AY 2004-05, I have considered issue and given relief to assessee in appellant case in appeal no.12/12-13/1038. My findings on this issue are reproduced as under: I have considered assessment order, written submissions and oral arguments of Ld AR during appellate proceeding. Ld.AR has argued that depreciation of Noida Division and corporate office are assets of these divisions. Therefore, question of allocating depreciation to eligible units does not arise. Similarly, expenses of ₹ 20,26,125 are belonging to depots. Hence question of loading this expense to eligible unit does not arise. Ld AR has alternatively argued that any such addition will not have impact on taxable income. I have examined arguments of Ld. AR that depreciation of a particular unit cannot be bifurcated in prorata basis, as depreciation is eligible even if asset is not used exclusively for business. As far as, other expense amounting to ₹ 20,11,566 debited for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of ld. CIT(A) at pages 20 and 21 of his order. ld. CIT(A) has given categorical findings that various assets at HO are used for day to day working at HO. These assets are not used for activities of two units at Bated and Barotiwala. At HO at Udaipur, company has to perform certain corporate functions and these assets are used for that purpose. Hon'ble Supreme Court held that no such expenses can be apportioned against separate independent unit. AO has mainly relied on order of Hon'ble High Court in case of Rajasthan State Warehousing Corporation vs. CIT (supra) which has been reversed by Hon'ble Supreme Court. Therefore, ld. CIT (A) held that apportionment on account of HO made by AO was not justified. ld. DR also mainly relied on order of AO including decision of Hon'ble Jurisdictional High Court. However, ld. DR could not point out as to why order of Hon'ble Jurisdictional High Court is still applicable when same has been reversed by Hon'ble Apex Court, which has been considered by ld. CIT(A). Therefore, in view of facts and circumstances of case and in view of findings given by ld. CIT(A) which are reproduced somewhere above in this order, we hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking would have reduced eligible profit for deduction by INR 3 9571939/-. Assessee submitted before learned assessing officer that no expenses are incurred by eligible units in this regard nor any income has been earned for use of brand name. It was further stated that above brand is owned by assessee company itself and therefore there is no question of charging any royalty of nature suggested by AO. Learned assessing officer rejected contention of assessee and stated that it is evident that royalty attributable to use of brand name by eligible undertaking has not been charged by brand owning entity. It is further noted by him that above brand is owned by head office/corporate office and accordingly for working out correct profit of eligible unit is provided u/s 80 IA (8) of The Act, non charging of such royalty for use of brand has resulted into distortion of real profit of eligible undertaking. He proposed that profits of eligible undertaking should be reduced by INR 39571939/ . On appeal before learned CIT A he held that definitely brand has been developed overall long period and is property of corporate or head office of company. Therefore, he confirmed above add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tulsi mix to another party. Admittedly, in case of assessee for assessment year 13 14, learned transfer-pricing officer in order dated 30/10/2017 while benchmarking specified domestic transactions has also not made any adjustment on this account. No doubt, there is a service to the eligible unit for using the brand name but its market value is required to be determined. Assessee has not given this brand name for exploitation to any third party. Further for market value in relation to services of user of above brand name would be price that such goods or services would ordinarily fetch in open market. Assessee has also not allowed anybody else to utilize above brand. Ld AO has compared with the brand name Tulsi Mix for which assessee is paying royalty, which is owned by third party. There is no comparison shown by the ld AO that both are similar brands. Further in later on years ld AO himself has not adjusted the legible profit on this account, therefore, it is apparent that ld AO himself do not think that such adjustment is required to be made. Therefore, brand market value is also not determined by learned assessing officer. In view of this ground number 12 of appeal of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering that M/s Dharampal Satyapal Sons Ltd. owns trade mark in field of chewing tobacco such as Tulsi etc. As M/s Dharampal Satyapal Sons Ltd. is a related party, approval was required for terms and conditions of such royalty payment by Director of Central Govt.of India. As per said agreement, royalty payment cap was fixed at 3% of net sales. However, as mutually agreed, royalty was paid @1% of net sales. Here also Ld AR has argued as in earlier grounds that maximum ceiling of royalty cannot be taken, as market rate as assessing officer has not brought any facts on record stating that under similar circumstances any party has not paid royalty @3%. Maximum ceiling approved by Regional Director is only maximum ceiling cap for payment of royalty as per provision of that Act. Further Ld. AR argued that same rate of royalty is paid to other undertaking of appellant, which are not eligible for deduction u/s 80IB/80IC. Reasons given by ld CIT (A) for deleting addition are found to be correct. No infirmity was also pointed out by learned departmental representative. It may be appreciated that rate approved by Regional Director is maximum rate and there could we no ground or bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NR 901187656/- in respect of claim of purchase of sandalwood oil from M/s Surya Vinayak industries Ltd and Allied perfumers private limited. Brief facts of case shows that ld assessing officer has made disallowance of purchase to extent of ₹ 72,23,61,646/- from M/s. Surya Vinayak Industries Ltd. (SVIL) and ₹ 17,88,26,010/- from M/s. Allied Perfume P. Ltd. (APPL) by making reference to seized annexure A- 1/ Page 52. Ld AO has alleged that part of purchases of sandalwood oil as recorded in books of assessee are inflated and bogus and that seller M/s. Surya Vinayak Industries Ltd. and APPL does not have production capacity to supply recorded quantity of Sandalwood Oil. However, CIT(A) has restricted disallowance to ₹ 54,94,24,290/- on ground that there is no dispute regarding purchase and use of quantity for manufacturing and sale and CIT(A) computed disallowance on basis of lowest price of other suppliers. Further, AO has made complete disallowance of purchases from APPL and part disallowance from purchases from SVIL. Relevant working of disallowance is at Page 84-85 of assessment order. AO has made such disallowance without appreciating use of actual quantity with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessee. Further, seized document relates to AY 2011-12 and as such, it has no relevance or bearing to assessment year under consideration. It is also important to note that name of assessee is nowhere mentioned in said document and it is not known as to how such document is relevant to present case. Hon ble ITAT has specifically disputed correctness of this document and has held that no adverse inference could be drawn on basis of same. He further submits that theory of bogus purchases and return of cash by SVIL and APPL as suggested by assessing officer has no valid basis as assessing officer has failed to bring any evidence on record to demonstrate alleged synchronized flow of cheque and cash between assessee and these companies and as such adverse inference is merely on hypothetical basis. reference to statement of various persons, who have no direct involvement with reference to alleged annexure A/1 Page 52, is not relevance. Assessee has simply made purchases of Sandalwood Oil from SVIL and APPL, which are independent third parties, and assessee is not answerable to internal affairs of these concerns. Further, statement of third parties have not been recorded so a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent category of raw material based on business and commercial expediency and also corroborated from manufacturing of difference quality and sale price and as such mechanical application of minimum rate is highly arbitrary and irrelevant. In any case, even if purchase price of other parties is to be considered, same should be average price and not lowest price. In light of above discussion and order of Hon ble ITAT for AY 2005-06 to 09-10, Issue stands settled in favour of appellant as lower authorities have not brought anything on record to substantiate allegation of inflated purchases particularly when seized material relied upon does not belong to year under consideration and there is no other material or finding to support such addition. There is thus no justification for disallowance of claim of purchases to extent of ₹ 54,94,24,290/- on basis of application of minimum third party purchase rate and same may kindly be deleted. 70. Learned departmental representative extensively read para number 70 102 of assessment order. It was stated that on perusal of annexure A 1 seized during course of search and seizure action and also various other an action it is appare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various assessment years appears to be reasonable in variation whereas if entire quantity purchased from these 2 entities are ignored and finished product per KG consumption of sandalwood oil will range from 13.47 to 65.25 therefore he held that if quantity purchased from these 2 entities are not considered in quantitative details will give an erroneous and inconsistent results in terms of finished product ratio. He further found that views taken by him is also supported by words mentioned in seized documents annexure A 1 and page number 42 seized from laptop of Mr. Gupta where there is a mention of adjustment of apportionment of excise duty and rate difference. Therefore, he gave a conclusive finding that purpose of these bills is just adjustment in prices. He further analyze details of purchases from all parties assessment year -wise in respect of sandalwood oil purchase and he found that average rate of alleged purchase from these 2 entities is a much higher rate compared to other undisputed parties. Therefore, he noted that purpose of mentioning quantity of goods as Central would oil ( C ) and sandalwood oil (SU) is just to inflate cost of sandalwood oil purchased and used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted which resulted into excess paid of ₹ 12.54 crores. Below that, there is a statement in which details of cash payment starting from 02.11.2010 to 24.11.2010 is mentioned totaling to ₹ 10.50 crores. A further details of account of SVIL and APPL is mentioned and net of it is stated to have been amount excess received of ₹ 9.49 crores which result in to amount to receive of ₹ 30436590/-. 29. Surya Vinayak Industries in fact gave this document to Shri Rajiv Kumar who is managing Director of Dharampal Stayapal Ltd. This paper was shown to him vide question No. 13, which was replied by him by asking for some time. He further replied this question vide question No. 27. The ld AO further examined Shri Rajiv Gupta on 13.06.2011 where he has denied of having paid any excess cash to the assessee. The director of M/s. Surya Vinayak Industries Ltd was also summoned and his statement was recorded on 02.05.2011 wherein, he too have denied having received the payment other than by cheque or payment any cash in lieu of sales of material to the assessee company. The ld Assessing Officer himself has stated that the paper is dated 30.11.2010 that means the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. Attending to these arguments of the counsel is superfluous and merely an academic exercise as we have upheld the applicability of the decision of the Tribunal in the case of LMJ International Ltd. (supra) for the proposition that the where nothing incriminating is found in the course of search relating to any assessment years, the assessments for such years cannot be disturbed and other local decision cited above. Accordingly, the additional ground raised by the assessee for all the four appeals under consideration is allowed and in favour of the assessee. The matter reached honourable Bombay High court [2015] 63 taxmann.com 14 (Bombay)/ [2015] 235 Taxman 163 (Bombay)/ [2015] 378 ITR 84 (Bombay)/ [2015] 278 CTR 144 (Bombay) where in para no 7 it is held that If there is reference made to some loose papers found and seized from his residence indicating some on money receipt during the admission process then above corelation and assessment year wise ought to have been established. In the circumstances, we do not think that the tribunal's order raises any substantial question of law. On further appeal before Honourable Supreme court in [2017] 84 taxmann.com 290 (SC)/ [201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputed fact that the documents which were seized did not establish any co-relation, document-wise, with these four Assessment Years. Since this requirement under Section 153C of the Act is essential for assessment under that provision, it becomes a jurisdictional fact. We find this reasoning to be logical and valid, having regard to the provisions of Section 153C of the Act. Para 9 of the order of the ITAT reveals that the ITAT had scanned through the Satisfaction Note and the material which was disclosed therein was culled out and it showed that the same belongs to Assessment Year 2004-05 or thereafter. After taking note of the material in para 9 of the order, the position that emerges therefrom is discussed in para 10. It was specifically recorded that the counsel for the Department could not point out to the contrary. It is for this reason the High Court has also given its imprimatur to the aforesaid approach of the Tribunal. That apart, learned senior counsel appearing for the respondent, argued that notice in respect of Assessment Years 2000- 01 and 2001-02 was even time barred. 19. We, thus, find that the ITAT rightly permitted this additional ground to be raised and cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in respect of the assessment year 2007-08 there was a significant difference in the pattern of assessment for this year also, the return was filed for Nil income but there were certain documents and which showed that there were transactions of sale of development rights and from which profits were generated and taxable for the assessment year 2007-08. Thus, the receipt of ₹ 44 crores as deposit in the previous year relevant to the assessment year 2008-09 and later on became subject matter of the writ petition before the Delhi High Court. That was challenging the validity of notice under section 153C read with section 153A. In dealing with such situation and the peculiar facts that the Delhi High Court upheld the satisfaction and the Delhi High Court found that the machinery provided under section 153C read with section 153A equally facilitates inquiry regarding existence of undisclosed income in the hands of a person other than searched person. The provisions have been referred to in details in dealing with a challenge to the legality and validity of the seizure and action founded thereon. We do not find anything in this judgment which would enable us to hold that the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e act. Therefore according to revenue assessee has reduced the profit by booking the over invoiced purchases of the eligible units, and such income is also derived from the eligible industrial undertaking and further assessee is eligible for higher deduction u/s 80 IC of the act. 32. The LD AO has stated that the companies from whom the material has been purchased are not capable of supplying that quantity of raw material. The ld CIT (A) has held that the quantity details of the assessee cannot be doubted for the reason that amount of finished goods assessee has produced does not justify the lower consumption of material than what is shown by the assessee. This finding of facts is not disputed by revenue. Therefore it cannot be disputed that assessee has purchased the material. Now the issue is at what rate. If it s the case of the revenue that assessee has purchased goods at ₹ 100 But has booked purchases at ₹ 150 and received ₹ 50 back from the supplier in cash, then revenue should have brought on record the near about comparable prices of those material with reasonable evidences. These facts could have been proved either by the availability of the material i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 tally with the I.A.S. statement available in page No.9 to 12 taken on 31.3.2010. But surprisingly, the sandalwood oil is not included in this statement of physical stock taken on 23.03.2010 which goes to show there was no stock of sandalwood oil present on that day, whereas the closing balance of I.A.S. statement says closing balance of 2926 Kgs. This again proves the booking of bogus purchase of sandalwood oil by M/s DSL. Page no. 72 of Annexure 14 seized from Perfumery Division of Okhla are now being referred to and discussed. On page 72 there is mention of various raw material purchases as on 31.12.2010. Item No.8 is sandalwood oil where receipt as per MD (Shri Rajiv Gupta) is 12,694 Kg and as per Accounts it is 12,894. A different of 200 Kgs is there and in the remarks column it is mentioned that details are attached. And in this context entries of Page no. 67 are being referred. On this page bill wise detail of purchase from various parties of sandalwood oil for the period 1.4.10 to 31.12.2010 are mentioned. Page No.87 to 90 of Annexure A-11 of the Perfumery Division are now being referred to and discussed. In these pages DSL has calculated the average rate of its raw mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seized documents belongs to the Assessment Years 2005- 06 to 2009-10. Even otherwise, without commenting whether they are incriminating or not, it does not pertain to the assessment years involved. The ld CIT DR could not show us document, which pertained to the Assessment Year 2005-06 to 2009- 10. As none of the documents seized during the course of search are shown to us pertaining to the Assessment Year 2005-06 to 2009-10, we are of opinion that all the additions made by the ld Assessing Officer are not based on incriminating documents found during the course of search, hence they are not sustainable. 72. Therefore, the coordinate bench has given a categorical finding that this seized document does not belong to AY 2010-11 but for Ay 2011-12. There is no material shown to us by the LD CIT DR, which authorizes us to impute the seized papers pertaining to later years for making addition in the earlier years. Revenue has also not initiated any redressal mechanism provided in the act. No reasons are given by the ld AO or ld CIT (A) to extrapolate those seized documents for AY 2010- 11. The findings of ld CIT (A) are also for Ay 2011-012 and for the reason without application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he noted that since tested party is assessee , prevalent interest rate that could have been earned by taxpayer by advancing loan to an unrelated party in India, with weak financial health as that of associated enterprises, as there is no security provided by subsidiary against loan advanced, he proposed to charge interest at rate of 16.31% on rupee equivalent of loan advanced to associated enterprise. Assessee submitted its reply on 3/12/2013 submitting that assessee company has given foreign currency loan to its wholly owned subsidiary in Switzerland at interest of 3%. It was further contested that where transaction was of lending money in foreign currency to its foreign subsidiaries in such a situation domestic prime lending rate would have no applicability and international rate fixed being LIBOR should be taken as benchmark rate for international transaction. Learned transfer pricing officer rejected contention of assessee and stated that assessee, in process of lending money to its subsidiary has not followed arm s-length principle by not correctly assessing risk associated with international transaction of lending of money where cost of borrowing is not relevant but return th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng rate for purpose of benchmarking interest rate under CUP method. Assessee aggrieved with order of learned CIT A preferred this appeal by this ground of appeal. 75. Learned authorised representative submitted that in remand report submitted before learned CIT A for assessment year 13 14 learned AO has accepted that loan has been advanced in foreign currency. He further referred to copy of remand report placed at page number 72 of paper book number 2. He further submitted that assessee has determined its arm s-length price at ₹ 2 2163283/ at rate of 3% per annum inclusive of LIBOR rate applicable on loan. However learned transfer pricing officer determine ALP at INR 8 1714969/ and thereby addition of INR 59551686 has been made. He further submitted that learned transfer-pricing officer has used CUP method for benchmarking international transaction by adopting interest rate at rate of 16.31 percentages per annum by benchmarking with prime lending rate of state bank of India and making an adjustment of further 400 basis points. He submitted that since borrowing entity is a resident of Switzerland which is a country that functions on LIBOR plus rates, hence, borrowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that benchmarking of interest, if any, should be done on basis of LIBOR instead of prime lending rate of state bank of India is all transaction with its associated enterprise have been undertaken in one currency and as such transfer pricing adjustment is not sustainable under law. 76. Learned departmental representative vehemently supported order of learned transfer pricing officer and learned CIT A. 77. We have carefully considered rival contention and perused orders of lower authorities. Facts in facts show in present case is that assessee has given a loan to its wholly owned subsidiary in Switzerland namely DS Business AG, Switzerland at interest rate of 3% per annum. Currency of loan is Foreign currency and therefore assessee stated that Swiss LIBOR should be taken for benchmarking interest rate and not Indian rate. In remand, report submitted by learned transfer pricing officer in para number 2.1 it is clearly submitted that assessee has given loan to its associated enterprise in foreign currency and however till now such loan has not been repaid by associated enterprise. From this, it is apparent that assessee has lent money to its foreign associated enter ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
